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What happened to Luna/Terra?

As a quick summary of what happened, UST was a “stable” coin that was supposed to maintain its value at $1. In Crypto land there are several ways that people have attempted to pull off this trick. The easiest way is to just hold 1 for 1 US dollars in a bank account that back up each token, so then if anyone ever needs to they can redeem the full amount, this is basically the approach that USDC and USDT try to use to run their version of stable coins. The second approach is to use assets other than US dollars to back up the value of the token (Ethereum, Bitcoin, other cryptocurrencies), usually this is done in a way so that there is more value in reserve than US dollars outstanding so you have a margin of safety if the value of the assets drop. This is basically how Dai the stable coin is managed (by MakerDAO). Finally there has been multiple attempts to create a stable coin out of thin air that is backed up by some kind of equity token. The idea being if we create this token and it goes below $1 we will use the equity token as a backstop and sell it to make you whole. That is how UST worked. The Luna token was the equity token. Everything was fine until you had a feedback loop which dropped the Luna token market value to below the outstanding value of the UST, and that’s when the game was over, panic set in. People pointed this out as a very real possibility, not to mention the fact that it has happened in crypto a few times over, in almost the exact same fashion, but this time it was different because… because… it was much bigger this time? There is a bit of logic to that argument because in the end the real USD is in a similar position, at least in some respects.

Because of all of this we have entered an interesting time in the crypto market. I am now seeing a lot of people saying “I told you so!”, it was all a house of cards and now its fallen apart. I haven’t heard “crypto is dead” yet but I feel like I’m getting that vibe from some news outlets and social media types. Part of that is coming from the draw down in crypto assets over the last week and half or so, and another big chunk not unrelated to that is the UST collapse.

Lets get one thing straight for anyone out there who might be in doubt the crypto ecosystem is far from dead, this blow up was predicted by many. Crypto prices tanking by 20 – 30% in a week is pretty normal, its a super risky asset class, you just need to look at a chart to see that reality. Also when you read headlines like “Stable Coin at the Center of Crypto Fails!” which was an approximate headline from the Wall Street Journal, you might think that something fundamentally broke in crypto and that there was some event that will change the tide of the future. No. This is why people don’t trust the media these days, the headlines are many times mis-leading and sometimes outright false. UST was a very large stable coin, but it certainly was not at the center of crypto, that crown goes to USDC, USDT, and DAI, collectively which were many many times the size of UST. Don’t get me wrong this was a big deal, but it was some what of a pseudo ponzi scheme that ended up blowing up, not something fundamentally wrong with crypto, other than there are a lot of people who still don’t understand the risks they are taking when they pursue magic get rich quick narrative coins.

The Luna Terra ecosystem is one area I have avoided, not necessary because I saw exactly what was coming though I was hesitant about the model, but it may have been half luck on my part. To be 100% honest I had plans to purchase some Luna when we were in the bear market/crypto winter because I figured that it must be gaining some traction given its size. I’m glad my patience and hesitance was rewarded this time. But if you were involved and lost money, hopefully you didn’t go overboard with your allocation, and hopefully you took some profits on the way up, but if not don’t beat yourself up about it (unless this is a pattern for you then maybe you should look a little deeper), make this a very good learning opportunity. I have lost money in the past, I have been nearly wiped out by going overboard on trades (the financial crisis and a leveraged Etrade account do not mix well), but I have learned, and that has served me extremely well over the last decade or so.

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