Who got rich before the collapse of Terra Stablecoin?
WASHINGTON – In May, the collapse of one of the most popular stablecoin projects pegged to the US dollar cost investors tens of billions of dollars as they pulled out in a panic that some compared to a banking run. But before that, the stablecoin terraUSD (or UST, for short) and its sister token, Luna, had seen a pretty dizzying rally — and some investors killed it before it all collapsed.
Venture capital firm Pantera Capital told CNBC that it generated a 100-fold return on its $1.7 million investment in Luna. Hack VC and Winklevoss-backed CMCC Global haven’t exactly shared their winnings, but CMCC told CNBC that it closed its Luna center in March, while Hack reportedly exited in December.
The scheme relied largely on faith and the promise of future returns, as well as a complex set of code, with very little hard cash to support the entire arrangement.
Unlike USDC (another popular stablecoin pegged to the dollar), which has fiat assets in reserve as a way to back up tokens, UST was an algorithmic stablecoin created and managed by Terraform Labs in Singapore. He relied on computer code to self-stabilize his value by creating and destroying Earth’s vaults and Luna in a kind of swinging supply and demand effect.
For a while, it worked.
UST maintained its peg to the dollar and the luna symbol rose. The Luna token soared to over $116 in April, up more than 135% in less than two months. Traders were able to balance the system and take advantage of the deviations in the token’s price. But perhaps the biggest catalyst for the entire scheme was an accompanying lending platform, called Anchor, which promised investors a 20% annual return on their underground holdings — a rate many analysts said was unsustainable.
Extensive buying – and general public service announcements – from respected financial institutions lend credibility to the project, fueling the narrative that the whole thing was legitimate.
Everyone was happy until everything collapsed in early May.
Although the project had amassed nearly $3 billion in bitcoin in its reserves as a backing for UST, when the price of Luna became unstable, investors rushed out of both coins, sending prices skyrocketing. The Luna Foundation Guard attempted to restore the treasury’s $1 peg by spending nearly all of the bitcoin in its reserves. did not work.
At its height, the combined market capitalization of Luna and UST was approximately $60 billion. Now, they are basically worthless.
The whole episode revealed the advantages of experienced investors on a large scale over retail investors who gamble with hope.
One person posted on Reddit that he doesn’t think he’ll have enough money to pay the next semester at school after losing money at Luna and UST. Another investor hit by the crash tweeted She and her husband sold their house and bet everything on Luna, stating that she was still trying to comprehend whether this was really happening or just a nightmare.
Others contemplate suicide after losing everything they have.
One Reddit commenter wrote: “I got lost on the verge of committing suicide in a chair.” “I lost my life savings in investments (LUNA UST), and the worst thing is that I made an offer to my girlfriend 3 weeks ago. She doesn’t know anything, I lost $62,000. Here I don’t know what to do.”
Who spent and why?
Among the winners of the fixed-earth reservoir collapse is Pantera Capital, a hedge fund that has generated a 100-fold return on its investment.
Joey Krogh, the fund’s chief investment officer, told CNBC that they sold about 87% of their position from January 2021 through April 2022 in the underlying fund where they held and traded it. Once it turned out that the fastening of the floor cabinets was broken. At the end of all this, Krug says Pantera “hung” about 5% of its position.
All of that liquidation translated into a return of $171 million on an initial investment of $1.7 million, assuming the remaining amount they own still amounts to nothing.
Even when the fund was selling, Dan Morehead CEO of Pantera Capital Join CNBC in December 2021 to talk about his top altcoin picks, which included the Terra blockchain luna coin. At that time, Luna’s price increased by more than 15,800% in 2021.
“We think it’s one of the most promising coins for next year,” Moorhead said of Luna. “A lot of people are just discovering it and starting to trade it.”
But Krug says the company’s initial decision to liquidate is down to risk management and fund rebalancing.
“For the big part we sold during 2021 and part of 2022, that was a simple risk management reason,” Krug said. “It just kept getting a bigger and bigger part of the fund, and so we had to get rid of the risk because you can’t really run a liquid hedge fund with one position being a very big part of the fund.”
When Pantera noticed that the US dollar peg was broken in May, it was sold off again.
“It was really just seeing the peg break a few cents and a pattern that matches it up with the historical peg,” Krug continued, noting that in general when a coin breaks the peg, it takes a beating. Although the company owns a set of luna as opposed to floor lockers, when floor lockers are traded under its peg, the dynamic is that more luna is minted, reducing the value of each coin overall.
“So, basically, you want to sell it so you don’t end up getting diluted,” Krug explained.
Hong Kong-based CMCC Global was one of the first investors in Terraform in early 2018.
Martin Bowman, founder of CMCC, told CNBC that it gave up its stake in March due to concerns arising from ongoing due diligence. The decision to sell was partly about the technology behind the floor cabinets, but his main concern was more about organization.
“Unlike asset-backed stablecoins, which are derivatives of the current US dollar in circulation, treasuries were actually increasing the money supply of existing US dollars,” a post Baumann notes for the Federal Reserve.
“We came up with an interesting concept, which is that regulators will not tolerate manipulation of the money supply for the US dollar,” Baumann continued.
Rapid growth in terrestrial reservoirs has accelerated CMCC concerns.
When CMCC sold, the Luna token was trading at around $100. When asked about the profit on this sale, Bowman said the company does not comment on the returns or performance of individual investments.
Crypto-focused venture capital fund Hack VC reportedly exited its Luna stake in December.
CNBC contacted Hack VC partner Rodney Yesep, but he did not respond to our request for comment on the profitability of this sale. Yesep said in a recent interview on the DeFi Decoded Podcast that they were core investors in Terra from “back in the day” when it was “like a different entity.”
“It’s upsetting to see a group of people affected by this kind of thing,” Yesep said on the podcast. “We were no longer in office by the time the economic downturn happened, but a lot of people were, and a lot of people were greatly affected.”
Then there is Galaxy Digital, the crypto-merchant bank founded by billionaire investor Mike Novogratz.
In a public letter addressed to “contributors, friends, partners, and the crypto community,” Novogratz – Who got a Luna tattoo on his arm To commemorate his official status as “crazy” – where the project went wrong was commented on, but also noted that Galaxy made profits along the way.
In reporting its first-quarter earnings, Galaxy indicated that the largest contributor to its $355 million net realized gain on digital assets was sales of Luna.
Other major backers of Terraform Labs include some of the biggest names in venture capital, including Lightspeed Venture Partners and Coinbase Ventures. Three Arrows Capital and Jump Crypto buy Luna coin. CNBC has not learned how these companies have performed.
The path of redemption?
Terra supporters voted to revive the failed project. The The proposed rebuild includes a new Terra blockchain and getting rid of the embattled stablecoin that helped spark the collapse of the original project. It may also mean the recovery of the institutions and individual investors that have been wiped out.
For those who have experienced a significant loss, a relaunch can translate into an opportunity to recoup losses on initial investments.
Delphi Digital, for example, revealed that it was “currently experiencing a significant unrealized loss” after it misestimated the risk of a death spiral event paying off, and Coindesk reports that Seoul-based Hashed Ventures has lost more than $3.5 billion.
The proposal for terra 2.0 includes a plan to distribute tokens to holders of old Luna (soon to be renamed “Luna Classic”) and terrestrial treasury tokens. If the rebranded coins take off, it could be a form of redemption for investors who have suffered a loss.
But for those who got out before things went south for the floor tanks, they’re clearly headed.
“With the new chain, it appears that a significant portion of the airdropped tokens will be awarded over a period of several years,” Pantera Capital’s Krogh told CNBC. “We have projects in our portfolio that integrate with Terra. I’d like to see something community-driven work out here, but we’re a fairly chain-neutral fund.”
CMCC Global’s Bowman said the fund decided not to make new investments in the revived Terra ecosystem at this time.
Days before the floor tanks collapsed, Terraform Labs founder Do Kwon – who boasted about it He does not “argue the poor” – He said in an interview That 95% of coins “will die” but there is “the entertainment of watching companies die too”.