I enjoyed a healthy portion of humble pie today.
I’m talking about Terra, its native token Luna, and its UST stablecoin. UST is an algorithmic, stablecoin that technically is not backed by anything (bear with us, Luna bulls). Each time 1 UST has been minted, 1 LUNA has been burned.
This keeps the peg at $1. But what happens if there is so much selling pressure on UST that it drops below the peg. This is what scares people.
People are often afraid to sell UST out of fear of losing their pegs.
This triggers fear which then triggers selling which in turn triggers fear which in turn triggers even more fear. I could simply have called it a run to the bank if I used a more precise word count. Today we saw this with the UST trading at a record low of 88 cents, about 30 minutes ago (currently at 89 cents).
I Capitulated
I was one those people. In fact, I sold my UST to 95 cents on a dollar, absorbing a rather unpleasant 5% loss. This is detailed in the Twitter thread that I wrote as my tears poured down my face and fell onto the keyboard.
I just sold most of my $UST95c per dollar
I’m going to make a quick thread about why while the egg is still hot.
Gun to my head, I believe that the peg still survives.
— Dannii Ashmore (@FearlessIntern) May 9, 2022
Before you start hurling abuse at my already-egg-covered faces, here are a few reasons.
As I write this, Do Kwon has not tweeted in five hours and counting, when he said “deploying more capital – steady lads”. While his tone was questionable at best amid the greatest crisis in Luna’s history, the lack of further elaboration on the defense mechanism is a real problem. Terra has Bitcoin in reserve via the Luna Foundation Guard to be used in collating the peg in such instances. But when will it be deployed? What has been spent? Is there any additional capital?
I did my best to track the Bitcoin reserves via the below address tweeted out by LFG, but it’s unclear what has been spent of the 37,000 bitcoins withdrawn (circa $1 billion) as much of it was sent to various exchange wallets.
Here is the updated LFG $BTCAddress of your wallet: https://t.co/9t0NX3VEMI
LFG withdrew the last clip for 37K BTC. It has been loaned out to MMs, just like the last deployment.
A very small amount of the clip has been used, but it is being used to purchase. $UST.
Keep checking back for new updates.
— LFG | Luna Foundation Guard (@LFG_org) May 9, 2022
It was radio silence, except for the one tweet by Do Kwon.
Why sell?
I did the math and concluded that selling was the best choice for me. The final two words in that sentence are essential – “for me”. Everyone has their own risk tolerances, and each investment decision should always be taken in the context of one’s own portfolio.
For me, I had been using an “arbitrage” strategy of earning the Anchor 19.5% yield (which was recently reduced to 18%) while paying a lower interest rate on a loan. This was crucial, and was the decisive factor in deciding whether to sell.
By holding, I implicitly bet my entire UST reserves (the majority of which were borrowed) that the peg will hold at 1/20 odds. I borrowed money to wager that the peg would hold. I didn’t like those odds.
Another way to look at it is the following: at 18% yield, a 5% haircut equates to 5%/18%*365 = 101 days worth of interest in the Anchor protocol. This is something I can accept, but losing my entire UST portfolio would have severe consequences for my portfolio.
The UST traded at 95 cents per dollar while I ate my stale leftover lunch for lunch a few hours ago. I then hit the sell button.
Risk Management
Here is where you admit that you made a mistake, that your risk management was poor, and that this was always possible. And you’re right.
Funny thing is, I was actually doing due diligence on other protocols while I was moving these borrowed funds. I was becoming increasingly uneasy with the rhetoric from Do Kwon, Terra and the fact Anchor has been dynamic and that the rate is falling (already to 18.5% and projected to 16.5% next months) led me to want to diversify and move large portions of my holdings abroad.
If this madness had struck a week later I would have laughed.
But that’s crypto. That’s life.
It is very painful to realize that Anchor was a higher risk, but I am still coming out on the wrong side.
What happens next?
My gut feeling is that the peg remains. The market should hopefully find its footing and stabilize, at least for the short-term. I’m not sure what it means for the long-term confidence in the peg, but I don’t think I wake up tomorrow to see UST is no more.
And that isn’t a contradictory statement to make. I feel like it holds; I’d still be very surprised to see it break down. But I wasn’t willing to risk it, as I didn’t like the odds that were being offered.
If it has rained 95 of the last 100 days, you’d gladly accept a $10 bet that it would rain again tomorrow. Would you risk half of your net worth to bet on it? To leverage up, would you consider taking out a loan? Exactly – it depends on your financial circumstances and risk tolerance. Today at lunchtime, UST was no longer worth the risk-reward ratio for me.
So, yeah, I sold a lot of my UST at 95c per dollar. It was a loss for my pride and ego. But that’s the world of investing, and if you don’t like it, well you can always go hold cash.
You can win some and lose some.
