How To Turn $1,000,000 to $0.43 in 7 Days

Is this the biggest collapse in crypto history?

An $18 billion stablecoin has lost its dollar peg with all the magical chaos of algorithmic stables, with a dash of Bitcoin systemic risk drama. That’s the big news making its round in crypto-land.

What is UST and How Does It Work?

The UST was created and maintained by a company called Terraform Labs. This company also maintains the Terra blockchain. It has a "sister" cryptocurrency called LUNA, which you must burn to create UST and vice versa. In theory, you can always exchange 1 UST for US$1 worth of LUNA. If LUNA is at $100, you can redeem it for 100 UST, and vice versa.

The system works on demand and supply. If demand for UST drops and its price loses its peg to the dollar, arbitrageurs will sell LUNA for UST until the balance is restored.

What’s Supporting the Peg?

Anchor Protocol

Stablecoins require utility to maintain their demand and defend their peg. UST gets its utility from Anchor Protocol. Anchor Protocol is like a money market that pays you 19.5% when you stake UST. Which is why you see people hold UST. It’s worth emphasising that it’s not risk-free, as recent events have shown.

Being an algorithmic stablecoin, UST is not backed by actual cash, unlike its other stablecoin peers like USDC and USDT.

Every UST in circulation reduces the circulation of LUNA. The more UST in circulation, the less LUNA there is. If there's huge demand for UST and you're the last LUNA holder on earth, you call the shots on redemption.

The problem comes when there is too much LUNA in circulation. Which is what we’re seeing now.

The mechanisms of supporting UST's price are semi-automated and work well in most scenarios, even when there's lots of volatility. But they do not work well in extreme scenarios, such as market demand for LUNA and/or UST disappearing overnight.

The Luna Foundation Guard (LFG)

The Luna Foundation Guard (LFG) is a well-funded organization that can add collateral needed to protect the UST's price. The LFG have been adding Bitcoin to its treasury, in a bid to protect UST’s price. Bitcoin as an asset is volatile in itself, and the LFG may be forced to sell them for dollars at a lower price.

What Caused the De-Peg?

The de-peg stemmed from the massive withdrawals from Anchor. Anchor is a Terra-based decentralized finance (DeFi) protocol that offers high yields to those who deposit UST. Over a weekend, UST deposits in Anchor fell from $14 billion to $11.2 billion.

What’s Next?

No one knows for sure.

In this situation, you have to choose to save either LUNA or UST. It’s as difficult a choice as saving your drowning mother or girlfriend. As a stablecoin issuer, the moral choice would be to defend UST by holding the treasury, even if it means sacrificing LUNA.

What will possibly play out if this happens:

• The LFG sells BTC and buys UST, stabilising the peg.

• UST peg restores and LFG buys back into BTC.

At the moment, these are just guesses and conjectures and I could be horribly wrong.

What Can We Learn From This?

Crypto is a highly volatile asset class. If you didn’t already know it, this serves as a reminder. All investment comes with risk. Portfolio sizing will help to reduce the risk of a single failed investment.

I sympathise with people who lost their life savings from this saga. While it may hurt, money can be earned back and it’s not worth taking your life over it. There are various helplines available should you need someone to speak to.

Here’s my personal take on crypto:

Bitcoin (BTC) and Ethereum (ETH) are “safer” than stablecoins. They have the same downside as stablecoins (it can theoretically go to zero), but offer huge upside as well.

With stablecoins, you’re getting more than 10% via staking. This comes at a cost, there is little to no upside potential and unlimited downside potential.

With BTC and ETH, you get 5% to 6% via staking. These have the same unlimited downside potential as stablecoins, but it comes with unlimited upside potential at the same time.

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What I’m Using For My Investments:

Crypto

FTX

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Hodlnaut

I use Hodlnaut to stake my BTC and ETH (for 6.71% APY and 5.65% APY respectively). They offer some of the best rates for staking your crypto.

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Stocks

Interactive Brokers (IBKR)

I opened this about 1 year ago. The platform is not too user-friendly, but I like the charts they use to show historical returns.

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Saxo

My first brokerage I opened to invest in the US markets. I love that they give a P&L breakdown, both on a monthly and yearly basis.

Earn up to S$500 per person (depending on your deposit amount). PM me on FB if you’d like to open an account and we can split the rewards.

Moomoo

My most recent brokerage which I opened, just to get some freebies if I’m being honest.

Get 1 FREE share (worth up to $1,000) when you sign up here.

TD Ameritrade

The charting software for TD is second to none. The platform even allows you to do backtesting and simulations. My only gripe is that they lack a P&L chart like Saxo or IBKR, making it hard to track your returns.

Note that TD only allows trading for US markets.