I ate a healthy dose of humble pie today, so maybe this article can serve as therapy.
I am talking about Terra, its native token Luna and its UST stablecoin. In short, UST is an algorithmic stablecoin that is technically backed by nothing (bear with me, luna bull). Every time 1 UST is mined, 1 Luna is burned, and vice versa.
This keeps the peg up to $1, but what happens when there is so much selling pressure that UST drops below the peg? Due to which people are scared.
And when people get scared, they sell UST for fear of breaking the peg.
This creates more fear, which triggers more selling, which triggers more fear and so on and so forth. If I was on a strict word count, I could only call it a run on the bank. We saw this today, with UST de-pegging, trading as low as 88 cents about thirty minutes ago (currently at 90 cents).
I capitulated
I was one of those scared people. In fact, I sold mine for 95 cents on UST dollars, swallowing a rather inconvenient 5% loss, as detailed in the Twitter thread below, which I typed as tears rolled down my face and fell on my keyboard. Went.
I just sold most of mine $UST At 95 cents on the dollar.
Why a quick thread together, while the egg is still fresh on my face.
And yes, gun to my head, I still think Peg survived.
1/6 https://t.co/ruToLdAvf6
— Danny Ashmore (@FearlessIntern) 9 May 2022
Some reason why, before you abuse my already egg-covered face.
As I write this, Do Kwon hasn’t tweeted in five hours and counting, when he said “More Capital Deployment – Stable Guys”. While his tone was questionable in the midst of the biggest crisis in Luna’s history, the lack of further detail on the defense mechanism is a real problem. We know that Terra, through the Luna Foundation Guard, holds bitcoins in reserve to settle the peg in such cases. But when will it be deployed, what has been spent and is there any additional capital available?
I tried my best to track bitcoin reserves via the address below tweeted by LFG, but it’s unclear how much of the 37,000 bitcoins (about $1 billion) withdrawn has been spent, because of this Most were sent to various exchange wallets.
Below is the new LFG $BTC Wallet Address: https://t.co/9t0NX3VEMI
The last clip LFG pulled was ~37K BTC. Similar to the previous deployment, it has been loaned to MM.
The recent clip has been spent very little but is currently being used to buy $UST,
Updates are coming.
— LFG | Luna Foundation Guard (@LFG_org) 9 May 2022
Other than that one tweet from Do Kwon, it’s radio silence.
Why sell?
I ran the numbers and decided that selling was the best decision for me. The last two words in that sentence are essential- “for me”. Everyone has their own risk tolerance, and every investment decision should always be taken in the context of their portfolio.
For me, I was using the “arbitrage” strategy of earning an anchor 19.5% yield (which was recently reduced to 18%) while paying a lower interest rate on a loan. The fact that these borrowed funds were important, and in compiling a scenario analysis, was ultimately the deciding factor in what to sell.
In holding, I was betting my entire UST reserve (most of which was borrowed) that the peg would be at 1/20 odds. I was borrowing money to bet that this peg would hold. I didn’t like those situations.
Another way of looking at it is the following: At an 18% yield, a 5% haircut equates to 5%/18%*365 = 101 days of interest in the anchor protocol. I can live with its sacrifice, but the loss of my entire UST holdings will seriously damage my portfolio.
With UST trading 95 cents to the dollar, while I ate my stale leftover salad for lunch a few hours ago, I hit the sell button.
risk management
This is the part where you say I messed up, that my risk management was off, and that was always a possibility. And you’re right.
The funny thing is that I was in the process of doing due diligence on other protocols, as I was in the process of transferring these borrowed funds. I was becoming increasingly uncomfortable with the rhetoric from Do Kwon and Terra and, along with the fact that the anchor has been dynamic and the rate is now falling (already 18% and projected to 16.5% next month) has Inspired me to diversify and move a large part of my wealth elsewhere.
So if this madness had come a week later, I would have laughed.
But that is crypto. That’s life.
It sure sounds painful that I had rated Anchor as a high risk one and still keep coming off on the wrong end.
what happens next?
My gut feel is that the peg holds. I think hopefully the market will settle a bit more, at least in the short term. I’m not sure what this means for long-term confidence in PEG, but I don’t think I’ll wake up tomorrow to see that UST isn’t there anymore.
And this is not a contradictory statement. I feel like it holds; I’d be very surprised to see it still break. But I was not ready to risk it, as I did not like the odds being offered.
If it has rained 95 in the last 100 days, you will gladly accept the $10 bet that it will rain again tomorrow. But would you bet half of your net worth? Would you take a loan to avail? Exactly – it depends on your financial circumstances and risk tolerance. For me, at lunchtime today, UST was no longer worth it on a risk-reward basis to me.
So yes, I sold a huge chunk of my UST at 95 cents on the dollar, hurting my pride and ego in the process. But that’s the investing world, and if you don’t like it, you can always keep the cash.
win some lose some.