Luna Is Crypto’s First Hyperinflationary Collapse

If it sounds too good to be true, it usually is.
Unless you’ve been living under a rock, then you’ve heard about the collapse of Terra (Luna). Its native token – Luna – was trading at over $100 recently. Now it is just fractions of a penny.

Luna Cryptocurrency Graph Showing it is now trading just fractions of a penny

What on Earth happened?
I will do a deep dive on what happened to Luna in my upcoming issue of Crypto Cycle. But I will provide a condensed version here.
The world just witnessed the failure of algorithmic stablecoins. 
Unlike traditional stablecoins such as Tether (USDT), which is pegged to the U.S. Dollar 1:1 by purchasing and maintaining reserves, Luna used a complex system of minting and burning.
The creator, Do Kwon, didn’t think that his stablecoin (UST) needed to be backed by bonds. Rather, his algorithm would provide all the stability needed to maintain UST’s dollar peg.
The minting process worked like a shock absorber. As people purchased UST, its price would rise over $1.00 which would incentivize traders to burn $1.00 worth of Luna for the UST and pocket the small difference. If one were to do this many times, then it provided a steady stream of income.
Maintaining the UST dollar peg by burning Luna also had a deflationary effect. This led to Luna rapidly increasing in value even while the overall crypto market was in a downtrend. 
This incentivized people to buy and hold Luna. They were also lured into buying UST with the promise of 20% APY. 
It seemed like a no-brainer to buy into the ecosystem. If one owned Luna, they were seeing massive gains in the price of the token, and if they held UST they were generating 20% interest per year.
It seemed too good to be true. And there were many critics. 
I, myself, was skeptical of the protocol from the beginning. I couldn’t figure out how the price growth and yield were sustainable over the long-term.
The algorithmic stablecoin model is inherently fragile. Most of the previous projects failed. Even Mark Cuban got burned investing in a similar stablecoin project, Iron Finance, last year.

Someone with a lot of capital recognized and exploited Luna’s fragility.

In what appeared to be a coordinated attack – they purchased hundreds of millions of dollars worth of UST thereby draining the liquidity pool. This caused a chain of events that led to the swift collapse of UST’s dollar peg and the value of Luna along with it. 
Personally, I wouldn’t trust a stablecoin that didn’t have $1.00 held in reserve for every token issued. And this event only further strengthens my conviction.
Sadly, many people put their entire net worth into this project and lost it all. 

I can’t stress enough how foolish that is. Crypto is unregulated and highly speculative. Unlike a bank account that has FDIC insurance, there’s no safety net for crypto assets. When they’re gone… they’re really gone.
Crypto investing should be done with “extra” money that one can afford losing. I firmly believe that it’s very worthwhile to invest in the space with a long-term outlook in mind. But by no means would I ever recommend that someone mortgage their house or take out a loan to invest in a DeFi project.
There are a lot of shady and unscrupulous characters who convince people to take such reckless actions. 

One would do well to avoid them.

Chris Curl

Chris Curl
Editor, Daily Profit Cycle