Can you imagine losing 20 billion dollars!?
A 7 minute synopsis of cryptocurrencies and the spectacular crash of Terra Luna
Imagine owning a stock that was worth 60 dollars a share on a Friday. On Monday that same share was worth 32 cents…
Over the course of 3 days, the cryptocurrency Luna shed 20 billions dollars of market cap. It made the vomit inducing idea of losing 99% of value a reality.
Let that sink in.
Luna, a cryptocoin on the hot rocket “to the moon” is living the good life. And then over the course of 3 days imploded supernova style. On May 9th, the price of a Luna token was $61.98. At the end of May 11th, the price was $.327 cents.
Maybe you don’t care about crypto. Maybe you love crypto. Maybe you are fury posting twitter rants at Do Kwon and how he stole your life savings. Regardless, this story is wild. I’m no crypto expert but 20 billions dollars “poofing” away is worth a trip down the rabbit hole. So welcome to 7 minutes of mental heaven.
Grab your popcorn and strap in.
In the beginning…
There was no cryptocurrency. Duh
But then this dude comes along, we’ll call him Satoshi Nakamoto. We call him that because no one really knows who he or she is. Satoshi Nakamoto is a pseudonym. This person mined the first blockchain of this thing called Bitcoin, a peer-to-peer electronic cash system.
Basically, bitcoin is digital money. You have dollars, maybe even in your wallet. These are physical, sometimes retained by someone. A digital currency however has no physical element. But it’s a cryptocurrency.
The crypto part represents the security. The digital currency is secured by cryptography. So through lots of math, algorithms and complex encryption, the digital currency can be kept secure.
The blockchain tells you who has the digital dollars. But how does the blockchain do that?
Well, a neat thing about bitcoin is its decentralized. No banks, no central ledger. Instead, people all across the world have copies of the ledger. To make changes to the ledger, these people do something called mining.
What’s mining? Basically a complex process that itself could spawn a newsletter entry.
So let’s just say many people, with many computers, “mine” the blockchain and this mining maintains the ledger.
What does this have to do with Luna?
That’s a great question!
Bitcoin is a fantastic and amazing invention. But bitcoin has a darkside. Bitcoin mining is hard and as more bitcoins are mined, additional minging gets harder (generally). So people doing the mining need massive compute power. Compute power requires huge amounts of energy.
Energy costs money.
Bitcoin is also kinda slow. Using a coin to make a purchase or pay for a service is not quick. And many people want to perform many transactions with bitcoin (some even legal). So slow transactions doesn’t really work well.
Finally, bitcoin is volatile. Volatility is in the DNA of bitcoin and cryptocurrencies. Imagine using a bitcoin to buy a sandwich one day and then the next day that coin is worth 100 dollars or 10 cents. Volatility happens.
All of these issues represent problems for smart people to solve with “better” versions of cryptocurrency. Etherium, Dogecoin, TerraUSD, Luna and others.
One of these problem solutions is at the heart of Terra Luna.
Enter the Stablecoin!
Price volatility is a an absolute pain. Again, its hard to spend a bitcoin worth 5 dollars today and have the same coin worth 50 dollars tomorrow. Volatility makes transactions for goods and services highly difficult.
Stablecoins aim to solve that problem. Digital currency is inherently volatile but dollars and commodities are not. Imagine having a crypto coin that was backed by some asset or was tied to some real currency.
Well, there’s a coin for that.
Coins have been developed that tie themselves to fiat currencies, commodities (think gold) and other financial instruments.
The Terra protocol (a type of blockchain) aimed to provide a solution to volatility. Terra USD would act as the stablecoin and Luna would incur the volatility.
And thus, Terra Luna was born!
My eyes are starting to cross…
Mine too. Let’s see if we can get through this together.
So, we have the crypto coin Terra USD. And we have this other crypto coin Luna. And they exist in a little slice of harmony. Imagine a seesaw. To create one you must destroy some of the other.
Let’s walk through this thought exercise. Imagine Terra, you stablecoin. You want to keep 1 Terra equal to 1 U.S. Dollar (or as equal as possible).
Now the law of supply and demand kicks in. As the demand for Terra goes up, the price will go up because supply will get low. And as the demand goes down, the price goes down because supply goes up. We left our gold bars in our other pants so we need a different way to back the cryptocoin.
Enter Luna. Luna says; I know cyrpto has volatility, why don’t you shift the volatility to me. You can do so using a computer program. That program will work to keep Terra’s price per coin a dollar. It does that by making it worthwhile to buy or destroy Luna and Terra (supply and demand).
As the price of Terra increases, more supply is needed. So the program makes it worthwhile for people to destroy Luna to mint new Terra. And when Terra prices decrease the program makes it good to destroy Terra to mint new Luna.
So Terra’s stable by moving its volatility to Luna.
Or is it…?
Let’s think about this 1 Terra equals 1 U.S. dollar. Super useful… but what if that changed and became not the case?
Consider a company like Morgan Stanley. They are considered a market maker in the financial world and so their transactions are HIGHLY regulated. They are big enough to impact the market. Because their so big, their trades can potentially move markets.
In crypto there is no regulation like this and there are people with billions of dollars in assets (Scrooge McDuck style virtual coins). So any entity with enough worth could potentially add or remove enough money to shift the value of a crypto market.
Or in this case, move Terra lower than a dollar.
But to do that you would have be able to remove hundreds of millions of dollars worth of Terra in a Thanos type snap of your fingers…
350 million worth of Terra to be exact. This amount was withdrawn from Terra by a single wallet in a single transaction.
This large of a withdrawal caused the stable coin value to go below a dollar. Down town to 85 cents. When the price of a Terra no longer equals anything close to that of a dollar…
Shit gets real.
This initial withdrawal caused a cascade of additional withdrawals. 3 billion worth in a single weekend.
With that, Terra was de-pegged. Even a last ditch effort by the management group for the Terra Luna block chain couldn’t stop the de-peg. A 1.5 billion dollar bitcoin loan.
So the price of Terra dropped and the price of Luna dropped even more.
Remember, a program is supposed to keep Terra & Luna balanced so Terra remains pegged to a dollar. Well, being de-pegged basically broke the program.
Remember our seesaw? With Terra on one side and Luna on the other? Luna was essentially pushed off the seesaw in an attempt to fix Terra.
Supply of Luna grew and grew and grew. So the price fell and fell and fell.
At the start of this craziness, Luna was around 60 dollars a coin. As of this writing, Luna’s price per coin is .00026.
Terra’s trading was halted. It sits at 12 cents.
Well that was a crazy fluke right.
Funny thing. I’m an advocate for following the money trail. If someone is trying to sell me a narrative, I tend to go to the money.
Crypto, major news outlets, basically any politicized topic of the week. It usually comes down to money.
But in this case everyone lost money because all crypto was down. Luna’s demise scared the b-jesus out of everyone so markets soured. Can’t be any winners…
Unless. Unless you have a strong short position.
In stock trading, you can short your stock position. Basically, you profit if the price of a stock goes down. In crypto it turns out, same.
So let’s say that I had a short position on say bitcoin. And I really needed bitcoin’s price to drop to increase the profit I would make on a short. Let’s also say I am big enough to be a market maker.
In theory (cough cough) I could put some fear into the crypto market. This fear might cause markets to go down. This could happen right as my short position was coming due. But I would need good market timing. Like I’m talking Nancy Pelosi level accuracy of timing the markets. If I did that its entirely possible that I could make…
Carry the one… Add a 4..
800 million dollars.
Let that sink in for a moment. There are thousands of people that had significant money in the Terra blockchain and their money is now gone.
There is also another entity out there that is 800 million dollars the richer.
Well, did you make it to the end?! Seven minutes of heaven but now you get to be in the know!
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