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Terra: 3 Key Lessons from its Crash

The cryptocurrency industry is still a nascent and volatile market. As such, TerraUSD (UST-USD) and Terra (LUNA-USD) crashed earlier this month.
Investors should have deep knowledge of the assets they invest in.
Algorithmic coins and fundament…

  • The cryptocurrency industry is still a nascent and volatile market. As such, TerraUSD (UST-USD) and Terra (LUNA-USD) crashed earlier this month.
  • Investors should have deep knowledge of the assets they invest in.
  • Algorithmic coins and fundamental flaws of protocols can cause crashes as large investors can manipulate the price of cryptos.

Source: David Sandron / Shutterstock.com

TerraUSD (UST-USD) and Terra (LUNA-USD) witnessed a massive crash in their prices earlier in May. This event has written another important chapter in investing, trading and speculating.

Stablecoin TerraUSD and its sister coin Terra (Luna) were trading at $0.066498 and $0.000163, respectively, on May 24. These numbers gave a one-month return of negative 93.39% for TerraUSD and negative 100% for Terra (LUNA). There are too many questions to ask about this crash. However, the top question is: should you buy now? I do not consider this to be a dip, but rather a collapse. I also consider both cryptocurrencies failed ones.

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When large investors, like Binance, invested $1.6 billion in Luna just to watch their investment decline to $3,000, then you realize the magnitude of this massive crash.

Here are not one, but three key lessons from the historic crash of TerraUSD and Luna.

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Ticker
Company
Price
UST-USD
TerraUSD
$0.087135
LUNA-USD
Terra
$0.000186

Cryptocurrency Has Not Yet Matured

The cryptocurrency market is still a nascent and very volatile, very risky market. Has it matured yet? I argue that no, it is still a market full of hype, dreams, wishful thinking, and naïve investment thoughts like “to the moon.” This phrase suggests that the price of several cryptocurrencies will explode and rise too much too fast to easily build a generation of wealthy people.

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I personally have never been a supporter of the cryptocurrency market and will never become one. I see too many irrational moves with investors betting their savings on untrusted coins that are based on greed.

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“Greed is good” is a famous quote from the movie Wall Street. But greed is dangerous, as well, if it is not controlled. Greed caused this crash for TerraUSD and Luna because investors wanted a high yield, but failed to understand the underlying weakness behind the Terra protocol.

Invest in What You Know

How many investors read the whitepaper to understand the technical details before investing in cryptocurrency? I believe it to be very few of them. This is a costly mistake.

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If you do not really understand the full rationale of the whitepaper, then sudden negative surprises, like this crash, become a matter of not if, but when.

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Not a Good Idea

Algorithmic coins like TerraUSD use complex algorithms to “maintain their peg with the fiat currency they track. These algorithms can also [incentivize] and manipulate investor [behavior] to [stabilize] the coin’s price around the peg.”

There is a huge fundamental flaw in TerraUSD and in Luna. There was too much certainty that TerraUSD was a stablecoin and would remain stable at $1. When the price was no longer stable, the speculators kicked in. Soon, more people followed to take advantage of the loophole that would create massive returns in no time, selling UST and exchanging it for Luna. There was then a spike in supply. Additionally, there is a conspiracy theory about what caused this crash. This theory includes an attack from a large investor, the so-called “whale.”

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When TerraUSD lost its peg to the U.S. dollar, panic began. The story of Terra shows that if a stablecoin can crash, others may soon follow. So, this makes us ask: how safe are stablecoins?

The crash of Terra will probably expedite regulation in the cryptocurrency market. Although rules and guidelines would make this a safer market, this makes this industry less appealing to investors.

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These three lessons can be summed up in one phrase: Be fully prepared at any time for the unexpected when investing in cryptos. The market is not suitable for all investors.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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