Crypto Just Had its Madoff Moment
The collapse of the Terra stablecoin wiped out more than $50 billion of value in 48 hours and triggered a crash across the entire crypto asset market
When the snows fall and the white winds blow, the lone wolf dies, but the pack survives.
Ned Stark (Game of Thrones)
Anyone following the crypto ecosystem will remember this week. In just 48 hours, one of the largest crypto projects (LUNA) and its stablecoin (UST) collapsed in a spectacular fashion, taking with them more than $50 billion of investors’ money. The level of losses is similar to that of the ponzi scheme that Bernie Madoff ran for decades before it collapsed in 2008.
The crypto community must take stock of what went wrong, learn from this failure, and move on.
UST was a stablecoin that was collateralized by the LUNA token, a token that had little utility beyond collateralizing the UST stablecoin (quite the design flaw, isn’t it?) Yet, the LUNA token reached a valuation of $40 billion in early April 2022.
Two months ago, realizing that UST may one day have to defend itself against an attacker, the LUNA Foundation started acquiring Bitcoin to use as reserve asset. The LUNA Foundation acquired a total of 80,000 bitcoins. But here is the fatal mistake that was made: The LUNA Foundation disclosed under what specific conditions it would utilize its Bitcoin war chest to restore the peg: If the price of UST reached $0.98 (i.e. a 2% deviation from its peg). At this point, the fate of LUNA and UST were sealed.
A sophisticated market actor executed a series of trades that first led to the de-pegging of UST and then to the demise of the LUNA token. The objective of the trader was to force the LUNA Foundation to liquidate its Bitcoin war chest in a fire sale, which would cause the price of Bitcoin to collapse. This is what the trader was after since he had taken a short position on 100,000 bitcoins.
Based on information publicly observable on chain, it looks like this trader walked away with a profit of about $800 million. The thread below explains how the trade was structured.
In the interview below, Nic Carter, Castle Island Ventures partner and Coin Metrics co-founder, didn’t have words strong enough to condemn the promoters of the LUNA project.
This is not the first time Bitcoin has experienced a severe correction, and it won’t be the last either.
Episode of the Week
This is THE episode you don’t want to miss this week if you want to understand the LUNA debacle. In this episode, the hosts explain how the project got so big and how it eventually collapsed spectacularly.
Macro Corner
Hidden Forces | Revenge of the Old Economy & How to Invest in the Commodity Supercycle | Jeff Currie
Jeff Currie, global head of Commodities Research at Goldman Sachs and an expert on commodity markets, talks about commodity markets, geopolitics, and he explains what factors led to severe under investment in commodity producing assets in the last decade. A must listen for everyone interested in commodities and infrastructure.
On the Margin | Inflation Has Put the Fed in Handcuffs | Peter Boockvar
Peter Boockvar, chief investment officer at Bleakley Advisory Group, discusses the Fed’s dilemma. With markets selling off in reaction to one of the fastest hiking cycles in recent history, Peter explains how current inflation rates have "put the Fed in handcuffs.” He explains that while the Fed has clearly stated its plan, one would be wise to remember Mike Tyson’s quote: “Everybody has a plan until they get punched in the mouth.”
The Pomp Podcast | #954 Travis Kling on Why the Fed Is Crashing the Market Intentionally
In this conversation, the Founder & Chief Investment Officer of Ikigai Asset Management discusses the market crash, the macro environment, why the Fed’s intention is to lower asset values to create a “reverse wealth effect,” what he expects the Fed to do in the coming months, and what is his outlook for Bitcoin.
All-In with Chamath, Jason, Sacks & Friedberg | E80: Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more
This is the only podcast that I never miss and that I listen to religiously every week. In this week’s episode, the hosts discuss what they believe is an imminent recession in the US, how the Fed and the US government created this situation by printing too much money, and how companies will have to adjust to weather the next two to three years.
Finally, I want to leave you with a quote from Nassim Nicholas Taleb, the author of The Black Swan and Antifragile. When interviewed, he often talks about one of the most important lessons he learned from another veteran trader when he first started trading: “Take all the risks you want, but make sure you're in tomorrow.” Avoid the risk of total ruin, because once you have lost all your money, you are out of the game.