Terra Luna Fallout – Retrospect & Takeaway

The Terra Luna fallout needs no introduction, especially since it had became global news and the impact was so great that it was the talk of the town amongst common folks who were totally clueless on cryptocurrencies. That had also painted a big red bullseyes for the regulators.

It also took quite a while for me to get a grip on the situation and understand what happened. A lot of people had been burnt by this fallout and some time is needed to calm down and assess the damage.

Brief Background

Unless you have been living under rock, here is a brief summary of what happened.

TerraUSD (UST) is an algorithmic stablecoin that maintains its 1:1 peg with the US Dollar via software logic instead of being backed by physical assets (unlike USDC). LUNA is the native token of Terra, a blockchain developed by Terraform Labs and is primarily used to operate the collateralizing mechanisms that ensures UST’s peg. USTs are minted by burning LUNA and can be also swapped for LUNA. For example, if the UST values goes above USD$1, the equivalent value of LUNA would be burned, which mints more UST, making it less valuable. If the UST price drops below USD$1, they are swapped for LUNA, which in turn makes UST more valuable.

Early this month, a large amount of UST was dumped, and UST started to de-peg. As it dragged on, with the backdrop of lack of official information, more UST was sold in mass panic. Hence it was not just a case of UST being de-pegged but it also had an effect of crashing the price of LUNA. With both UST and LUNA prices in free-fall, the rest is history.

Biggest run in crypto history.

Aftermath

Needless to say, it triggered a fallout on the broader crypto market as well as getting international headlines. Even Tether (USDT), another stablecoin, but backed by physical assets de-pegged for a brief period of time. A lot of people’s hard earn money went down the sink and talks about suicides were everywhere. I think it was the largest wipe out in the crypto market.

Personal Experience

I had done my research and knew of the risks involving algorithmic stablecoins and how Terra Luna works. I knew that it is a matter of time before a serious de-peg occurs and that the potential of a bank run is always there. Even with their Bitcoin and other reserves, it is in my belief that they are unlikely to survive a full run onslaught.

At that time, before the great crash, 5-8% of my portfolio is in UST and LUNA. I was expecting that I would have enough warning and buffer time to exit if I had to. In the end, I lost almost everything despite knowing what I had gotten into and having an “exit plan”.

Then came the de-peg and crash.

I didn’t expect it to free fall so fast and both at the same rate. The plan was to exit if there was a loss of more than 50% for LUNA. When the price of LUNA was around $30, I was considering selling it all, including UST. Actually, based on the plan, I WAS supposed to sell it all. But I hesitated, thinking that there was a chance that it might recover, despite all signs pointing to further free-fall ahead. It was sunk cost fallacy at work.

When I did finally wake up from my slumber, the price was at $8-9. I sold everything. And later on, out of greed and false hope that I could recoup some of those losses, I stupidly bought some LUNA at around $0.05, and you all knew what happened after that.

Retrospect/Takeaway

It was my first crypto crash. In the last major crash, I was only an observer and I thought I would have learnt from it. I was so wrong. It was very stressful to experience it first hand and for the first time and you really need steady nerves and calm mind to do the right things.

I had a plan, but my discipline to follow through with the plan failed. My emotion is the weakest link. You can make all the plans you want, but when the crunch comes and you could not execute, it is pointless.

Another thing learnt is don’t be greedy. Most of the time when you are too greedy, you lose more.

The fortunate thing is that because I had done my research and knew what risks of I am getting into, UST and LUNA did not constitute a major part of my portfolio, hence losses were limited.

There were two questions that I had been pondering about since I started my crypto journey and perhaps it might be answered this time.

  • Is it better to stake or earn/keep in CEX (Centralized Exchange)?
  • Compensation/Airdrops for staked coins vs coins in CEX?

Staked coins might not be easy to exit as compared to coins store in centralized exchanges. But in the event of compensation, in the case of LUNA, you will be the first to get airdrops but for coins in exchanges, you probably might get nothing at all.

That is why I am pleasantly surprised that Hodlnaut supports the new Terra Network airdrop.

Hodlnaut Supports the New Terra Network (LUNA) Airdrop

To my knowledge, they have been the only one that supports it and throughout this Terra Luna fiasco, they have been very professional and provide clear and timely updates. Major exchanges should be learning from them. Am certainly very impressed and I think they have a bright future ahead.

Moving forward

I still believe that there is future in crypto and it is just the beginning. However, we have to be realistic and looking at the path it took for internet to be part of our day to day life, it will be a rough journey ahead.

The lessons learnt today, I hope, would allow me to avoid making even more costlier mistakes in the future. Life is an on-going learning experience. And always remember, invest what you can afford to lose and always, always remember, there is more to life than dollars and cents.

If you are curious on what caused and how TerraUSD (UST) came to de-peg, you can check out the link below.

Nansen – On Chain Forensics: Demystifying TerraUSD De-peg

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