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Cryptocurrency and risks

My personal experience with the LUNA/UST collapse

What we’ve seen with LUNA and UST these last few days is unprecedented. Not because of a coin dropping 95% overnight — that’s happened countless times in crypto — but because of the scale and relevance of the project in question.

Both LUNA and UST were in the top 10 cryptocurrencies by market capitalization, and just a month before, LUNA had made a new all-time high. Now, it’s worth $1.4.

Many people where caught off-guard, myself included. Here’s my experience with what happened and what I’ve learned from it.

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My exposure to LUNA and UST

Let me tell you how invested I was in the Terra ecosystem first.

LUNA

I was lucky enough to buy LUNA pretty early. My entry price was about $34. It wasn’t a sizeable position to be honest, but it was quite important for me — an Argentine investing in crypto to scape 5% monthly inflation.

I had these LUNA staked at 8% on Terra Station, delegating to the Orion validator. A few months later, I switched to StaderLabs liquid staking.

Why? Because I didn’t feel comfortable with the 21 days undelegation period. StaderLabs’ LunaX token allowed me to swap my LUNA without having to wait. Looking back, that was one of the best choices I’ve made.

UST

At first, my position in UST was about the same size as my LUNA position. The 1:1 peg to the dollar and the ~20% APY on Anchor was simply too great of a passive income to ignore.

Not only that, but every time I closed a trade, I took profits in UST and deposited them on Anchor to increase my passive income yield.

Soon enough, my UST position in Anchor grew 4x times larger, becoming the second largest holding in my portfolio, only after BTC.

What I knew, what I didn’t, and how it mattered

I studied LUNA tokenomics for a while before entering the project. How LUNA was used to balance UST and maintain the peg, and how with the minting of UST, LUNA was burnt.

I also knew from following Do Kwon on Twitter and studying Anchor Protocol that the 20% yield was subsidized and organically unsustainable. I also knew that around 70% of the total supply of UST was deposited on Anchor Earn, driving most of its adoption and minting.

I’m not an expert, but believe me when I tell you, this wasn’t a secret.

What conclusions did I learn from this?

  1. First, that most UST supply was concentrated on a single protocol, and the failure of that protocol would trigger a catastrophic event.
  2. Second, that UST supply growth was mainly driven by an artificial APY subsidized by a yield reserve being rapidly consumed.
  3. Finally, that LUNA’s bullish rally was a consequence of its supply burns. As a consequence, LUNA price was also indirectly dependent on Anchor’s APY.
UST supply versus Anchor deposits.

Having these three items present in my mind, I knew the risk of catastrophic failure was a real possibility.

However, the many mechanisms in the works to protect the peg — such as the BTC reserve and Curve’s 4-pool— and Do Kwon’s confidence in his project, expressed several times by bullying concerned critics of the Terra ecosystem on Twitter, made me ignore it. Grave mistake.

Nevertheless, I was convinced we still had a long way to go before reaching the tipping point. I talked about it with my crypto-enthusiast friends.

We knew the debacle would come — everybody who researched UST did at some level. We just never imagined it would be now, and as fast as it was. And it caught us off guard.

How I reacted

I bought SOL at $160 last year. I saw it climb to $240 and I refused to sell, thinking it would go even higher. I’m still holding that SOL and I’m 75% down. Since that day, I swore I would always take profits.

I tell you this because about a month ago, LUNA reached a new all-time high at $118. Having learned that lesson, and knowing everything I knew about the Terra ecosystem, I took profits.

I couldn’t time the top exactly, but I did sell 60% of my LUNA position at $110. I recovered my initial investment and made quite a significant profit too, still keeping 40% of the LUNA I had. That was the first right choice I took. However, I deposited the profits in Anchor.

Then, the dump happened. It’s started with BTC falling from $38K to $36K, and from there to $33K. As it often happens, alts followed, and LUNA was among the worst of them. It tanked from $85 to $60, and the fear kicked in.

As Anchor started seeing massive withdrawals, I was calm. The peg was intact and I’m used to volatility. However, the day after, the run on the Terra’s main protocol kept going.

Remember, Anchor and its APY was the sole cause for ~70% of UST minting.

Anchor TVL chart.

What came after was what everybody knew would happen: losing confidence in LUNA and withdrawing from Anchor, there was no point in holding UST instead of, say, USDC or USDT — more liquid, widely adopted stablecoins with countless more trading pairs.

Exiting UST and LUNA

As soon as UST reached $0.98, and while most of the community was still calm that it would recover, anxiety kicked in. Yes, many stablecoins had lost the peg before and many of them recovered. However, many others didn’t, and considering what I knew about UST, I wasn’t quite sure about a recovery.

I decided to assume the loss, withdrew all my UST from Anchor and bridged it to Avalanche. There I swapped all my UST for USDC at $0.97 on TraderJoe. I payed $77 on trading fees, just so you imagine the volume that pair was experiencing.

It’s hard to explain the sense of relief I felt once the USDC showed up in my wallet. It was like landing a burning plane.

As I said before, I knew that if UST crashed, LUNA would follow. I still had my LunaX from the LUNA staked at StaderLabs, so I swapped it for LUNA and sent it to KuCoin, where I liquidated the last remnants of that position. My exit price was $54. Amazingly, I closed that in profit.

And just like that, it was over. I had dodged a bullet.

Lessons learned

This may sound cliché and repetitive, but believe me, you don’t really learn it until you lose money.

Do your own research

I knew I had to get out because I took time to read the mechanisms and tokenomics, and looked at the data, such as Anchor’s TVL compared to total UST supply.

If I didn’t understand something, I searched for smarter, trustworthy people that explained it in a YouTube video or on a Twitter thread. Listen to all the voices, both for and against. Compare what they say to what you know. Study. Make your choice.

You’re never the smartest person in the room, and there’s no shame in that. It’s much easier to make good decisions when you understand the whole picture.

If an opportunity is too good to be true, it probably is

20% annual yield on a stablecoin is simply too great a deal. As I mentioned, this was inflated through subsidies and a yield reserve, but many people — myself included — ignored this.

It’s important to look beyond the facade and branding of a project. Everyone from the Terra ecosystem, from the CEO to the unsuspecting community members, portrayed UST and LUNA as unbreakable, even though the risks were evident.

Not only that, but people who brought up these concerns were bullied, ridiculed, and made fun of, and it was easy to go with the flow.

There is always risk

There’s no such thing as a riskless investment in crypto — or in any sector for that matter. Regardless of how it’s perceived by the community, how it’s branded, and how reputable the project is, there is always risk.

Many of us thought we were safe and that our dollar value was protected because we were holding a stablecoin. Now, we all painfully learned the lesson that even those imply risks.

Closing thoughts

There’s a version that this was a coordinated attack from Binance, BlackRock, or Citadel. I really don’t know if this is true, but I do know it doesn’t matter. Best thing to do now is turn the page and move on.

If you were caught in this mess, I hope you’re doing well. It’s not easy seeing your money evaporate and many are having a bad time. But remember: it’s only money, life goes on.

If you need support, help, or someone to chat just to wash the sourt taste off your mouth, feel free to send me a message or contact me on Twitter. You’re not alone, and although we make mistakes, crypto is still one of the friendliest and most empathetic communities out there. I hope this picture helps.

Stay strong and take care.

Did you like this story?

I’m glad you did! My name is Santi. I enjoy and write about video games, cryptocurrency, and pop culture. If you’d like to read more content like this, consider following me on Medium and Twitter. I’d really appreciate it!

Thank you for your support!

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