WTF Just Happened?
Friday May 20, 2022 - Issue # 13
I know you haven’t heard from me in a couple weeks. It probably seems like I’ve been in hiding but it’s far from the truth — I haven’t been hiding just god--damn--busy…mixed with a little bit of writer’s block but I’ll try to shake it off on this one.
So, firstly, I hope that you’re all doing okay. What happened with Terra - UST/LUNA - was swift and brutal — I hope no one reading this had meaningful exposure but the chances of that are… not so good. So, to those that did, sorry for your loss but don’t give up on this space. The last time I remember something like this happening was with BitConnect back in Feb 2018. After reaching the value of over $470 per coin in Dec 2017, the token plummeted to below $1, taking many investors’ savings with it. Other examples of tragic wealth vanishment was the Mt. Gox hack and subsequent shut down in Feb 2014 and (representing Canada!) the Quadriga saga coming to a head in early 2019.
If you lost money during any of these events and decided to give up on the entire industry for good, you would’ve missed out on monumental growth that followed. We are still early and have a long way to go.
And look, at least (hopefully) you don’t have a permanent reminder of your loss like legendary investor Mike Novogratz. Yikes.
So wut happened?
What happened to Luna/UST is, in my opinion, directly correlated with a bad macro backdrop.
Global macro has not been kind to all risk assets this year. It’s actually quite impressive that BTC and ETH have held up as well as they have off their highs (~-55%) vs. a number of growth stocks — especially the ones with negative cash flows (higher rates = lower the present value of the future cash flows = bad for growth stocks) — that are off 50-70%+ this year.
The Fed is in the process of taking back what they gave us all so rapidly over the last couple of years. The mass amounts of liquidity they pumped into the system which propped up all risk assets made us all feel richer than we probably deserved. For those that understood that this could not go on forever and sold their assets along the way — good on you. For the rest of us, we’re essentially feeling the pain of shall I say, rather undeserved quick spoils being rapidly stripped away. Whether you deserved it or not, having 50%+ of your wealth decimated over the past 6 months is gut wrenching. We got used to spending it like we had it. Now hopefully we can adjust to the new norm and tighten up a bit.
When times are tough, “free money” is pumped into the system meant to stimulate economic activity. Ideally, “economic activity” is less gambling your net worth on NFTs, dog coins and GameStop stock and more spending money at restaurants, stores, vacations, etc.. However, this period was different in that everyone was trapped inside due to never ending covid protocols and became sophisticated RobinHood investors with nothing else to spend money on aside from pizza, booze, sports betting, and the like. Healthy.
So, here we are. The “free money forever” ethos has left us staring in the face of the biggest bout of inflation since the 70s with a lot less money to spend. Risk assets that had monumental gains since Covid have been cratered. All of this put pressure on Luna and the reserves held to back Terra’s algorithmic stablecoins, UST. During the “good times” we witnessed UST rise like a phoenix from the ashes to become one of the largest stablecoins on the market. Its growth was a perfect combo of non-crypto folks hearing about a “risk-free” way to earn 20% on their “USD” via the Anchor Protocol, and crypto folks who just 10-100x’d their net worth over the past couple of years deciding to “cash out” into “stables” to wait for the next cycle…because “F the banks!” and “how else can I be guaranteed to outperform inflation?”
When folks noticed inflation numbers coming in at record levels and realized the Fed wasn’t just posturing about a rapid pace of tightening, they did as expected and started selling off long duration assets (crypto being relatively far out, if not the furthest). The downward pressure on reserve assets backing UST coupled with UST withdrawals, triggered a “run on the bank.” The reserves weren’t enough to prevent UST’s collapse. In Luna and UST alone, $40bn of market value was destroyed in days.
So, on top of a disgusting macro backdrop, the market had to soak up an 80,000 BTC sell order as the LFG dumped its BTC reserves. Again, it’s impressive that we’re still at BTC $30k all things considered.
It wasn’t just retail that got crushed…
I’m sure this is not the last we’ll here about tremendous losses from funds, exchanges, and other players in this space because of the collapse.
There’s typically some sort of blow up during every cycle in crypto. We get excited, greedy, and exuberant. Then we get a reality check.
For the majority of people, it’s probably best to stick to Bitcoin.