I fell asleep 2 nights ago watching Venom: Let There Be Carnage, and while I didn’t consider it to be a harbinger of things to come, I did wake up earlier than usual the next morning and reallocated some of my positions. Those early moves saved a large chunk of my portfolio over the past 48 hours. Being in these markets for as long as I have, you notice where things are headed whether explicitly, or in this case, more subconsciously.
Of course, I’m talking about the recent carnage in crypto, but much more specifically, the incredible implosion of the Terra Luna ecosystem — an algorithmic stablecoin experiment. To put this in perspective, this is the 3rd worst event in crypto history,
- MtGox (650,000 BTC stolen)
- The DAO (3,600,000 ETH stolen)
- Terra Luna Implosion ($33 billion in value wiped)
These are the worst events in the history of crypto. It is not just the monetary impact of the events, but the social and psychological effects. MtGox was handling >70% of all cryptocurrency transactions at the time and affected nearly every crypto user. The alleged inside job impacted the trust users have in exchanges, self-custody, and brought significant scrutiny from regulators. The legal ramifications are still being sorted out to this day, nearly 8 years later.
The DAO was an extremely controversial event, where 15% of all Ethereum in circulation was raised by investors into a DAO to vote on and invest in new projects. Unfortunately, there was a bug in the DAO code and 3.6 million ETH were siphoned out of the contract by a hacker. In the aftermath, the blockchain was rolled back so it was as if the DAO never happened. This has been a stain on Ethereum with respect to the immutability of its blockchain. It even resulted in a fork being created to preserve the original history in the form of Ethereum Classic (ETC).
The Terra Luna Implosion
Today, May 11th, 2022, we’re only just beginning to witness the fallout of the Terra Luna fiasco. Almost $35 billion (USD) has been stripped from users in one way or another so far — a 98% fall in 24 hours. It’s unknown what recovery it may have, if any, but millions of people have been severely hurt or affected. However, the details of the collapse are not what I’m interested in highlighting — there are plenty of threads on Twitter for that.
In short, it was a coordinated attack on an experimental, algorithmic stablecoin mechanism that millions of users got caught up in. Caught up because of the impressive rewards for staking in Anchor Savings (19.5% APY), caught up because influencers called it a “blue chip,” and caught up because it grew steadily to a $40 billion market capitalization without many apparent red flags.
Lessons From a Blue Chip?
I’m more interested in what we can learn from this because I, too, got caught up in the Luna narrative. And whether it was experience or luck that got me out relatively unscathed I’m not sure, but this is something we should all reflect on.
Nothing is a “blue chip” in crypto and nothing is devoid of complete destruction in crypto. The term blue chip has been thrown around a lot recently; it’s often used to describe a project or token that’s valuable and much more stable that the rest of the flock. It’s derived from the term “blue chip stocks” that refer to giants like Apple, Coca-Cola, and Visa.
I’ve heard Solana described this way, Avalanche, Uniswap, Link, and even NFTs like BAYC, Doodles, or Azuki’s. Azuki’s floor has dropped by 50% in the past 24 hours because the creator’s past of abandoning other NFT projects came to light. Blue chips aren’t affected by surprises like that. Due diligence checks prevent them and blue chips don’t become blue chips without deep due diligence. There really are no blue chips in crypto, and if there were, it’s Bitcoin and Ethereum — full stop.
Nothing’s a Sure Thing
The maximalist ideology becomes attractive on days of carnage. Many will begin to see why Bitcoin and Ethereum maximalists exist. Sometimes it is out of stupidity, but often it’s out of experience. It’s better to be down 10–15% than 80–95%, and when you are down, you have the conviction to continue investing, something I suspect is lacking in many today. And please remember, just because something is down 99% does not mean it cannot go down another 99%.
Few people expected the implosion today, but there were several threads on the vulnerabilities of the Luna-UST peg. Many disregarded and discredited the concerns as FUD (fear, uncertainty, and doubt), but they were in fact true. It’s important to step outside your crypto echo chambers and try to understand the criticism.
No matter how great your conviction or confidence in your investment is, having a diversified portfolio can mitigate many potential and unforeseen risks. Nothing will humble you quicker than steep price movement to the downside. Prepare yourself for anything because nothing’s a sure thing.