Just Lost Everything | The Freaky Truth Of $1 Terra Luna

All right guys, I was out of town this last weekend getting beat up by Michael Reeves. But now that I'm back in my office, let's talk about the collapse of Terra Luna. Because I have to say, this was the most catastrophic large-scale event in cryptocurrency that I have ever witnessed, and it sets the dangerous precedent that nothing you buy is safe.

No, really. Bitcoin just witnessed the seventh straight week of losses for the first time ever in history. Investors have slowly begun to lose their faith in stable coins as several have de-pegged from the one-dollar value, and now there's the concern that things are about to get a lot worse.

The fact is, the more I've looked into this and the deeper down the rabbit hole I've researched, the more concerning the trend becomes. There are some serious implications for the entire cryptocurrency market that everybody should be made aware of because I promise this affects a lot more than meets the eye.

So, let's talk about the Terra Luna crash, what's going on, how much worse this could get, and what this means for all of us as investors. I have to say there is so much being spread on YouTube right now based on random theories and baseless claims with no merit whatsoever.

But before we start, if you appreciated information like this, it would mean a lot to me if you teared that like button apart and subscribe for the YouTube algorithm since it helps me out tremendously. So thank you guys so much for doing that, and also a big thank you to Masterworks for sponsoring this video, but more on that later.

First, we need to talk about what Terra Luna actually is and its impact throughout the entire cryptocurrency market. To do that, we gotta break down the anatomy of a stablecoin. In this case, a stablecoin is simply a cryptocurrency whose value is pegged one to one to the US dollar. So, it's no different than you giving me a dollar and me giving you back a virtual token redeemable for one dollar of U.S. currency.

In fact, it's very similar to the creation of physical money that we use day to day, which was originally created to facilitate transactions that could later be redeemed in gold. The more you know. Anyway, stablecoins play a fairly important role within the entire cryptocurrency ecosystem because they allow you to store your money in a way that's stable, easily transferable, and bridges the gap between your everyday money and your gambling money—I mean, your digital holdings.

No, but in all seriousness, stablecoins provide a great way for you to store your assets online without the volatility and with the assurance that your money's not going to fluctuate plus or minus 20% in an hour because Elon Musk decides to post a tweet.

So, how does it work? Well, first we have a stablecoin that's backed by the US dollar, or more appropriately put, by cash equivalents. This could mean that you give them a dollar, they give you back a one-dollar stablecoin, and then they're free to lend out your money while holding an IOU as a reserve. This way, there's always some type of backing that could be directly redeemed for US dollars.

The value should remain fairly stable, and even though there are some serious concerns that I'll address a little later, for the most part, it's fairly straightforward. But second, we got another type of stablecoin based on an algorithm. How could that go wrong?

Well, in this case, instead of being backed by reserves in a bank account, an algorithmic stablecoin regulates its price by trading between two coins—one whose value could fluctuate day by day depending on supply and demand, and the other which gets bought and sold in proportion to how far away it is from a dollar.

And if that sounds extremely confusing, here's how this works in relation to Luna: When the price of their one-dollar stablecoin trades for more than a dollar, holders could cash in on that tiny profit, and as more people do that, the price of the stablecoin drops back down to a dollar. On the other hand, when the price drops below a dollar, holders could buy that one-dollar token for less than its face value, with the expectation of selling it shortly after for a profit.

So now that you at least know the very basics of how a stablecoin works, here's where we get to the very interesting and very juicy part: Carolina was one of the most popular cryptocurrencies, with their stablecoin becoming the third largest within the crypto ecosystem and their Luna token entering the top 10 with a market cap of 41 billion dollars at the peak.

I mean, by all accounts, Terra Luna seemed unstoppable, having reached as high as 117 dollars a coin with 1.1 billion dollars held in Bitcoin as a reserve. Except it was stoppable. Now, up until recently, the Terra Luna community was extremely massive. Their project was created to combat the entire banking system by working to replace credit card networks, banks, and payment processing.

Basically, what credit card transaction fees would cost—anywhere from two and a half to three percent—Luna would be able to do the same thing on the blockchain for a fraction of the price. It was very popular; over a hundred projects were built within the Terra ecosystem, and it quickly gained widespread adoption including one that got everyone's attention and drove a lot of money onto the network.

That would be a 20% yield on your money. Essentially, you would be able to take your one dollar UST stablecoin, lend it to other people who want to borrow it, and you get paid back twenty percent interest. Well, those rewards were so appealing that a lot of money went into Luna for the sole purpose of just being able to get that 20% return.

From there, we saw post after post where people would invest their entire savings accounts to earn twenty percent or use it as a way to save up for the down payment of a house, and the response, along with the criticism, was almost entirely the same: twenty percent probably isn't sustainable long-term, but you may as well get it while they offer it. Or I guess, as this poster says, long story short, there isn't much of a catch; it just works.

And that, of course, is where the problem begins. Now, here is where we put on the tinfoil hat because there are several, how should I say, conspiracies floating around about what caused the collapse. So to entertain those theories, here's what we have so far.

First, on the most basic level, Coindesk reported that there was a mass sell-off of Luna onto the open market during a time where cryptocurrency was already beginning to fall, and for the first time ever, the market cap of Luna was lower than that of the one-dollar stablecoin, meaning there is no longer one dollar worth of Luna to back every one dollar worth of UST.

So, in an attempt to hold off an entire collapse, the Luna Foundation deployed about two billion dollars worth of their Bitcoin to bridge the gap, but that only lasted so long until the cracks began to reappear, and 48 hours later the entire project evaporated.

But that of course begs the question: What would cause the sudden sell-off to begin with? Well, the second story was that the Terra platform was maliciously attacked, and the story goes something like this: one wallet dumped 350 million dollars worth of UST all at once, causing the price to destabilize and forcing Luna to sell their Bitcoin reserve.

That, of course, caused the price to fall, which would make that person a lot of money if they opened up a short position right before selling. There's a Twitter thread detailing everything that a link down below in the description for anyone curious or who wants more information on this.

Now the third rumor, on the other hand, was that BlackRock and Citadel were behind the coordinated attack, and as usual, all of this begins on Twitter. In this case, he claims that BlackRock and Citadel conspired to borrow a hundred thousand Bitcoins on Gemini to then go and buy 25,000 Bitcoin worth of UST.

Then they did a private deal with Do Kwon, the creator of Terra, to trade the remaining 75,000 Bitcoin for UST at a discount, thereby lowering the liquidity of UST. At that point, they dumped everything, causing the price to fall, and then they could buy Bitcoin even cheaper to pay back the original loan and profit the difference.

Yes, seriously, as ridiculous as that sounds. I can't make that up. Basically, all it takes is one rumor, and people copy and paste it everywhere as a fact, even though, by the way, there's zero evidence that I could find linking them to any of this.

But fourth, the most plausible scenario that I could find, according to Business Insider, is that somebody bought one billion dollars of UST while at the same time shorting Bitcoin. Eventually that wallet sold, and the combination of a large sell-off at the same time that the entire cryptocurrency market was suffering caused a bank run where people lost faith in Luna.

And once that faith was destroyed, it was never going to recover. To me, this just seems like the most realistic explanation—that somebody found an exploit and then used it to make a very quick profit, especially when the founder himself was publicly taunting billionaires to do an attack to see what happens, as outlined by Coffeezilla.

It's also not the most confidence-inspiring either when the founder, Do Kwon, was also behind another failed stablecoin project known as Basis Cash, and he's now proposing to create a new stablecoin that would make up for the loss of Terra Luna, which I think it's pretty safe to say you should probably stay far, far away from that.

But what about the rest of the cryptocurrency market? Since another stablecoin, DAI, also just recently depegged from its one-dollar value while Tether recently saw a drop as low as 95 cents.

Well, first of all, this should go without saying: the higher the potential returns, the more you risk losing money. Even though I'm directing this towards cryptocurrency, it also applies towards everything. There is no scenario where earning above 10% is risk-free, except for I-bonds, and there's a reason why even the most reputable banks don't pay any more than between one and three and a half percent at the very most.

Sure, even though there is certainly the assumption that high yields are simply the cost of doing marketing and it's fueled by endless Venture Capital, so you may as well get some of that money for yourself.

The fact is, it'll only work until it doesn't. As of now, Luna's dropped from a high of over a hundred dollars a coin down to 0.000018. So for every ten thousand dollars you invested, one dollar would be left.

The other sobering reality that everyone needs to be made aware of is that with cryptocurrency, it's not protected by FDIC or SIPC insurance. That means if your investment disappears or the brokerage files for bankruptcy, there is no protection that you will get any return of your capital.

On top of that, in a previous analysis I did that covered the top cryptocurrencies by market cap throughout the last four years, only eight cryptocurrencies have stayed in the top 30—that's it. The rest have fallen, and we don't talk about those anymore. That just means what's top 10 today is very unlikely to be what's top 10 in the future, and that also applies to stocks.

Throughout the last 20 years, only one company has stayed within the top ten, and that would be Microsoft. The rest have dropped off while new companies take their place.

Now, definitely don't get the wrong idea about all this because I'm a cryptocurrency investor and I get the appeal, but it's also equally important to have a level-headed, realistic approach to the risks and rewards. That means not investing more than you could lose, understand what you're investing into, and realize that there are a lot of risks.

None of this is meant to scare off investors, but it is meant to be a voice of reason in a market that's extremely volatile. Truth be told, I see no other option besides one day stablecoins will need to be regulated and strictly enforced to ensure that they're properly backed and operated.

After all, most platforms have nothing in place to prevent you from borrowing cryptocurrency, taking it to another platform as collateral, borrowing even more, repeating the process another 50 times, and pretty soon you'll have fifty dollars for every one dollar that you deposit.

My biggest concern is that the entire market could be propped up by over-leverage, and there's no way to accurately verify how much of this is pure speculation and how much is reality. We have a major problem on our hands if the market were to suddenly collapse out of nowhere.

We also have the same risks with Tether, which has continually come under scrutiny that maybe it's backed by nothing and they're simply creating their own currency to buy and prop up the price of Bitcoin. But you know what? We'll save that for another time.

All of that is to say that at some point, regulation is going to have to come into play, and I think in the big picture it's going to add a lot of legitimacy to many projects and will make people feel a lot safer to invest their money in crypto. Until then, just play it safe.

Don't invest any more than a small part of your portfolio. Understand that everything has a reward in direct proportion to the chance that you could lose everything, and always, no matter what, subscribe and hit the like button if you haven't done that already.

Thank you guys so much, and until next time.