WASHINGTON — In May, the collapse of one of the most popular U.S. dollar-pegged stablecoin projects cost investors tens of billions of dollars as they retreated in a panic that some have likened to a bank panic. But before that, the stablecoin known as terraUSD (or UST, for short) and its sister token luna, had been on a pretty dramatic rise – and some investors had a kill before it all came crashing down.
Venture capital firm Pantera Capital told CNBC it had multiplied the return on its $1.7 million investment in Luna by a factor of 100. Hack VC and Winklevoss-backed CMCC Global didn’t share their exact earnings, but CMCC told CNBC that it closed its luna position in March, while Hack would exit in December.
The scheme relied heavily on faith and the promise of future returns, along with a complex set of codes, with very little cash to back the whole arrangement.
Unlike USDC (another popular dollar-pegged stablecoin), which has fiat assets in reserve as a way to back its tokens, UST was an algorithmic stablecoin created and administered by Singapore-based Terraform Labs. It depended on computer code to stabilize its value by creating and destroying UST and Luna in a sort of seesaw effect of supply and demand.
For a while it worked.
UST maintained its peg to the dollar and the luna token soared. The luna token rose to over $116 in April, up over 135% in less than two months. Traders were able to arbitrate the system and profit from the price discrepancies of the two tokens. But perhaps the biggest incentive of the entire program was an accompanying lending platform, called Anchor, which promised investors a 20% annual percentage return on their UST holdings – a rate that many analysts have called it unsustainable.
Widespread buy-in – and public service announcements – from respected financial institutions lent credibility to the project, further reinforcing the narrative that it was all legit.
Almost everyone was happy until it all came crashing down in early May.
Although the project amassed around $3 billion worth of bitcoins in its reserves as a safety net for UST, when the price of luna became volatile, investors rushed into both tokens, sending prices off a cliff. . The Luna Foundation Guard attempted to restore the UST’s $1 peg by spending nearly all of the bitcoin in its stash. It did not work.
At their peak, Luna and UST had a combined market value of nearly $60 billion. Now they are essentially worthless.
The entire episode laid bare the advantages of large, experienced investors over retail investors betting on hope.
One person posted on Reddit that they don’t think they have enough money to pay for their next semester at school after losing money on Luna and UST. Another investor affected by the crash tweeted that she and her husband sold their house and bet it all on luna, noting that she was still trying to digest whether this was actually happening or just a nightmare.
Others contemplate suicide after losing everything.
“I’m lost, about to kill myself on a chair,” one commenter posted on Reddit. “I lost all my savings in the investments of (LUNA UST), the worst thing is that 3 weeks ago I proposed to my girlfriend. She does not know anything, I lost 62 000 dollars. I’m here, I don’t know what to do.”
Who cashed and why
Among the winners of the UST flash crash are Pantera Capital, a hedge fund that has seen a 100x return on investment.
Joey Krug, co-chief investment officer of the fund, told CNBC that in the main fund where they held and traded luna, they sold about 87% of their position from January 2021 to April 2022. Pantera then sold another 8% in May. once it was clear that the UST ankle had broken. At the end of it all, Krug says Pantera “got stuck” with about 5% of its position.
All of this liquidation has resulted in a return of $171 million on an initial investment of $1.7 million, assuming the remaining luna they own continues to be worth nothing.
Even as the fund sold off, Pantera Capital CEO Dan Morehead joined CNBC in December 2021 to talk about its top altcoin picks, which included the Terra blockchain luna token. At the time, Luna was up over 15,800% in 2021.
“We think this is one of the most promising plays for the year ahead,” Morehead said of Luna. “So many people are finding out and just starting to trade it.”
But Krug says the initial decision to liquidate the company was driven by risk management and fund rebalancing.
“For the big part that we sold in 2021 and part of 2022, it was a very simple risk management reason,” Krug said. “It continued to become a bigger and bigger part of the fund and so we had to reduce the risk because you can’t really run a liquid hedge fund with a position that’s a very large part of the fund.”
When Pantera noticed the break of the UST$1 peg in May, it sold back.
“It was really fair to see the peg break by a few cents and match it to the currency’s historical pegs,” continued Krug, who noted that typically when a currency breaks the peg, it’s hammered. Even though the company owned a bunch of luna as opposed to UST, when UST trades below its peg, the dynamic is such that more luna is minted, which lowers the overall value of each coin.
“So basically you want to sell it so you don’t end up diluting yourself,” Krug explained.
Hong Kong-based venture capital firm CMCC Global was one of Terraform’s first seed investors in early 2018.
CMCC founder Martin Baumann told CNBC he divested his stake in March due to concerns stemming from ongoing due diligence. The decision to sell was partly related to the technology behind UST, but its main concern was more related to regulation.
“Unlike asset-backed stablecoins, which are derivatives of the existing USD in circulation, the UST was effectively increasing the money supply of the existing USD,” a job that Baumann says is reserved for the Federal Reserve.
“We thought, although it’s an interesting concept, that regulators would not tolerate the falsification of the USD money supply,” Baumann continued.
The rapid growth of the UST has accelerated the concerns of the CMCC.
When CMCC sold, the luna token was trading at around $100. Asked about the profit from this sale, Baumann said the company does not comment on the returns or performance of individual investments.
Crypto-centric venture capital fund Hack VC reportedly exited its Luna stake in December.
CNBC reached out to Hack VC partner Rodney Yesep, but he did not respond to our request for comment on the profitability of this sale. Yesep said in a recent interview on the DeFi Decoded Podcast that they have been seed investors in Terra since “back when” it was “like a different entity.”
“It sucks to see a bunch of people affected by this stuff,” Yesep said in the podcast. “We weren’t in a position when the downturn happened, but a lot of people were, and a lot of people were quite affected.”
Then there is Galaxy Digital, the crypto merchant bank founded by billionaire investor Mike Novogratz.
In a public letter addressed to “shareholders, friends, partners and the crypto community”, Novogratz – who got a luna tattooed on his arm to commemorate his status as an official “moon” – gave his thoughts on where the project went wrong, but also noted that Galaxy took profits along the way.
In its first-quarter earnings report, Galaxy noted that the biggest contributor to its net digital asset gain of $355 million was luna sales.
Other major backers of Terraform Labs included some of the biggest names in venture capital, including Lightspeed Venture Partners and Coinbase Ventures. Three Arrows Capital and Jump Crypto bought the Luna token. CNBC has not learned how these companies fared.
A path to redemption?
Terra supporters voted to revive the failed venture. The the proposed rebuild involves a new Terra blockchain and the removal of the beleaguered stablecoin that helped trigger the original project’s collapse. It could also mean redemption for institutional and retail investors who have been wiped out.
For those who saw a big loss, the stimulus could potentially translate into an opportunity to recoup losses on initial investments.
Delphi Digital, for example, revealed it was “currently sitting at a significant unrealized loss” after miscalculating the risk of a death spiral unfolding, and reports from Coindesk show that Seoul-based Hashed Ventures, lost over $3.5 billion.
The terra 2.0 proposal includes a plan to distribute tokens to holders of old luna (soon to be renamed “luna classic”) and UST tokens. If the name coins take off, it could be a form of redemption for investors who suffered a loss.
But for those who got out before things got bad for UST, they’re walking away.
“With the new chain, it looks like a good portion of the tokens airdropped will be acquired over several years,” Pantera Capital’s Krug told CNBC. “We have projects in our portfolio that have integrations with Terra. I’d love to see something community-based succeed here, but we’re a pretty chain-agnostic fund.”
CMCC Global’s Baumann said the fund has decided not to make any new investments in the revived terra ecosystem at this time.
Days before the UST collapsed, Terraform Labs founder Do Kwon – who bragged about it he does not “debate about the poor” – said in an interview that 95% of coins would “die”, but there is “entertainment in watching companies die too”.