In just a few days, UST and LUNA lost billions of dollars, and now have a market capitalization that is far from the all-time high of $60 billion.
In May, the collapse of one of the most popular stablecoin – that is, a cryptocurrency pegged to the US dollar at a rate of 1 to 1 – caused the loss of tens of billions of dollars, with investors withdrawing at a moment’s notice in a situation that simulated a bank run.
But just before the big “bang”, terraUSD (aka UST) and it’s “twin” crypto LUNA had experienced a deafening rally, which some managed to exploit appropriately.
Venture capital Pantera earned a profit 100 times higher than its initial investment of $1.7 million.
For their part, Hack VC and CMCC Global, while not willing to share the amount of their profits, were content to assure that they closed their LUNA position in time in December and March, respectively.
UST, unlike the other stablecoins (linked to real assets), is an algorithmic currency created by Terraform Labs. It is not dependent on real money, as is the case, for example, with USDC (one of the most famous stablecoins). Instead, it is based on complex mathematical calculations that generate and burn UST and LUNA in an attempt to maintain the desired parity.
For a while, this complex operation worked effectively, as UST maintained parity with the dollar (1 to 1) and luna, the “sister” token, recorded successive rallies.
In April, for example, it had reached over $116, up 135% from February. At that very time, several funds rushed to increase their exposure, betting on the project’s prospects. And everyone was happy until early May and the big bank run.
For various reasons, the price of LUNA became unstable, investors crowded into the “exit” and a complete collapse was only a matter of time, despite Terraform’s efforts to support the exchange rate with the dollar by acquiring a large stock of Bitcoin. So in a matter of days, UST and luna lost billions of dollars, and now have a market capitalization that is now nowhere near the all-time high of $60 billion (under $1 billion).
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But, as noted above, not everyone lost. That’s because there were a few who managed to close their positions before the big bang.
Pantera Capital showed returns 100 times higher than the initial investment. Joey Krug, head of the hedge fund, tells CNBC that he had sold 87% of his LUNA exposure by April. Another 8% was sold in May, and he currently holds just 5%. All the liquidations yielded a profit of $171 million, while the initial placement was no more than $1.7 million.
CMCC Global, which is based in Hong Kong, was one of Terraform’s first investors in early 2018. The stake divestment was initiated in March, as the founder and chief executive was concerned about the technology behind UST on the one hand, and the regulatory framework on the other.
“Unlike traditional stablecoins, which are backed by (existing) assets, UST was essentially increasing the existing supply of dollar-denominated money,” a job reserved for the Federal Reserve, i.e. the central bank. “We realized that, while interesting as an idea, regulators would not tolerate the violation of money supply rules,” Martin Baumann points out to CNBC.
The rapid growth of UST, however, intensified the concern of the Asian fund, which was quick to sell at the $100 price.