There are already a million Terra Post Mortems so I won’t repeat what’s already been said. What I will say is that anyone who was following this debacle could’ve made a ton of money shorting Luna and UST. Here’s a video of me during the crash explaining why I’d went short.
My Background with LUNA
LUNA caught my attention when it’s price skyrocketed from $16 to $70 and I’d heard it mentioned by some famous VCs. I researched it, but decided not to buy because it was obvious it could always be subject to a death spiral if there was a loss of faith. This risk could’ve been mitigated if there was actual significant real world usage of UST driving demand, but the only apparent use case was a South Korean “Venmo” named Chai that didn’t seem to be getting any significant usage (my Korean friend working in crypto had never heard of it). Around 75% of UST was simply deposited in Anchor Earn earning 20% interest, which obviously was never sustainable. Most people were just in UST to milk that insane 20% interest rate, and as soon as that rewards program ended, short of some other real utility for UST cropping up, this UST would probably flee to the next best yield.
LUNA subsequently shot up to $100+ and $30b+ market cap with $18b+ in UST, making me question my skepticism and wonder if I was missing something. Turns out Ponzis can do very well before they implode (eg. Olympus).
A week before the Terra/Luna crash I borrowed some UST on Aave (against my staked ethereum, stETH) to deposit into Anchor Earn, earning 18% on a 4% variable borrow rate. I specifically borrowed in UST instead of another stablecoin with a lower interest rate (eg. USDC) because I didn’t want to be exposed to UST de-pegging risks.
A few days before the de-pegging, UST borrow rates on Aave skyrocketed to 95%, so I closed my position. (foreshadowing of the Terra attack/crash?)
De-pegging begins
When UST de-pegged to 80c, it was clear that faith had been lost. UST had depegged to 96c a year ago and survived, but there’s a huge difference between 96c and 80c. If USDT fell to 96c, people would freak out but most people probably wouldn’t do much about it assuming it will shortly be restored. At 80c everyone would be rushing for the exits thinking the house of cards was finally about to collapse.
At this point I wrote a blog post about it, and even made a video on my side channel. But the thought of putting on a trade hadn’t even crossed my mind.
The following day UST had crashed all the way down to 30c, and was back up at 50c. When LUNA market cap went below UST market cap, it was clear that UST was done short of a miracle.
I was talking to some friends, one of whom said that their friends made a lot of money shorting, and then the other person asked how to even short this. I started explaining how one could short this, then stopped myself and thought “how pissed would I be if I wrote out this clever idea of how to short this, and it all plays out like I believed it would? I don’t want to be that loser complaining about how he could’ve made so much money if he’d put on that trade, when in reality he never had the conviction and cajones to put it on in the first place.”
The Short
It was at that moment that I put on the trade. With UST at 49c and LUNA at ~$5, I took out a UST loan on Aave (against my stETH collateral), sold that UST for USDC, deposited that USDC into dydx, and then shorted LUNA on dydx. Gas fees were very high (230 gwei) so I paid $290 just to borrow and sell my UST, but thankfully dydx has gas free deposits when depositing $1k+ (max once every 3 days).
LUNA collapsed to less than a penny very quickly, so that LUNA short made the maximum possible profit. (only “doubled” that investment since I regretfully didn’t use any leverage)
UST actually rallied to 80c before crashing back down, meaning my UST short was in the red. At 80c I wanted to double-down on that short, but stopped myself not wanting to be a degen who doubles down upon losing. In hindsight of course I most definitely should’ve entered that trade.
The following morning I woke up to UST at 5c, and LUNA below a penny. UST subsequently rallied back up to 30c, and currently sits at around 10c. I have no idea why it’s still trading at those levels. I will probably close my short when it falls down to 1-5c or so.
How to Short
Again I shorted UST and LUNA by borrowing UST, selling that UST for another stablecoin (USDC), depositing that stablecoin (USDC) into dydx, and then shorting LUNA on dydx. The beauty of this is that I didn’t rely on any centralized exchanges. The downside is that gas fees were very high, so just putting on the trade cost about $300 in gas fees.
Alternatively one can short through centralized exchanges like Binance, FTX, and Kucoin.
Make sure that you’re prepared to short the next time an opportunity like this strikes. This is especially important if you want to short using decentralized applications because gas fees always 10-40x during crazy times. You don’t want to be paying hundreds of dollars to deposit collateral during these times. Take advantage of when gas fees are low (15-35 gwei) to make sure you’re all set up.
What Terra Could’ve Done Differently
I won’t sit here and pretend like I knew all along exactly how everything would play out. Otherwise I would’ve taken on a much larger position (without being reckless) and this post would instead be titled “how I made a million dollars shorting Luna”. I thought Terra would’ve handled this more swiftly and intelligently.
When it was clear that UST was done, I expected Terra to just kill UST. UST holders would take a massive haircut, say 80%, and then be given an IOU for that loss that basically promises that Terra will pay them back in the future when they can afford to (this is what hacked crypto exchanges have done). Terra would then seek to collateralize UST and raise funds. LUNA of course would tank, but at least the project would still be alive and there’d be a plan in place to turn things around.
Instead Terra made the idiotic decision of hyperinflating LUNA to try to save UST despite it being clear that there was no possibility of saving UST. Terra leadership clearly didn’t care at all about the LUNA holders actually securing their blockchain, and let LUNA die while trying to prolong UST’s inevitable death. Though if LUNA holders/validators are responsible for governance, then I guess they allowed their own token to collapse and have no one else to blame.
Now there are proposals in place to reallocate the remaining wealth, but it sounds like a little too late.
What’s Next
Although a relief rally is possible, personally I think we’re on the brink of another recession, which would drag down crypto with it. In crypto crashes, altcoins in particular get slaughtered, as we’ve already seen during this Terra crash. As a result, I’ve sold most of my altcoins for ethereum and USDC even though it stings to sell at these lows. I continue dollar-cost averaging into ethereum, and will be heavily buying if ethereum drops under $1.5k. I personally don’t see ethereum dropping below $800, and if it gets that low, I will be leveraging up long. I bought more stETH due to the stETH discount increasing. The reason I prefer staking through Lido finance (stETH) is because it can be deposited in Aave as collateral (stETH is not without its risks so I’m not saying you should do the same, but I’m personally ok with the risk and am guessing the discount is due to people liquidating from the crash and flying to safety).
Since I’m already a bit overexposed on the long side, I put on a small short position on ADA (Cardano) at 57c in order to hedge my bets and profit on a market crash. I didn’t put a lot of thought into this trade, my reasoning is more that if we face another crypto crash, then alts will get slaughtered. Cardano is a ghost chain with a $20b valuation, and thus would get hammered in a crash. The Terra fiasco will lead to more scrutiny on frothy valuations, and Cardano is considered a laughingstock in the crypto community, also run by a cult of personality type leader.
That being said this is not financial advice. I admittedly haven’t research this heavily, and am also doing this to get more comfortable with shorting since prior to this Terra crash it’s not something I really did or thought about. I’m not a macroeconomist and don’t have a crystal ball. I’ll be researching this more and sharing any additional findings.
Still Bullish Ethereum
I’m still heavily bullish ethereum on a multiyear time frame due to the “merge” upgrade making ethereum deflationary, as well as layer 2s becoming dominant. Once the recession ends and markets turn bullish again, I believe that ethereum will skyrocket to new all-time highs with institutions FOMOing in. For me this thesis is contingent on layer 2s becoming mainstream, with ability to bridge directly from centralized exchanges eliminating the need to touch layer 1. Without layer 2s, ethereum price is constrained by gas fees. With layer 2s, ether could go to $30k while users only pay fractions of a penny for instant transactions on layer 2s.
Again my guess is that ethereum will drop in price in the short-term to $800-1,500, so I recommend ensuring you have some cash on hand during the bear market to scoop up these steep discounts. No one knows how long a bear market will last so don’t invest any money you might need later this year. You definitely don’t want to be forced to sell any crypto during a bear market to cover real world bills.
Also my thesis on ethereum price still rests on some assumptions that need to be fleshed out. I will research those further and share my findings.
Conclusion
Anyone who actually researched Terra knew that UST was always susceptible to a death spiral, and should’ve put on a short position the second they saw that the house of cards was collapsing. Anyone who did this could’ve multiplied their initial investment.
Make sure that you’re prepared to short (or long) the next time an opportunity like this arises. Gain familiarity with the tools necessary to put on shorts (eg. dydx), open accounts with centralized exchanges if you want to go that route. Learn about collateral requirements and margin so that you’re able to take responsible calculated risks, rather than putting on too small a position because you’re ignorant and afraid, or too large a position such that you allow yourself to get liquidated.
I personally now will be more alert to trading opportunities and prepared to pounce on them when they arise. All it takes is one golden opportunity to create life-changing wealth. Be prepared.
J. Savage 