Bitcoin Price: Crypto Market Panic Has Janet Yellen’s Attention

What’s Happening: Since last Friday, bitcoin’s price had fallen nearly 50% from its all-time high as traders — concerned about whether the Federal Reserve’s bid to fight inflation could send the economy into recession – dump riskier investments.

But in recent days, the implosion of TerraUSD, a high-profile crypto experiment, has fueled a deeper fear. On Thursday, Tether – a popular “stablecoin” billed as a safe place for crypto investors to park their money – broke its peg to the US dollar, raising even more alarm. The price of bitcoin fell to $26,350.

“If we see this going on for several days, we’re going to get pretty worried, pretty worried,” Marcus Sotiriou, a crypto analyst at digital asset broker GlobalBlock, told me. “The implications are so huge. It’s just unknown.”

Breaking it down: Understanding the situation requires a quick introduction to stablecoins and their wilder offshoot, algorithmic stablecoins.

Traditional stablecoins like Tether have become the foundation of the crypto market as they are theoretically fully backed by hard assets. One digital coin can be exchanged for $1 at any time and serves as a hedge against volatility. Given the infamous swings of the market, its use has skyrocketed among crypto companies, exchanges and traders.

The Federal Reserve estimates the value of stablecoins “has grown rapidly over the past year,” reaching $180 billion in March.

The boom helped fuel the rise of algorithmic stablecoins like TerraUSD. These coins are also technically worth $1. But they are not backed by hard assets, instead using financial engineering to maintain their linkage.

The entire subsector has experts worried, including the Fed. In a report published earlier this month, the central bank said there is little clarity about what really supports stablecoins, noting that a few major players dominate a market with little oversight. A loss of confidence could then set off a devastating run, which in turn could erode confidence across the entire digital economy.

It is not clear what is happening now. But when stablecoins churn, that’s the risk.

TerraUSD was hesitant at first and broke its peg to the US dollar over the weekend. It fell to 23 cents on Wednesday before gaining some ground again. It last traded at 58 cents after its makers announced an emergency intervention.

“This is exactly the ‘death spiral’ that many people predicted,” Henry Elder, chief of decentralized finance at Wave Financial, a digital asset manager, told me.

Tether was last below 99 cents for the dollar and also dragged bitcoin down. The most popular cryptocurrency – which has been bought in by a growing number of traditional investors – has fallen by 10% in the past 24 hours.

Why it matters: This may seem like a lot in the weeds. After all, crypto assets remain a very small part of the wider financial system. But powerful people like Treasury Secretary Janet Yellen are watching, fearing the situation could cause nasty and unpredictable aftershocks for investors of all levels.

“A stablecoin known as TerraUSD had a run and had fallen in value,” Yellen said when she testified before the Senate earlier this week. “I think that just illustrates that this is a fast-growing product and there are risks to financial stability.”

Inflation slows, but price pressures won’t go away

On the face of it, the latest US inflation report looked like some good news.

The latest: Consumer prices rose 8.3% in the year to April — a slight decline from March, when inflation rose at its fastest rate in four decades.

But digging into the data made it look less reassuring. Excluding volatile food and energy prices, core inflation rose 0.6% month-on-month, indicating that costs for a wide range of products are rising.

That makes economists and investors nervous.

“Inflation is no longer limited to the supply chain,” said Jefferies chief economist Aneta Markowska.

Companies have built up their inventories, which helps reduce inflation for goods. But prices in the services sector are skyrocketing as Americans travel and resume other leisure activities.

“Here’s the inflation story to worry about: Core services inflation has risen for four straight months,” economist Jason Furman tweetednoting that services are a much larger input than goods when calculating the consumer price index.

Investor Insight: The news shocked Wall Street and sent the S&P 500 down 1.7%. The index is now 18% below its all-time high in January.

Investors were nervous that the inflation value was worse than forecast. Economists polled by Refinitiv had expected an annual inflation rate of 8.1%. That could force the Federal Reserve to continue its aggressive support to the economy even longer, hurting riskier bets.

Disney dodged the fate of Netflix. But it’s not all good news

The question has lingered Disney DIS since Netflix NFLX reported the first loss of subscribers in more than a decade: If people cut costs, will they also save on Disney+?
So far that doesn’t seem to be the case. Disney said Wednesday that its flagship streaming service added nearly 8 million subscribers in the most recent quarter, avoiding Netflix’s misfortune.

“The platform’s growth since launch reinforces its uniqueness,” CEO Bob Chapek said during an interview with analysts. “Actually, we believe that Disney+ is one of a kind.”

Hulu and ESPN+ also grew last quarter. The company’s services now have nearly 206 million users.

Chapek said Disney+ is still on track to reach between 230 million and 260 million subscribers by mid-2024.

That said, Disney shares initially rose after the report, but are now more than 5% lower in premarket trading.

A concern? Disney spends a lot to keep growing. The company’s direct-to-consumer unit lost $887 million in the quarter — more than triple its loss from a year ago. Disney blamed “increased programming and production, marketing and technology costs”.

Next one

Six flags SIXTapestry TPR and Utz Brands report results before US markets open. Poshmark and Wheels Up will follow after the close.

Also today: The US Producer Price Index for April publishes at 8:30 a.m. ET.

Out tomorrow: The University of Michigan Consumer Confidence Survey for May.

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