Terra Aftermath.
It’s extremely unlikely that you don’t know about the state of Terra. Therefore, I will not dive into unnecessary details and instead will focus on why we picked Terra and why we decided to close 75% of the position, how predictable the occurred events were, and our stance going forward.
Starting from the first, Anchor’s high APY wasn’t the reason why we picked Terra in September 2021. The project held the potential to grow outside of the crypto crowd and become a gateway for non-crypto people that are looking for convenient payment solutions. The now infamous founder, Do Kwon, expressed this vision and pointed out that it’s crucial to have as many use cases for the project’s stablecoins as possible.
Given the above, it’s frustrating to see how things played out over just a few months. The team could’ve stuck to its vision and pushed the payments use case, but instead, it focused heavily on acquiring users through Anchor.
When yields on stablecoins dropped after the market started to decline at the beginning of 2022, Anchor’s 20% APY became quite attractive. It became an easy way to prop up demand for $LUNA because it’s required to get UST and access yield. This, however, didn’t create sustainable use cases and therefore didn’t align with the original vision that we liked the project for.
On top of that, the UST peg was tested during the downfall of Daniele Sestagalli’s Wonderland. Therefore, since $LUNA was in profit, it made sense to be on the safe side and take out principal.
We didn’t completely close $LUNA because the push for new use cases still existed. The project started to gravitate more towards DeFi, which may be dictated by a decline of interest in Terra-based payments in the non-crypto world.
While a bit less exciting, new use cases outside of Anchor could’ve helped the adoption of UST and straightened its peg. Also, UST could become a vessel between Cosmos liquidity and Ethereum-compatible projects.
VCs and decentralized teams recognized the project’s potential. Heavyweights like Jump, Arca, and Delphi Digital were bullish on it. Some put a lot of their own money on the line. Our Pick, Redacted Cartel, and a respectable stablecoin player, Frax Finance, engaged with Terra to bring more usage for UST.
Given the above, I argue that the recent depeg wasn’t predictable. The project had a substantial number of skeptics because of the overall reputation of algo stablecoins and the overly confident and even hostile behavior of Do Kwon and Terra’s community. They claimed that the project would fall apart, but only very few put their money on the line. Shorting $LUNA was the most productive way to benefit if the ongoing events were inevitable, but it wasn’t popular.
The reason for the depeg couldn’t be predicted well in advance. During re-arranging UST liquidity on Curve, the team left the stablecoin in a vulnerable state. Once that vulnerability led to negative consequences, the team didn’t step in with the necessary measures to maintain the holders’ trust. As many analysts, including us, stated, UST is an algo stablecoin, and that’s why Terra had a risk of suffering from a black swan event. The point is that it’s called “black swan” because it’s unpredictable. So is the team’s reaction.
Now to our stance. First and foremost, let me say that I feel bad for everyone who lost their money on $LUNA. I would say it even if we didn’t pick it. As I said in the above paragraph, no responsible person would touch Terra if it was a blatant Ponzi scheme like Bitconnect. I understand that many responsible investors suffered, and I feel bad about it.
That being said, speaking strictly about SIMETRI Portfolio, we shouldn’t close Terra at this stage. We have 25% left and the principal out. That means that technically it’s a “no profit” scenario for those who followed our recommendation. Let me state that it’s not the part where I say that “we told you so.” But, we can’t adjust our approach based on whether our recommendations are followed.
Do Kwon’s most recent communication doesn’t instill optimism about Terra. Apparently, he didn’t expect that he wouldn’t be able to bootstrap funding and bail the project out, which is why his response to the crisis is shallow. Overall, Do’s handling of the situation came as an unexpected frustration, and others also highlighted it.
Still, since only profit was destroyed, the most rational way is to leave $LUNA in the Portfolio because of an unlikely but possible reversal. That’s the same approach adopted by a person who made a multi-million bet on $LUNA’s downfall and shorted it. There’s no point in closing a position unless the project ceases operations.
Some subscribers argued that Terra should be closed because it damages SIMETRI’s image. This will be fixed once we start accounting Take Profits in the Portfolio Tracker, which should happen by the end of May. The new version will reflect that principal was taken out in advance, which in my opinion is the main point for image maintenance.
Let me finalize by saying that I feel sorry for everyone who lost money in $LUNA. The magnitude of this wipeout for crypto is comparable to The Great Recession, and we all will feel the negative consequences of what happened, whether we hold $LUNA or not.
SIMETRI Portfolio – Pain
Terra’s downfall negatively affected the entire market. BTC is currently hanging at $30,000, and the market’s sentiment is substantially damaged. In such circumstances, a further push to the downside is possible, bringing more pain for Picks.
