The Breakdown - Why Argentina Is Paying a Premium for Stablecoins

Episode Date: July 6, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.    On today’s episode, NLW looks at a number of crypto events from the long weekend, including:  Why Argentines flooded into stablecoins and drove the price of tether above $1 over the weekend Whether on-chain bottom signals are reliable this cycle  The latest in crypto contagion    - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit: hernan4429/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, July 5th, and today we are talking about why Argentinians are paying a premium for stable coins. Before we get into that, however, if you are enjoying the breakdown, please go subscribe. to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us in the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure as always. In addition to them being a sponsor of the show,

I also work with FTX. All right. So today we are catching up on some of the crypto news after the long holiday weekend, at least in the U.S. hope all of the U.S. listeners out there had a Great America's birthday. Today, however, we're going to start with what seemed to me like easily one of the most interesting stories from over the weekend. On Saturday, the Economic Minister of Argentina, Martin Guzman, announced that he was resigning effective immediately, and this was a huge, huge shock. Guzman had been the chief architect of the recent deal with the IMF. This was agreed to in March and granted the country access to a $44 billion loan. over a 30-month term that was meant to meet balance of payments shortfalls,

reduce persistent high inflation, and overall help Argentina transition to a more credible monetary policy. Behind the scenes, there has been a lot of political turmoil. Guzman has been a minister since 2019, but the IMF deal was not necessarily the most popular among some of his fellow officials. In particular, it caused a huge rift between Guzman and the vice president, Christina Fernandez de Kurchner, who used to. to be the president of Argentina, by the way, who had voted against the deal while calling for more

funding from the government to tackle poverty. The Argentine economy has battled for over a decade to try to reach some modicum of stability, but things have just gotten worse and worse. May saw a multi-decade high of 60% inflation, and this is only one of the ways in which the situation has become more acute. So how does this relate to the crypto space? Well, first of all, this IMF deal that Guzman negotiated was more followed by the crypto crowd than most. As part of the deal, the government of Argentina was required by the International Monetary Fund to discourage the use of Bitcoin and other cryptocurrencies. The letter of intent signed by Argentina said, quote, to further safeguard financial stability, we are taking important steps to discourage

the use of cryptocurrencies with a view to preventing money laundering, informality, and disintermediation to strengthen the country's financial resilience. Remember, we talk to talked back when this came out about how they were saying the quiet part loud. It wasn't just money laundering. They were specifically talking about disintermediation. The IMF, in other words, was attempting to bolster the intermediaries. Well, in May, the Central Bank of Argentina released a statement effectively prohibiting the country's formal financial sector from providing services around digital assets. The statement read, the measure ordered by the board of directors of the BCRA, which, editors note, is the central bank of the Republic of Argentina, seeks to mitigate

the risks associated with operations with these assets that could be generated for users of financial services and the financial system as a whole. The specific trigger had been that just a few days before the announcement, Argentina's two largest banks by market value, Banco Galicia and Burbank SAU, had announced that they would be starting to let their customers purchase crypto. So even if it was just this, this larger content, it would be fascinating from the crypto industry standpoint. Annual inflation in Argentina, over the last 10 years, according to the World Bank, has been 22.3% in 2012, 23.9% in 2013. 40.3% in 2014, 26.6% in 2015. 41.1% in 2016, 26% in 2017. And then the last few years

have been even harder. 42% in 2018, 50.9% in 2019. 39. 39. in 2020 and 54.1% last year. It may make sense then that this is a country that ranks in the top 10 among highest crypto adoption rates in the world. However, it wasn't just this context that was the most interesting thing that happened in the wake of the announcement. Following the news of Guzman's resignation, Argentinians purchased between two and three times as many stable coins over the weekend as compared to normal amounts. Because of a fear of a coming devaluation in the Argentine peso, these citizens were willing to purchase stable coins like dye and tether add up to a 15% premium in peso's terms compared to prices on Friday.

The trading activity caused tether to depeg to the upside by 6% in Argentina. And following the announcement of Sylvenia Batakis to replace Guzman late on Sunday, tether valuations rose another 9%. Sebastian Serrano, who is the CEO of the Argentinian exchange Ripio, told Coiness, quote, Whenever there's one of these news stories in Argentina, because of the 24-7 nature of crypto, it is the first market where Argentina starts to look for a price for the U.S. dollar. This drives volumes up. Argentine Exchange, Buenbit, recorded a 300% increase in trading on Sunday as compared to the same day in previous weeks.

Part of the story here is the demand for dollars. In Argentina, there's an official rate for dollars and a cap on how many you can buy in exchange. And then there's the blue market rate, which in a market rate, which in a market, other places might be called the black market rate, which tends to be pretty different. Zahir at Split Capital on Twitter said Tether and Stablecoin use case has never been highlighted better. Globally, these stable coins alone will engulf all forms of currency in a few years slash decades. To that, Notch, an Argentinian responded, Argentinian here, although I agree with you, the article is a little bit misleading as it infers that Argentinian people are adopting, quote-unquote,

crypto. They're just using its technology to buy USD, as the government doesn't allow. purchase of it over $200 USD per month. Because of the disparity between the official price of the dollar that the government sets, i.e. 1 USD equals 125 Argentinian pesos, and the actual dollar, which Argentinians call dollar blue, where 1 U.S. dollar equals 260 Argentinian pesos. Furthermore, the quote-unquote illegal exchange places where people buy the dollar blue are mostly closed on weekends. Now, I think what Notch is trying to say is that there is a difference between non-sovereign cryptocurrencies, like Bitcoin and stablecoins that are pegged to fiat. He's stating that Argentinians are just using stable coins to get effective access to dollars. But I think that's still a powerful show of how

important crypto rails can be in this context. What matters to these Argentinians is them being able to use the options made available by the crypto industry to hedge a collapsing currency and rampant inflation, not to mention political instability. If you want a discussion for how this type of behavior and activity fits in and sits alongside a larger Bitcoin worldview, go check out my interview with Alex Gladstein from last week. We talk about how he had to come around to the functional utility of these types of stable coins in this exact type of context after seeing just how valuable they were in times of market chaos. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still

stay in crypto, you need a trusted partner by your side. Nexo is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, Chainalysis is here to help. Chainalysis demystifies cryptocurrency by performance. providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi.

Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets. with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs.

When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show. Let's shift over now to the market side of the house. As discussed last week, June was Bitcoin's worst month ever and also concluded its worst quarter, at least in terms of price. A natural question then for many is, are we close to a bottom? Glass nodes have been reporting that multiple previously accurate bottom signals are currently flashing.

Almost the entire suite of on-chain activity metrics indicate that the number and activity of network users are approaching the deepest historical bare market territory. The Bitcoin network is approaching a state where almost all speculative entities and market tourists have been completely purged from the asset. The report put numbers around this. Address activity has declined 13% since November. User-based growth has collapsed to only 7,000 net new entities per day, which is comparable to the worst bare market lows of 2018 and 2019.

On-chain transaction volume has been stagnant for over a year. Addresses with non-zero balance continue to decline, following the worst. the largest purge on record in Q1 of this year that saw over 24% of wallets getting rid of their holdings entirely. On the flip side, the Hoddle cohort seemed to be holding up so far. Only 50% of on-chain transactions are being made to or from an exchange. Bitcoin balance on exchanges dropped to 2.4 million Bitcoin, a level last seen in July 2018. A liquid supply spiked up by 223,000 Bitcoin last month, which is its largest position changed since July of 2017. In case you're wondering what that might mean, a liquid supply represents Bitcoin moving to wallets

that have little or no history of spending. What's more the strongest accumulation is occurring at the extremes, i.e. those that have more than 10,000 Bitcoin in their wallet and those that have under one Bitcoin in their wallet. Here's how GlassNode sums this all up. Bitcoin on-chain activity is firmly in bare market territory, and the most recent network utilization suggests an almost complete purge of all market tourists has occurred. Demand for Blockspace, is low, and the growth of network users is lackluster at best. However, below the surface, the market is experiencing a number of very intriguing divergences. Despite a historically bad year to date and now the worst month of price performance since 2011, strong hoddler undertones

persist. Exchange reserves continue to drain as participants find renewed momentum towards self-custody. These coins appear to be flowing into wallets with no history of spending, and the balanced growth in exchange withdrawal activity of both shrimp and whale cohorts are at historically aggressive levels. The Bitcoin bear is in full swing, and in its wake, the hodlers of last resort are the last one standing. The question we have to ask, though, of course, is can they keep standing? Now, there are two main reasons that people point to for why we might not have reached the bottom. The first is, of course, crypto-contagion, the further fallout of rapidly decreasing prices, which has caused institutional failure, which then spins over into other institutions, etc., etc.

This is the Luna Celsius 3-Aros capital problem. The second reason, however, is macro, obviously the part that we talk about most on this show. The fact that inflation remains high, that the Fed seems intent to keep pushing rates up to fight inflation, even in the face of a potential recession. Now, the markets don't totally agree that the Fed will be able to keep up its aggressive streak if recession hits, but that's what they're signaling, and even in the best case, we would need to see some serious declines in inflation before this would even be on the table. I did see this great comment from Chow Wang, though. People who are worried about crypto because

of macro realize how bullish this is, right? This is the first cycle where the main bear case is an exogenous factor. In previous cycles, it was endogenous, e.g. Mount Gawks in 2014, and ICOs in 2018. Lots of mentions of U.S.T. and Celsius and 3AC. Yes, they are endogenous, but relative to the size of the industry, they are nothing burgers compared to Gox. If they didn't exist, the market would have found a different way to de-leverage itself. They are, by and large, symptoms, not the cause. The point here is that while there is some similarity between the 2014 and 2018 bare market problems, i.e. for selling and bank runs, the context in which they're happening is just so different.

Observable macro conditions are incredibly tight and going through the fastest tightening of financial conditions in basically as long as can be reasonably compared. global bond markets are currently on pace for their worst year since 1865, the U.S. 10-year suffered its worst drawdown year-to-date since the founding of the country. This means that rates rose across the world at the fastest pace ever. What that means is that this crypto drawdown isn't just about Luna and 3AC and contagion. It's about monetary conditions tightening and taking a wrecking ball to the entire global asset complex. Now, of course, this doesn't make it any better necessarily, but it does show the maturity of the industry that these are the

problems that it's now facing. All that said, I will say that we do likely have some more of this contagion to work through. 3AC continues to be under intense scrutiny. On Friday, they filed for Chapter 15 bankruptcy in the Southern District of New York, Chapter 15 applications being related to foreign legal proceedings, and according to Bloomberg, the filing will allow the firm to protect its U.S.-based assets, even after its British Virgin Island assets are liquidated. Celsius has announced layoffs for 150 employees, which is about 23% of the firm's total headcount. They also hired specialized restructuring advisors last month after they had frozen withdrawals. At this time, withdrawals from Celsius remained frozen.

Singapore-based crypto lender Vald has also suspended all withdrawals trading in deposits, as it also looks to restructuring options. It too announced in June that it would be laying off 30% of its. staff. Finally, publicly traded Voyager Digital announced on Friday that it was also temporarily suspending all trading deposits withdrawals and loyalty rewards. Upon the news, Voyager's stock fell an additional 25% in U.S. markets, which is on top of an already brutal 99% drawdown from the all-time highs in November. Lastly, in a story that isn't about contagion but is just a denou ma of the phase that we just lived through, meta has announced that it will shut down its

Novi Crypto Payments Wallets in September. This is the final close of the company's three-year crypto payments project. Users have been contacted to withdraw all funds and will lose the ability to deposit funds or download the app starting on the 21st of this month. In a statement, they point to their Metaverse pivot as the reason, saying we are already leveraging the years spent on building capabilities for meta overall, on blockchain, and introducing new projects such as digital collectibles. You can expect to see much more from us in the Web3 space because we are very optimistic about the value these technologies can bring to people and businesses in the Metaverse. R-I-P Libra. With that, I want to say thanks one more time to my sponsors, nexus.io, chainalysis and FTX.

And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.