terrausd luna crash

Last week, I had a short interview with Business Insider to share some of my insights on the TerraUSD and Luna crash.

For those who are not in the loop, it was one of the biggest crashes in the crypto market, causing many investors to lose all their life savings.

So, how did it all happen, and what are the lessons we can learn from it?

 

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The article is mainly about the experiences of retail investors coping with the big crash, so I thought I’ll share some of the other points not included in the article, for education purposes.

Here goes:

What does a stablecoin mean? How do they differ from other cryptocurrencies?

One way is to think of it in terms of real world currencies. The price of a currency fluctuates according to demand and supply, unless it is a pegged currency, for example the HKD is pegged to the USD, so its price movements follow the USD. If we think of cryptocurrencies as a currency, then a stablecoin is a cryptocurrency which is pegged to another asset or currency (usually the USD).

Reference: https://synapsetrading.com/best-stablecoin-crypto/

What about TerraUSD and luna? How do they differ from other stablecoins?

There are several types of stablecoins, depending on what they are pegged to and the pegging mechanism. For example, there are metal-backed stablecoins, currency-backed stabelcoins, or algorithmic stablecoins.

For stablecoins like Tether (USDT) and USD Coin (USDC), they are purportedly backed by fully reserved assets, similar to how a nation holds reserves to back its currency.

TerraUSD (UST) is an example of an algorithmic stablecoin, where instead of being backed by collateral, the price is managed by an algorithm which maintains its peg to the US dollar through an arbitrage mechanism with LUNA.

Are stablecoins a good form of savings/preserving value, why or why not?

If you are talking about stablecoins purely as a store of value, then holding fiat USD would be a better option because you can avoid unnecessary risks such as depegging risk, or the risk of getting your hot wallets/accounts compromised. 

Of course, this is assuming you can get access to fiat USD, if not stablecoins would be the next best option to preserve your wealth if you live in a country which has a fast depreciating currency.

Are stablecoins a good form of investment, why or why not?

I assume that by investment, you are not referring to the appreciation of the USD (and hence the pegged stablecoin), but rather the 20% APY by staking on Anchor Protocol.

I would say it is a good investment if you know what you are doing, for example understanding the product and the associated risks, and taking steps to minimise the risk.

For example, in DeFi (decentralised finance), there are common risks such as software risk, counterparty risk, token risk, regulatory risk, impermanent loss, gas fees, etc.

Just a few weeks prior to the crash, I highlighted that the funding rate to short UST was about -10%, meaning people were willing to pay 10% APR just to have a short position on TerraUSD. This was an early warning signal of sorts.

I suggested to hedge any open UST positions, because you can still get a net 10% APY (20% from Anchor minus 10% for short position funding rates), and you would be fully protected if UST depegs and crashes (your gains from the short positions would offset any losses).

In your view, what were the different factors that resulted in the crash?

I think firstly the market was already on edge, because prices have been on the decline for most cryptocurrencies, so people became more risk averse. This also lowered the value of their reserves, which were held in mostly cryptocurrencies.

The actual catalyst was several large accounts withdrawing large quantities of UST (either for risk management or some yield farming strategies), causing a slight depegging.

Normally, the algorithm would be able to restore the peg via its arbitrage mechanism, but more UST holders got spooked and started withdrawing their UST as well.

Thus, as more people withdrew their UST, the lower the demand for UST, which caused the price of UST to drop, which in turn caused more people to withdraw… 

This caused a positive feedback loop, straining the system, and resulted in something akin to a traditional bank run, thus leading to a depegging of the stablecoin and its price crashing.

The investors I spoke to seemed to come from places where USD was not easily convertible. They also seemed to be in tighter economic conditions and were attracted by Anchor’s 20% APY. Do you think what TerraUSD and luna were marketed as appealed to them? Do you think the marketing was a big part of why they were attracted to TerraUSD/Luna?

I’m not sure what kind of marketing they were exposed to that convinced them to invest, but based on the retail investors that I came across, a lot of them found out about it via word of mouth, or from bloggers or influencers who parroted it without really understanding the product or associated risks. Thus they might get the idea that this is a “risk-free” 20% investment, and when greed takes over they decide to go all-in on it.

There are some who actually know about the Terra network yet still lost money. What about financial savviness/education as a factor in finding out why these investors lost money?

Knowing about how the system works might not mean they are fully aware of all the potential risks, or even if they are aware of it, they might not be aware of the magnitude or probability of the risk, or even worse, decide not to take steps to mitigate it due to faith in the system.

Hence when we approach this from a financial perspective, I feel that technical knowledge alone is not enough, because one has to consider other factors like financial savviness, behavioral psychology, portfolio risk management, etc.

Do you think there should be more oversight or regulation on education and marketing?

Normally, for financial products, there are pretty strict guidelines on marketing, including checks like KYC to assess the risk appetite and savviness of the investor, as well as full disclosure on the risks and returns.

However, in the crypto space, it ist somewhat less regulated, so the onus falls on investors to do their own due diligence.

However, every new product is going to be pretty technical and hard for the average retail investor to understand and assess the risk, so there is a limitation on product education as the solution.

A better solution would be to impart the basic universal skills that allow a retail investor to manage the risk of any investment product in general, such as those mentioned above (financial savviness, behavioral psychology, portfolio risk management).

What is the biggest takeaway for the crypto community from this incident? What about for investors?

For professional and seasoned investors, this will likely not be their first rodeo, as 80-90% of crypto projects historically have crashed and burned. They most likely did not put all their eggs into one basket, as they are aware of the risks of any individual crypto investment. So I would say some seasoned investors might have suffered some losses, but not to the point where they go totally bust. 

For retail investors, especially for those getting burnt the first time, this will be a good lesson not to be too greedy, and to diversify your portfolio. Another important lesson is that there is no truly risk-free investment, so before investing in a product, you need to know all the risks associated with it, and decide how much risk you want to take on (and mitigate the risks you don’t want).

 

Read the full article here:
https://www.businessinsider.com/terrausd-luna-60-billion-crash-sparks-fears-suicide-self-harm-2022-6

Easiest Way to Invest in the Metaverse Stocks Crypto

metaverse ready player one

Seems like nowadays, everyone is talking about the Metaverse, and every company is following Facebook’s (now called Meta) lead in pivoting to a Metaverse company.

So what exactly is the Metaverse?

 

What is the Metaverse?

If you have watched movies/shows like “Ready Player One” or “Sword Art Online”, you will have a pretty good idea.

The origin of the term comes from science-fiction writer, Neal Stephenson, who coined the term “metaverse” in his 1992 novel “Snow Crash,” which envisions a virtual reality-based successor to the internet. In the novel, people use digital avatars of themselves to explore the online world, often as a way of escaping a dystopian reality.

In short, it is like creating a virtual world which mimics the actual world, so activities like socialising, learning, gaming, working which you normally do in the real world, can also be done in the virtual world.

metaverse wikipedia

By now, you probably get the idea that this is something big, judging by how every major company is looking to get a slice of the pie.

But the big question is, what is the best way to invest in the Metaverse?

If you are not an expert in the industry, it will be hard to pick the correct stocks that give the best exposure, and have the most potential.

So here are some easy ways to do it:

Metaverse Index for Stocks (META)

The first way to get exposure is to invest in stocks that are related to developing the Metaverse, and an easy way to do it is via an ETF (exchange-traded fund) which allows you get diversified exposure without needing to do much research.

Here is the current most popular ETF:

The Ball Metaverse Index is the first index globally designed to track the performance of the Metaverse. The Index consists of a tiered weight portfolio of globally-listed companies who are actively involved in the Metaverse.

roundhill metaverse index META

roundhill metaverse index META holdings

Source: https://www.roundhillinvestments.com/etf/meta/

Metaverse Index for Crypto (MVI)

Besides stocks, there is another possibility that the Metaverse might develop independently in the crypto space, via DAOs or decentralised projects.

The metaverse is a broad term to define the ever-expanding virtual reality worlds where players can create an avatar, buy land, build experiences, import NFTs, and trade with other users. Here are some projects and tokens:

CUBE is the ERC-20 token native to Somnium Space, a virtual world that offers both community-led events and an in-game economy. CUBE can be used to purchase virtual assets and pay for goods and services in the metaverse. Participants can join via virtual reality (VR) headsets or mobile and web browsers.

MANA is the ERC-20 token used to pay for goods and services in Decentraland. In Decentraland, users connect and interact with each other, create content, and play games. It even has a virtual economy where users can monetize the content and applications they build.

SAND is the ERC-20 token used in The Sandbox virtual world. The Sandbox virtual world is made up of LAND – digital pieces of real estate – that players can buy, and on which they can build games and other virtual experiences.

So it makes sense to get some exposure to this as well.

The easiest way to do it is also via an “ETF”, which is not really an ETF but it is a token which mimics the performance of a variety of Metaverse-related projects.

Here is one such index:

The Metaverse Index (MVI) is designed to capture the trend of entertainment, sports and business shifting to take place in virtual environments.

metaverse index MVI overview

metaverse index MVI components

Source: https://www.indexcoop.com/mvi

 

In conclusion, these are the 2 easiest ways to get exposure to both stocks and crypto in the Metaverse space, for people who do not want to spend too much time or effort doing rsearch.

If you interested to take it to the next level, then you can do more precise targeting by buying specific stocks and projects, but that will involve more research.

 

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If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”

FTX perp futures 1

If you are interested to start trading or investing in Cryptocurrencies, but you are not sure how to pick individual coins, you can consider looking at indices instead.

For example, if you are bullish on a particular segment, like say DeFi (decentralised finance) tokens, but you are not sure which tokens to buy, you can diversify your risk by buying the whole index.

One way to do this is using perpetual (perp) futures on FTX.

To start trading on FTX, you can use my referral code to open an account for discount on commissions: https://ftx.com/#a=synapse

FTX perp futures 1

FTX perp futures 2

By comparing the different indices, you can also see which sectors within the crypto market are leading or lagging, which is useful because there is a certain “market rotation” between different sectors, and you can significantly increase your profits by timing this correctly.

 

For those keen to know the index components, here they are:

  • XCH-PERP tracks the price of a basket of 5 exchange tokens, using a weighed average of the prices of BNB, HT, OKB, LEO, and FTT
  • DRGN-PERP tracks the price of a basket of 9 popular Chinese coins, using a weighed average of the prices of BTM, IOST, NEO, NULS, ONT, QTUM, TRX, VET, and ARPA.
  • ALT-PERP tracks the price of a basket of 10 altcoins, using a weighed average of the prices of ETH, EOS, BCH, BNB, LTC, XRP, TRX, DOT, LINK and ADA.
  • MID-PERP tracks the price of a basket of 24 medium-market-cap coins, using a weighed average of their prices.
  • SHIT-PERP tracks the price of a basket of 50 low-market-cap coins, using a weighed average of their prices.
  • PRIV-PERP tracks the price of a basket of 9 privacy coins, using a weighed average of the prices of BEAM, DCR, GRIN, KMD, XMR, XVG, XZC, ZEC, ZEN.
  • DEFI-PERP tracks the price of a basket of 25 Decentralized Finance coins, using a weighed average of the prices of KNC, MKR, ZRX, REN, REP, SNX, COMP, TOMO, RUNE, CRV, DOT, LINK, MTA, SOL, CREAM, BAND, SRM, SUSHI, SWRV, AVAX, YFI, UNI, WNXM, AAVE, BAL.

https://help.ftx.com/hc/en-us/articles/360027668812-Index-Calculation
 

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If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”

crypto home study

These are the top 10 major cryptocurrency coins based on market capitalization.

Here is a quick summary of the primary function of each cryptocurrency coin:

  1. Bitcoin (BTC) – A store of wealth, digital gold.
  2. Ethereum (ETH) – Decentralized smart contract platform, allows apps to be built on top of it.
  3. Cardano (ADA) – Decentralized smart contract platform with lower fees, specific use cases.
  4. Tether (USDT)Stablecoin, pegged 1-1 to the US dollar.
  5. Binance Coin (BNB) – Owned by the largest crypto exchange, Binance.
  6. Ripple (XRP) – Banker’s coin, settle global payments across borders.
  7. Solana (SOL) – Decentralized smart contract platform, uses proof of history & proof of stake instead of proof of work.
  8. Polkadot (DOT) – Multi-chain protocol to allow different blockchains to talk to each other.
  9. DogeCoin (DOGE) – Meme coin
  10. USD Coin (USDC) – Stablecoin, pegged 1-1 to the US dollar.

 

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If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”

stablecoins

Stablecoins are non-volatile digital assets (cryptocurrencies) that are pegged to an external, real-world asset.

Because they are designed to have a consistent value, in theory they allow for a risk-free investment.

By solving one of cryptocurrency’s biggest issues (volatility), stablecoins give retail investors more confidence to invest in cryptocurrencies.

In this blog post, I will go over what stablecoins are, why they are popular, the top four stablecoins to invest in, and the risks associated with this digital currency.

 

Stablecoins 1

What are Stablecoins, and How Do They Solve the Problem of Volatility?

As previously mentioned, stablecoin is a non-volatile cryptocurrency that can reduce the risk of loss for crypto traders to a great extent.

But, considering that stablecoin is a cryptocurrency, how can it be non-volatile?

Here’s your answer:

Stablecoins are pegged to fiat currencies or any other real-world asset.

In other words, they are tied to a government-issued currency that we use every day, like the U.S. Dollar ($).

If a stablecoin is backed by U.S. dollars in a 1:1 ratio, it means that one single-currency stablecoin equals $1 in cash or cash equivalents and very short-term government securities.

Because it is backed by a fiat currency, the value of this digital currency remains constant—hence the word “stable” coin.

With stablecoins, crypto users do not need to be concerned about the value of their investment plummeting at any time.

Real-world assets serve as collateral for stablecoins—for every stablecoin in circulation, an asset is saved in reserve.

The reserve is overseen by an independent custodian, who is audited on a regular basis to prevent any fraud.

This is what makes stablecoins the most reliable and secure cryptocurrency out there.

For now, we cannot directly use stablecoins for our daily transactions because they are not yet an acceptable mode of payment and are not exactly widely popular.

To ensure safety and prevent financial losses, crypto traders can only buy stablecoins with other cryptocurrencies at the time.

 

Types of Stablecoins

It is also worth noting that not all stablecoins are pegged to fiat currencies. There are some that are backed by other real-world assets.

1. Metal-backed Stablecoins

Some stablecoins are backed by precious metals such as gold and silver.

The value of the stablecoin is determined by the value of the metal—one stablecoin token equals one gram of gold. Just like fiat-backed stablecoins, there are reserves for precious metal-backed stablecoins as well.

The most common precious metal-backed stablecoins are Digix Global (DGX),  Tether Gold (XAUT), and PAX Gold (PAXG).

2. Cryptocurrency-backed Stablecoins

Then, there are cryptocurrency-backed stablecoins. In this case, the problem of volatility is addressed by the over-collateralisation of reserves.

The stablecoin to cryptocurrency ratio is 1:3. In other words, the amount of cryptocurrency reserved is three times the amount of stablecoins—so for every $1 of stablecoins, there are $3 worth of crypto in the reserves.

3. Algorithmic Stablecoins

Finally, there are algorithmic stablecoins that are not backed by any collateral. Instead, their price is determined by an algorithm that controls the supply of stablecoins.

This is how it works: when an increasing number of people are buying a lot of stablecoins, the value of the coins shoots up.

When this happens, the algorithm limits the supply of coins, causing the value to revert to its original level.

The same thing happens when the demand for stablecoins goes down, and its prices fall.

 

What Attracts Crypto Traders to Stablecoins?

Stablecoins have a number of advantages in addition to having a fixed value and offering stability.

To begin with, because stablecoins are a component of decentralised finance (DeFi), no intermediary financial institution is involved in stablecoin transactions. The traders can communicate directly without interference from a third party.

This also means that you will not be charged a third-party fee for the services you are using. However, you must still pay a small fee to use the blockchain network.

These blockchain networks are public ledgers that record all stablecoin transactions for public audit and inspection. This provides greater transparency, which is valued by all traders.

Most importantly, the transactions are straightforward, fast, and are not limited by geographical boundaries.

 

The Best Stablecoins to Invest In

Currently, there are around 200 stablecoins available around the world, some of which have already been released or are in development. Of those that are released, some show more promise than others.

Here are the four best stablecoins to invest in currently:

1.Tether (USDT)

Tether is a fiat-collateralised, blockchain-based stablecoin that is widely regarded as the most secure stablecoin to invest in.

It is pegged to the U.S. dollar at a 1:1 ratio—meaning 1 USDT equals $1.

Tether was originally known as RealCoin when it was introduced in 2014. It was later renamed Tether.

Today, Tether has become a major source of liquidity for the crypto market.

Crypto traders can buy Tether tokens on well-known cryptocurrency exchanges like Binance, OKEx, Huobi Global, FTX, and BitWell.

2. USD Coin (USDC)

USD Coin — like Tether — is pegged to the U.S. dollar at a 1:1 ratio.

All the USDCs in circulation today are ERC-20 tokens, which can be found on the popular cryptocurrency and blockchain system, Ethereum.

Coinbase and Circle collaborated to create USDC. While Coinbase is a well-known crypto exchange platform, Circle is a Boston-based peer-to-peer payments technology company.

USDC is a safe investment option because it is regulated by the United States Financial Crimes Enforcement Network (FinCEN).

Because FinCEN fiercely opposes money laundering, there is little to no risk of fraudulent activity when trading USDC.

Furthermore, the USDC reserves are audited monthly by Grant Thornton LLP, one of the world’s largest accounting networks.

The audit reports are also available on the Circle website for public viewing.

3. Binance USD (BUSD)

Binance USD is also a fiat-backed stablecoin that is pegged to the U.S. dollar at a 1:1 ratio.

It was founded by Paxos and Binance. Paxos is a New York-based financial institution and technology company specialising in blockchain, whereas Binance is a Cayman Islands-domiciled cryptocurrency exchange.

The BUSD stablecoin is approved and regulated by the New York State Department of Financial Services. It is known for making transactions accessible, flexible, and quick.

4. Dai (DAI)

DAI is another popular stablecoin that is an ERC-20 token.

It is known for being completely decentralised, as it is not backed by any external assets controlled by certain central authorities.

Unlike all other stablecoins, DAI is backed by a number of cryptocurrencies rather than just one.

By locking multiple cryptocurrencies in smart contracts, it maintains a 1:1 ratio with the U.S. dollar.

DAI is a ‘stable’ trading option for users in nations with high economic instability.

For such traders, this stablecoin provides a means of financial inclusion.

 

Disadvantages of Stablecoins

Although stablecoins were created to solve the problem of volatility, it also has some inherent issues.

1. Absence of Decentralisation

The absence of decentralisation is the most serious issue with stablecoins.

Stablecoins, unlike all decentralised cryptocurrencies, are owned by a single entity—in other words, centralised.

For example, the most popular stablecoin, Tether (USDT), is issued by Tether Limited.

The company has complete control over the supply and distribution of USDT.

If the company fails in the future, the value of USDT will suffer greatly as a result. It would be a huge financial loss for investors.

2. Lack of Transparency

Another primary disadvantage of stablecoins is their lack of transparency.

People buy stablecoins with the expectation that the owners have a reserve with a real-world asset for each stablecoin.

However, there is no guarantee that the fiat currency is locked in an actual safe.

Tether Limited is a good case in point. In 2018, the company was fined for failing to show reserves against which the USDT was pegged.

As a result, the value of USDT plummeted… albeit briefly.

3. Underlying Assets Might be Volatile

Ultimately, stablecoins are pegged to fiat currency, or some underlying asset.

This means they are subject to the same volatility of the underlying assets, and can be directly influenced by economic downturns, inflation, and black swan events.

Though they are pegged to high-value currencies—such as the U.S. dollar—and a sudden crash is highly unlikely, it is not entirely impossible.

Therefore, we can conclude that stablecoins are only as stable as the external assets that they are backed by.

 

Are Stablecoins a Good Investment?

Unfortunately, there is no such thing as a “risk-free” investment in the crypto world.

Before you invest your money in an entirely new digital financial system, you must take a leap of faith.

Although the advent of stablecoins have been heralded as an innovation in the crypto market, I would not go as far to say that they are completely risk-free.

Personally, when I invest in cryptocurrencies, I do so because I am looking for capital appreciation, so I feel that investing in a coin pegged to another asset is not very useful, because I might as well invest in that asset directly without the additional hassle and risk of the stablecoin.

If you are moving a lot of funds through crypto exchanges, then using stablecoins will be a good way to minimise transaction costs, while reducing volatility of your crypto assets during the transition.

Also, for people living in countries with unstable currencies (that are depreciating), then stablecoins might be a good way to store their cash to preserve its value.

Now that I have shared all about stablecoins and its pros and cons, what do you think of it? Do you think they are a good investment?

Let me know in the comments below.

 

thumbnail the ultimate guide to blockchain and crypto assets

If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”