Terra (LUNA)

7 cents. That is the precise value of a portfolio that invested $50,000 at the 52 Week High LUNA price of $119.51 compared to today’s price of $0.00017, netting a total return of -99.99% as seen in Figure 1. If that doesn’t sound bad enough, on April 5th Luna was recorded as having a market value of over $40 billion, one month later, that figure dropped to $30 billion – 1 quarter of its entire market cap had been wiped. One week later marked the demise of LUNA where its market capitalization dropped to under one billion. So, how did it go so horribly wrong?

Figure 1.

Luna Price December 2020 – May 2022.

Terra (LUNA) is a ‘stablecoin’ created in 2018 by Do Kwon, owner of Terraform Labs, and was designed to peg the value of the US dollar through UST. Terra was seen as a very attractive investment option as the yield ratio was 20% pa without taking the potential of capital gains into consideration. In theory, as long as LUNA has value, 1 UST should always equal 1 dollar. Due to a huge number of sellers and some short-sellers, the algorithms simply could not keep up which, in turn, forced the foundation to sell their bitcoin reserves which resulted in the overall BTC market declining.

Ideally, the coins were supposed to work as somewhat of a balancing act. One coin was created to either buy or destroy the other based on supply or demand, capitalizing on arbitrage thus propping up the price or bringing it down. However, many believe that huge firms dumped millions of UST resulting in the demise of the PEG. Others believe that the downfall of LUNA was carried out by Blackrock and Citadel by borrowing 100k BTC from Gemini. On the 11th of May, Gemini stated that they made “No such loan” without providing any evidence. Lastly, the blatant arrogance of DO Kwon has many believe it was him that fueled the mission of taking down LUNA. Statements that Kwon made such as “I don’t debate the poor”, and repeatedly poked fun of and aggravated the wealthy. The constant poking of the bears poses an argument where some millionaires such as Twitter user @GianticRebirth engaged in a wager with Do Kwon betting that LUNA will be at a lower price in one year compared to the price it’s at now.

Figure 2.

Algorithmic stablecoins historically fail and have been alluded to as a modern-day Ponzi scheme and that they are all inevitably ‘built to fail’. Because both of the coins rely on consistent demand, perceived as being attractive due to the insanely large 20% yield. The gigantic yield left some investors pondering the long-term jeopardy of the payout and raised the belief that getting a 20% return for nothing, would eventually result in getting 20% of nothing. Due to the huge BTC reserves LUNA had, it really was considered ‘too big to fail’.

With so many LUNA investors now skeptical about LUNA as a brand, it will be extremely hard for Do Kwon to restore the once prestigious image of that was LUNA. Kwon remains optimistic through tweets, ensuring investors that something will be implemented or created to give holders a chance to regain their losses - some of those being in the millions for certain unfortunate holders. With all the controversial tweets, the question does still remaining for investors. Will Kwon keep his promise and strive to cushion the heartache of some former investors or is this just another part of his ‘Ponzi’?

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