Cryptoverse: 10 billion reasons bitcoin could become a reserve currency

(Reuters) - A crypto platform's pledge to amass $10 billion worth of bitcoin to back its own "stablecoin" is firing up the market. It's part of a wider movement to crown bitcoin as the reserve currency of a new age.

Seoul-based Terraform Labs has so far built up nearly 40,000 bitcoin worth $1.7 billion in a series of purchases via a non-profit affiliate, Luna Foundation Guard, according to publicly available blockchain data.

The spree follows Terraform co-founder Do Kwon's announcement on Twitter last month that the project would buy the $10 billion worth of bitcoin reserves to underpin TerraUSD, breaking ranks with other large stablecoins - a ballooning class of cryptocurrencies that aim to minimise wild price swings and are typically backed by U.S. dollar reserves.

A stablecoin backed by bitcoin reserves, according to Kwon, "will open a new monetary era of the Bitcoin standard", referencing the gold standard that formed the backbone of global finance about a century ago.

The acquisitions, and the anticipation of more to come, are supporting the price of bitcoin, with some market players identifying them as a big driver of bitcoin's climb back towards $48,000 at the end of March. More significant, perhaps, is whether others will follow Terraform's lead.

"Buying $10 billion worth can move the price in the short term," said Sid Powell, CEO of Sydney-based crypto lender Maple Finance. "But over the longer period, it's more what it signals - that bitcoin has been introduced as the hottest form of collateral backing for currencies."

Yet other market participants cautioned that an ever-closer embrace between bitcoin and stablecoins like TerraUSD could introduce a new risk for crypto markets that raised the prospect of a "death spiral" for investors down the line.

"There is a danger some people are trying to position long ahead of the buying which could exaggerate a fall if the price starts to retrace," said Richard Usher, head of OTC trading at crypto firm BCB Group in London, who attributed bitcoin's gains last month to an improving risk environment.

Vetle Lunde, analyst at Norway-based crypto research firm Arcane Research who is tracking the Terra project purchases, estimates that, to reach $10 billion in reserves, it could eventually hold between 60,000 to 70,000 bitcoin.

Stablecoins are rapidly gaining ground. They're a common medium of exchange and often used by traders seeking to move funds around and speculate on other cryptocurrencies.

For example, it is much easier to swap tether - the biggest and most mature stablecoin - for bitcoin or other crypto, than it is to swap U.S. dollars for bitcoin.

A year ago, tether's market cap $44.5 billion, while upstart TerraUSD's was $1.76 billion. They have since risen about 85% and 850% respectively to stand at $82.3 billion and $16.7 billion, according to CoinMarketCap.

TerraUSD is now the fourth-largest stablecoin and, like its peers, is pegged to the dollar. 

However, while the likes of Tether and USD Coin have reserves in traditional assets which they say match the value of tokens in circulation, TerraUSD maintains its 1:1 dollar peg through an algorithm that moderates supply and demand in a complex process that involves the use of another balancing token, Luna.

The bitcoin reserves theoretically add another level of reassurance, while keeping the Terra project decentralised.

"Backing it with something as predictable – not from a price perspective but from a rules and governing perspective – as bitcoin brings a lot of confidence to people," said Matthew Sigel, head of digital assets research at VanEck in New York.

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