I ate a healthy slice of humility today, so perhaps this article can serve as a form of therapy. I’m talking about Terra, its native token Luna and its stablecoin UST. To quickly summarize, UST is an algorithmic stablecoin that is not technically backed by anything (bear with me Luna fans). Each time 1 UST is minted, 1 LUNA is burned and vice versa. This keeps the index at $1, but what happens when there is so much selling pressure that the UST drops below the index? It scares people. And when people are scared, they sell UST, for fear of going broke. That triggers more fear, which triggers more sales, which triggers more fear, and so on. If I had been on a stricter word count, I might have just called it a bank run. We saw this today with the unlinked UST trading at 88 cents about thirty minutes ago (currently at 90 cents).
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I capitulated
I was one of those scared people. I actually sold my UST for 95 cents on the dollar, swallowing a rather uncomfortable 5% loss, as detailed in the Twitter thread below, which I typed as tears streamed down my face and onto the keyboard.
I just sold majority of my $UST at 95 cents on the dollar. Putting together a quick thread on why, while the egg is still fresh on my face. And yeah, gun to my head, I still think the peg survives. 🧵1/6 https://t.co/ruToLdAvf6 — Dannii Ashmore (@FearlessIntern) May 9, 2022
A few reasons for that, before you throw insults at my egg-covered face. As I write this, Do Kwon hasn’t tweeted in five hours and counting when he said “deploying more capital – calm down guys”. While his tone was questionable at best amidst the biggest crisis in Luna’s history, the lack of further elaboration on the defense mechanism is a real problem. We know that Terra, through the Luna Foundation Guard, keeps Bitcoin in reserve to deal with the drop in such cases. But when will this be implemented, what has already been spent and is additional capital available? I did my best to track Bitcoin holdings via the address below tweeted by LFG, but it is unclear what was spent of the 37,000 bitcoins withdrawn (about $1 billion), much of it was sent to various exchange wallets.
Below is the new LFG $BTC wallet address: https://t.co/9t0NX3VEMI Last clip withdrawn by the LFG was ~37K BTC. Similar to the last deployment, it has been loaned to MMs. Very little of the recent clip has been spent but is currently being used to buy $UST. Updates coming. — LFG | Luna Foundation Guard (@LFG_org) May 9, 2022
In addition to that tweet from Do Kwon, there was radio silence.
Why Sell?
I counted the numbers and decided that selling was the best decision for me. The last two words of that sentence are essential – “for me”. Everyone has their own risk tolerances, and each investment decision should always be made in the context of your own portfolio. For me, I was using an “arbitrage” strategy of earning Anchor’s 19.5% yield (which was recently reduced to 18%) while paying a lower interest rate on a loan. The fact that they were borrowed funds was critical and, when compiling a scenario analysis, was the deciding factor for the sale. By holding, I was implicitly betting my entire UST reserve (most of which was borrowed) that the peg odds would be 1/20. I was borrowing money to bet this fall would hold. I didn’t like those odds. Another way of looking at it is this: at 18% yield, a 5% haircut equals 5%/18%*365 = 101 days of interest in the Anchor protocol. I can live by sacrificing that, but a loss of all my holdings in UST would have done serious damage to my portfolio. With the UST trading at 95 cents on the dollar, as I ate my old leftover salad for lunch a few hours ago, I hit the sell button.
Risk management
This is the part where you say I was wrong, that my risk management was wrong, and that was always a possibility. And you are right. The funny part is that I was doing due diligence on other protocols as I was in the process of moving these borrowed funds. I was growing increasingly uncomfortable with the rhetoric of Do Kwon and Terra and coupled with the fact that Anchor had become dynamic and the rate was now dropping (already to 18% and projected to 16.5% next month) made me want to diversify and transfer most of my possessions elsewhere. So if this madness happened a week later, I would be laughing. But this is crypto. This is life. It definitely feels painful that I’ve assessed Anchor as a greater risk and yet I’m coming off the wrong side.
What happens next?
My intuition is that the price holds. I think I hope the market finds its footing a little bit and stabilizes, at least in the short term. I’m not sure what that means for long-term confidence in the peg, but I don’t think I’ll wake up tomorrow to find that the UST is gone. And that’s not a contradictory statement to make. I feel she can handle it; I would still be very surprised to see it break. But I wasn’t willing to take any chances, as I didn’t like the chances that were being offered. If it rained 95 out of the last 100 days, you would gladly accept a $10 bet that it would rain again tomorrow. But would you bet half your net worth? Would you take out a loan to leverage? Exactly – depends on your financial circumstances and risk tolerance. For me, today at lunchtime, the UST was no longer worth it to me on a risk-reward basis. So yes, I sold a big chunk of my UST at 95 cents on the dollar, hitting my pride and ego in the process. But that’s the world of investing, and if you don’t like it, well, you can always save money. Win some, lose some.