A lesson to be learnt from Terra’s collapse
A rising star that was ranked among the top ten Cryptocurrencies collapsed in a matter of a few days shocked the world. It was every investor’s nightmare, as Terra’s native token, Luna fell by 97.5% in a few hours from $80 to a mere 0.0004 cents in a few days.
For those that invested in Luna and the Terra ecosystem, my heart goes out to you in these difficult times. It is also my regrets and apologies that I have recommended Anchor protocol as a passive income stream before. Even deep research and conviction did not help in this situation.
To understand what caused the collapse, we have to take a look at the mechanism in place.
The initial cause of collapse was due to the depegging of Terra’s stable coin, also known as UST. Stablecoins are usually pegged to a dollar in a 1:1 ratio. However, UST uses algorithms for the peg instead of traditional stable coins like USDC which is backed by the U.S. dollar. The algorithms mint (create) and burn (destroy) Luna and UST to maintain the price ratio. It is not meant to go under a dollar. But on 9 May, UST plunged in value when the algorithms cannot keep up with the downward pressure of UST.
The collapse was known as the death spiral, and it began a few days back when there were warning signs when over $400 million of UST was sold in 24 hours in a deliberate attack. This caused a chain effect that shook the whole crypto market as mass liquidations occurred. This, in turn, affected the price of Luna as many investors lost faith in the system.
How other investors and I were affected
My Anchor holdings were liquidated as of the morning of the 10th when the price of Luna dropped below $40. Unfortunately, I was at work and unable to access my holdings on Anchor.
It is a mistake on my part as I was playing around with leverage. I lost around 9.5 BLuna, equivalent to a value of around $1000 if the price of Luna was at its ATH of $110. Not only has Luna lost its value but so did UST which went as low as 0.2 cents from a dollar. I still have my borrowed amount of 100 UST and 1.2 BLuna out of the amount in Anchor as I was unable to get out in time partially due to work and network congestion, it is now worth less than 10 dollars anyways.
I also have a small allocation in Astroport, Retro, Prism, and Stader, these tokens are rendered useless due to the collapse. There was news of their migration to other networks such as Juno but it has yet to be confirmed. There is still some good news in the wake of devastation.
Just two days ago, the CEO of Terraform Labs, Do Kwon has put a plan named “Terra Ecosystem Revival Plan”, which aimed to restart the Terra ecosystem by giving UST holders compensation and ownership of the network. It is going to be an uphill battle and remains unclear if this plan will succeed.
In the meantime, avoid using leverage in this bearish environment and stay true to your original investment thesis. Stay away from Terra ecosystem and do not FOMO! My plan moving forward is take a break from Altcoins, use my GUSD to DCA into BTC and Ethereum using limit orders on Gemini due to their free 10 withdrawals per month. I am still vested in the stock markets through equities and ETFs as well as a couple of Altcoins such as FTM, Sol, and Avax so the collapse of Terra did not affect me heavily. However, I have seen talks of suicide over lost life savings on Twitter, Reddit and Telegram groups that fills one’s heart with sorrow. There is always a solution to every problem, don’t give up and keep fighting!
Through this crisis, we can learn a few pointers:
- Maintain a set allocation to your portfolio- invest in blue chips that can withstand the bear market.
- Diversify! Having diversification ensures that no single crypto that crashes will affect your portfolio and your mental health so you can sleep well at night.
- Invest in other asset classes OUTSIDE of Crypto – stocks, funds, properties, or even CPF!
- Look out for opportunities in other ecosystems such as the recent USN hype on NEAR.
Lastly, avoid USDT if you can as there are warning signs and rumors of impending collapse that could trigger another death spiral. Swop it for USDC, BUSD, or even Fiat (USD, etc).
Stay safe and strong!
An avid, young investor residing in Singapore, eager to share his experience and mistakes. Besides keeping an eye on the market, he likes to game, read and hike during his free time as well! This blog is his passion.