The Terror of Terra

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This culture of ‘wokeness’ we’re all living in today is a fascinating one. Social media and hordes of people are getting together to drive companies to cancel celebrities (most notably Will Smith after his 2022 Oscar’s altercation with Chris Rock). Some issues, like the Supreme Court voting to overturn abortion rights, may not be so easy to influence. I know I personally favor companies that seem to have a moral compass. Headlines like “Costco’s iconic hot dog deal is still $1.50, despite record inflation rates raising prices everywhere else in the industry” just melt my heart – and I’m vegetarian and could care less about hot-dog prices. It is the principle of it, it gives you that warm fuzzy feeling that a big corporation is looking out for the common man. McDonald’s, Starbucks, and PepsiCo among many others promptly pledged to stop business operations in Russia after the invasion of Ukraine was ordered by Russian president Vladimir Putin.

This past week was particularly catastrophic in the crypto market. There was a collapse of Terra’s UST stablecoin and the native network token LUNA. I have talked briefly about stablecoin’s in the past here, but essentially these coins are supposed to minimize price volatility, offer a stable value, and many are supposed to be pegged to the US dollar. Several exist, including Tether (USDT), USDC (the one I use), Binance USD (BUSD), and many others. Terra created an ‘algorithmic stablecoin’ with UST that was supposed to hover closely around the $1 mark; but achieved this value using the other token in its ecosystem, LUNA.

The magic behind a system like this working has to do with a concept called ‘arbitrage’ trading. In the Terra ecosystem, a person could swap UST for a LUNA token (or vice versa) at a 1:1 ratio. The algorithm burns UST or mints LUNA to absorb volatility and balances the demand so that the overall price stays around its $1 level. This is in slight contrast to how USDC and USDT rely on a reserve of assets, fundamentally backed by state-issued fiat currency e.g. the U.S. dollar.

Stablecoins, to me at least, are seen as a shelter or a reasonably safe option in an otherwise frenzied crypto market. Algorithmic stablecoins do not technically have a solid collateral to back the price; in this case TerraUSD (UST) was using its governance token (LUNA) and minting and/or burning to help stabilize pricing. During major market stresses or shocks, in times like we have now where the Federal Reserve is substantially raising interest rates to combat record inflation, where stocks and bonds prices are falling together for the first time in decades, perhaps we shouldn’t be so surprised that a stablecoin becomes de-pegged.

The price of LUNA peaked close to $120 about a month ago, and is today worth fractions of a cent. I consider myself extremely fortunate that I was not invested in anything within the Terra ecosystem; but an event like this certainly does make me reconsider my risk tolerance in my crypto holdings – which currently sit at about 10% of my overall portfolio. Most of my crypto is in USDC gathering yield in the Celcius Network, with a bit of Bitcoin and Ethereum to add some excitement to the mix.

Speaking of the Celcius Network, I would say that my experience thus far has been wonderful with them. Granted, I have not attempted to withdraw any funds yet – especially in times of crisis (like with the recent rapid crash of LUNA and UST) – but I consistently collect interest (now, only available to accredited investors in the U.S.) every Monday like clockworks. Alex Mashinsky, the CEO of Celcius Network, came out within hours of this Terra catastrophe and spoke openly and transparently about how everyone (including himself) got pummeled, but this encounter may separate the ‘tourists’ from the true investors that believe in the decentralized finance (DeFi) movement. I think that makes for a good leader. Like Costco and the $1.50 hot-dog, I genuinely feel like Celcius has a mission to do good for the ‘common man’ (while of course, making millions of dollars for the corporation).

Everyone, none of this is meant to be financial advice. Truth be told, I have probably lost tons of money in my venture into the crypto space and especially in all this stock market, crypto crashing turmoil that has been happening lately. I recognize now more then ever that simple, straight-forward investing into low-cost, well-balanced index funds would’ve spared me the stress of all this volatility, would have saved me the high transfer fees, and provided me priceless peace of mind of just staying the course. I dodged a bullet this time with Terra; but suffered great declines in Netflix stock, SOFI, ARKK and many other hand-picked losers.

Thanks for taking the time to read my post. I was going to write about our recent family vacation, but this was the hot-topic of the week and my mind has been on our finances lately due to the craziness of the markets…so, there you have it. Good luck to you all, and please feel free to write me or post your own experiences!

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