The War on Terra

  • If you think the Nasdaq is bad, try some crypto coins.
  • Terra, and its sister currency, Luna, are worthless.
  • If you put $10,000 in Luna two weeks ago, today you’d have $2.

Happy Friday, my friend!

I don’t know about you, but I’ve had a busy week.

Between running around getting all our new documents and cards together, watching the market carnage, and trying to get Micah to behave even a little bit, it’s been crazy.

And while my coffee soothes me this morning, I can’t wait to pop the cork on a bottle of Barbera d’Asti this afternoon.

Barbera?  Not Barolo?  Or Barberesco?

It’s funny, but I observed most people drinking Barbera here in the bars and cafes.

Barbera is delicious and made right around the block, so I can see why.

It’s a high-quality wine that comes at a lower price than its more famous Piemontese siblings.

And while that’s a perfectly happy circumstance when it comes to wine, I’m pretty sure it doesn’t translate to crypto.

This week, Luna, one of the darlings of the crypto world, now trades at under $0.01.

During the first week of April 2022, it traded at $115 per coin.

Luna is a perfect example of the dangers of the crypto world.

That’s not to say “all crypto is this dangerous.”  It’s more of a warning about any currency not named Bitcoin or Ether.

Let’s look at what happened, and why the crypto world is in such a precarious state right now.

In General, Tech is Out of Favor

Let’s go through a few charts to see just how dire the situation is for tech right now.

The Nasdaq shows no immediate sign of imminent recovery:

Bitcoin, though recovered from under-$30,000, is still in a technical mess:

It’s the same story for Ether:

Coinbase is the largest cryptocurrency trading platform.  For now.

This is Coinbase stock after the company revealed it could confiscate customer coins to pay its own debts in the event of a bankruptcy proceeding:

And everyone’s favorite Bitcoin proxy stock, Michael Saylor’s MicroStrategy, has been decimated:

What are Terra and Luna?

Well, if you think those are bad, try Luna:

Yes, that’s a coin that’s trading under $0.01.

At the beginning of April, it was trading at around $115 per coin.

What the heck happened?

I’ll try to explain this in the simplest terms I can.

After all, it’s Friday!

“Breaking the Buck”

A big no-no in the money markets is “breaking the buck.”

If a money market fund falls below the value of $1, it has “broken the buck.”

Rich folks stick their cash in money market mutual funds to earn a bit more than they would on their savings. They can also withdraw the money quickly should they need it.

They don’t mind earning a small return, but they never expect to lose money.

After all, that money is invested in things like treasury bills (short-term US Treasury paper) and commercial paper.

Commercial paper is like t-bills, except companies with excellent credit issue them to cover their short-term costs.

So there’s practically no risk; hence, no expectation of any losses.

Stablecoins

In the crypto world, the equivalent of money market funds is the stablecoin.

Stablecoins are “tethered” to the USD, and their value should fluctuate only in a very narrow band around $1.00.

The safest way to do this is to keep the equivalent number of dollars and stablecoins.

But as it’s expensive to keep all that cash doing nothing on your balance sheet.

So instead of keeping those dollars, coders write algorithms to maintain the “peg.”

In TerraUSD’s case, this stablecoin looks remarkably similar to the Hong Kong Dollar peg to the USD.

In the HKD’s case, if the value of the HKD falls too far against the USD, the Hong Kong Monetary Authority steps in to sell USD and buy HKD.

If the HKD gets too strong against the USD, the HKMA sells HKD to buy USD.

That way, the value of the HKD is always maintained.

Unfortunately, TerraUSD’s algorithm couldn’t handle a good old-fashioned run on its currency.

To be fair, no currency can.  (See: Asian Currency Crisis of the late 90s.)

TerraUSD (UST), which should trade at $1.00, was trading at $0.33, far worse than what happened during the financial crisis of 2008.

Investors flipped out when the money market funds were trading at $0.97.

UST’s Sister, Luna

As David Niven once wrote, “The Moon is a Balloon”… that just popped.

Luna, UST’s sister coin, suffered catastrophic losses in the wake of TerraUSD’s demise.

From $115.00 to $0.01 in six weeks?

It’s a staggering blow to those who had invested in Luna or kept their powder dry in UST.

This also knocked Bitcoin for a loop, as the Luna Foundation Guard is holding bitcoin as a reserve.

The fear is that the organization may have to sell its bitcoin to support the UST peg.

The Bigger Picture: Confidence

There are many more bells and whistles that go with UST, LUNA, and the entire DeFi (decentralized finance) industry.

The machinations are for another day.

But one thing even DeFi can’t escape is confidence.

Ultimately, I may think the USD is a crap currency.

But the markets violently disagree with me right now.

Why is that?

Because the “almighty” dollar is backed by the ingenuity of its people, overwhelming military force, and tax raising.

Here’s the Dollar Index over the last 14 months:

Sure, it’s not a massive increase in value.

But currencies aren’t meant to swing in huge roundabouts.

They’re supposed to be stable so entrepreneurs, families, and investors can confidently project into the future.

You simply can’t make plans when your currency is bouncing like a fat kid on a trampoline.

That is the crypto world’s biggest problem.

While I think governments don’t know what they’re doing in terms of money, crypto’s volatility means I can’t know what I’m doing if my projects are priced in those coins. 

Wrap Up

This doesn’t mean I don’t think you should hold a wee bit in crypto.

Holding 5% of your portfolio in Bitcoin or Ether, while it would’ve hurt over the past few months, will allow you to benefit from any big pop in those currencies.

But I’d avoid the smaller, lesser-known crypto names.

They’re just too risky for anyone looking to enjoy retirement and provide for their family in the near future.

One last thing to consider: as tech is so out of favor with investors right now, it could be a good time to start doing your crypto homework.

In any event, have a wonderful weekend!

All the best,

Sean

 

You May Also Be Interested In:

5 Ways to Dodge Taxes Like Bezos and Musk

If you’re wondering what tax loopholes the rich are using, today we’ll share with you five tax tips so you can pay less in tax like the rich. You don’t have to be wealthy to take advantage of these tips and you don’t need some genius accountant either. Here are five ways the rich pay less in taxes and you can too.

Sean Ring

Around the World in 22 Years with Sean Ring

Okay, let's take it from the top.

Joisey!

For something I did in a past life, I was born in New Jersey. I haven’t figured out what that was yet. Joking aside, I loved growing up in Hasbrouck Heights. It was a fun town.

I was...

View More By Sean Ring