Is LUNA Dead? Lessons We Can Learn From This Crypto Crash
Ever since its inception, cryptocurrency has always been a point of debate among investors. Some believe that cryptocurrency and the decentralisation of financial markets will be the future of currency, while others believe that cryptocurrency is nothing more than an elaborate scam, a glorified form of Ponzi scheme that has somehow managed to hook millions of unsuspecting victims.
But even with its many detractors, cryptocurrency still managed to make a place for itself in the market, as evidenced by Bitcoin and Ethereum’s meteoric rise. In 2021, Bitcoin managed to reach a historic high of RM269,248.83 ($61,374.25), while Ethereum reached a high of RM19,420.11 ($4426.74).
Which is why the crash of the LUNA cryptocoin in May 2022 caught so many people by surprise. Over the span of two days, LUNA’s price plummeted from RM526.44 ($120) to RM0.088 ($0.02), a 99% drop. In the following days, LUNA’s price managed to drop even more, bottoming out at RM0.0000049 ($0.00000112), before being delisted completely.
So what happened?
Rise of LUNA
But before we can discuss the crash, first we have to talk about where LUNA came from, and how it rose into prominence in the market.
LUNA was first developed by the Korean firm Terraform Labs, as the native token for Terra, their own self developed blockchain.
LUNA, TerraUSD (UST), and the Terra blockchain is part of an algorithmic stablecoin that worked to maintain its value.
The setup wasn’t anything new. Stablecoins were a thing ever since 2015, but LUNA saw an unprecedented rise in the market, largely due to the charisma of Do Kwon, the co-founder and chief executive officer (CEO) of Terraform Labs.
Do Kwon carried himself on social media with an unabashed swagger, going as far to label LUNA detractors as “the poor”, which inspired an almost cult-like following on social media, showing unseen levels of loyalty and following towards Do Kwon.
At one point, even billionaire Mike Novogratz got a tattoo of a wolf howling at the moon on his arm, signifying his commitment towards LUNA and UST.
Thanks to Do Kwon’s charismatic social media presence and the amount of followers he garnered, investors piled into the LUNA coin, giving LUNA and UST a combined net worth of $60 billion at one point.
Fall of LUNA
In order for us to understand the fall of LUNA, first we need to understand how LUNA, UST, and Terra worked. UST and LUNA are codependent on each other, and they exist in the Terra ecosystem. By design, users can always swap between LUNA and UST or vice versa, at a guaranteed price of $1.
In simple terms, here’s how it works. UST is pegged to the US dollar, which means that it’s designed to maintain its value at $1. If the price of UST drops for whatever reason, then a corresponding amount of LUNA will be removed from circulation to stabilise UST. Similarly, a UST price increase will see LUNA being removed to maintain parity.
This basically manipulates supply side economics to influence the price of the cryptocurrency.
So for example, if UST hits 0.99, then a small amount of LUNA will be burned to stabilise UST, and if UST hits 1.01, then a small amount of UST will be burned to stabilise LUNA.
This $1 price point is important, because this means that as explained above, if demand of UST rises and causes its price to rise above $1, LUNA holders can make a risk-free profit by swapping $1 of LUNA to create one UST token.
In this process, a percentage of LUNA is burned (permanently removed from circulation), and the remainder is deposited into a community treasury. By burning LUNA, this process creates scarcity of LUNA, and by swapping it into UST, it will dilute the market and drive the price of UST back down, to the peg of $1.
That’s how LUNA and UST are codependent on each other.
Well, that’s how it’s supposed to work. Until it didn’t.
It all started on May 7, 2022, when $2 billion worth of UST was taken out of the Anchor Protocol, which meant that it was now unstaked, and hundreds of millions of that amount was quickly sold. Why this happened is still a point of debate, but one thing for sure is that it caused the price of UST to fall to $0.91. This caused more investors to panic, and more sold their UST, which caused the price to fall and fall further.
For LUNA holders, it was even worse as the plummet of UST quickly meant that LUNA also lost a huge chunk of their value.
The crash kept going and going until it delisted completely.
In hindsight, LUNA has always exhibited plenty of red flags. UST’s Anchor platform offered a return of 20%, which is insanely high compared to the US government bonds, which were paying around 2% and savings accounts which were paying less than 1% in returns.
Analysts have said that it’s unsustainable, but thanks to Do Kwon’s charismatic presence and blind faith, investors kept putting more money into it.
What can we learn from the LUNA crash
So now that we understand what LUNA and UST is, and what caused the crash, now let’s have a look at 4 things we can learn from the historic crash.
Never risk everything into one investment
One of the most important lessons to be learned from the crash is also one of the most obvious, which is that you should never put all your eggs into one basket. LUNA’s crash was followed by meltdowns from people who put everything they had into it, which meant that they lost everything when it crashed.
Even the biggest projects can fail
One of the biggest draws of LUNA is the fact that it was backed by a huge number of big investors. As mentioned before, at one point the combined net worth of both LUNA and UST reached 60 billion US dollars.
However, even with all this financial backing behind it, it still crashed. Which is why the second lesson you should learn from this is that even the biggest projects can fail, and investment risk should be spread over a wider basket of options.
Use Stop Loss order to your advantage
One thing that you should always remember is that exchanges cannot be trusted in times of crisis.
Global centralised exchanges often have tricks that they employ to not let the money out of their system, such as;
- They suspend withdrawals.
- Their interface will not be responsive.
- They lock assets for certain periods.
This will make it hard for you to unload your assets in times of crisis. So what should you do in times like these?
Use the Stop Loss order to your advantage. Set it so that your assets will be sold automatically before you experience loss.
So in conclusion, the LUNA crash was a historic event, which everyone can learn from. Although the unprecedented crash might worry some people who are still very wary of cryptocurrency, there might still be a future in crypto investments.
However, as with other investments, prudent research and risk management is important.