I got rekt by LUNA and UST during the death spiral last month. As a result of the death spiral, over $50b got wiped out of the market in a matter of days and started the epic sell-off of crypto assets that has caused the market to lose over $1 trillion. This will likely go down in history as the biggest black swan event ever. It took me a while to process my thoughts but I’m finally ready to share.
First, if you were affected by the depeg, I empathize deeply. Perhaps you’ve lost savings, a large portion of your net worth, or everything. You experienced a strange sadness that was coupled with disbelief. You held deep conviction in something and then had those beliefs shattered. You start questioning other things in your life and wonder if they also will fail. You lose confidence in yourself and are plagued with self-doubt. It sucks, I’m sorry, and I’m right there with you 💔
Like many others on Crypto Twitter, I want to share some of the things I learned from this experience.
Taking Profits
In 2018, BTC dumped 80% from its then all-time high. Right now, BTC is already down 60% from its all-time high with potentially even more bloodshed. Many people, myself included, thought that the draw down in this cycle wouldn’t be as severe as 2018 because of wider adoption, network effects, and significantly larger institutional investment. In response, I only took profits on roughly 25–30% of my portfolio. I was wrong. I should have taken profits on 60%. To make matters worse, I took profits predominantly in UST. Ouch. Profit taking must only be done in battle tested assets. @thedefiedge wrote that he only trusts assets that survived 2 market cycles. This should also apply to stablecoins as well. UST didn’t fit the bill.
Due Diligence
The spectacular LUNA collapse was hard for me to swallow was because of how bullish the lunatic community was. The Terra network itself worked exceedingly well. The dapps were incredible and the interface was smooth. The Terra network as a whole had a better user experience than even Ethereum mainnet. Furthermore, the dapps on Terra were actually moving the needle in bringing crypto to the masses with IRL utility. Massive VC funding made LUNA seem invincible. Imagine trying to fade a network with so many tailwinds…
The truth is that the Terra network was built on a mint/burn mechanism that had an inherent major vulnerability. Regardless of how beautiful a mansion is, if it is built on a flawed foundation, the house will collapse.
Moving forward, how can I improve my due diligence? I, like many others, understand narratives and do a large portion of my research through Crypto Twitter. Unfortunately, because of Twitter’s algorithm, Twitter begins to show you more Tweets similar to the content you’re already viewing. Therefore, your timeline can quickly become an echo chamber that stifles critical thinking. You know you’re stuck in an echo chamber when any opposing views are met with ad hominem.
One of the biggest reasons why I absolutely refuse to watch Fox News, CNN, or any other major cable news channel is because opinion pieces are hidden under the guise of fact. Tucker Carlson or Wolf Blitzer, for example, have hour long segments of “news” but very little of it is fact. These segments are almost entirely biased opinion. After watching enough cable news, fact and opinion become one in the same where they are indistinguishable and these opinions subconsciously become the framework with which you begin to interpret your inputs. CT suffers from the same phenomenon where information is being shared by developers, venture capitalists, blue checkmarks, accounts with massive followings, all under the guise of fact. Moving forward, I find it sensible to begin research off of Twitter. Only after having established my own baseline understandings and convictions, writing down my thoughts, and doing proper analyses, would I then feel comfortable validating/challenging/sense checking my research.
Coronation Without Demonstration
Out of the top 20 coins in 2017, only 4 of them remain in the top 20 today. I am confident a similar outcome will continue for future cycles because it takes time to identify winners.
The Lunatic community believed that Luna would inevitably break top 5 and permanently settle in the top 3. Luna would solve defi’s need for a decentralized stablecoin, one that doesn’t require capital inefficient overcollateralization, and would therefore become the defacto crosschain stablecoin in perpetuity. In believing so, Luna’s price was deterministic based on UST adoption and thus being “early” was important to capture the massive upside potential of Luna.
Let’s take a step back and examine the bigger picture. I believe crypto is here to stay forever. There are roughly 300 million crypto users worldwide. This is about 4% of the world’s population. Of those 300 million crypto users, only 4 million of them are in the defi space. Any bluechip crypto asset will need to be adopted by the masses, not by merely 4 million people. This means that the crypto space is still incredibly early and that we have plenty of time to see who the winners are before we throw money into non-battle tested coins. You don’t need to be the earliest 0.01% of adopters to make it. You don’t even need to be in the earliest 1% of adopters to make it. For example, Microsoft is one of the biggest bluechip companies in history. You didn’t have to invest in their IPO in 1986 turn a large profit. You literally could have bought Microsoft stock 30 years later and still made a killing.
What I’m saying is that the crypto space is too quick to crown winners and call tokens bluechips. What I’m saying is that there is nothing wrong in waiting for clear winners to emerge before investing. Let’s not coronate tokens before they have demonstrated their longevity in the space.
Illusory Superiority
In the stock market, it is commonly understood that the majority of investors are better off buying an S&P500 index fund instead of trying to pick individual stocks. Beating the performance of index funds is difficult and most professional fund managers can’t do it. So, why would you be able to? In the same manner, I echo the now prevailing sentiment that the vast majority of crypto investors also cannot outperform BTC and ETH. They are therefore better off dollar cost averaging into BTC/ETH instead of picking small cap altcoins.
When looking at my own portfolio, a portion of it outperformed BTC. A portion also underperformed BTC. Most importantly, another portion initially outperformed BTC but then underperformed BTC because of suboptimal profit taking. Even if you had invested in coins that did a 10x+, like LUNA, SOL, AVAX, you would have still underperformed BTC if you hadn’t taken profits accordingly before the recent market selloff. Investors (myself included) suffer from illusory superiority where we overestimate our investment abilities. To make matters worse, illusory superiority is heightened during the peak of a bull market — the precisely worst time to be overconfident in your investing skills. Everyone looks like a genius in a bull market when everything is pumping off the charts. A large section of my portfolio would have been better off with the simple yet effective DCA strategy in BTC/ETH. Moving forward, it would be wise to limit only a small portion of your portfolio to altcoin investments. This would allow you to still experience the fun in engaging in new protocols but also limit your downside. For me, this will be around 25–35%.
Perspectives on Money
The death spiral of Luna/UST affected my own pockets. It took me about a week to process what was happening and to go through the five stages of grief. Moreover, I was also deeply saddened to see the fallout and how it affected other people. Reading on Reddit and Twitter, some lost their entire net worth. Some took their lives. These are truly heartbreaking stories.
When you face unfortunate circumstances in life, I think it is vital to examine your emotions. There is an important difference between sorrow and despair. Sorrow is pain for which there are sources of consolation. Sorrow comes from losing one good thing among others, so that, if you experience a career layoff, you can find comfort in your family to get you through it. Despair, however, is inconsolable, because it comes from losing an ultimate thing. When you lose the ultimate source of your meaning or hope, there are no alternative sources to turn to. It breaks your spirit. And money is a horrible object to make as your ultimate thing because the relationship is always one-sided. I’ve read many personal anecdotes of relentless pursuits of money. The ones who failed in their pursuit were, in the end, dissatisfied with life. The ones who succeeded found themselves ultimately unfulfilled.
The visceral reaction we feel with money perhaps is revealing of the dominion it has over our lives. When money becomes the indicator of your self-worth and when your significance is dictated by numbers in an account, you have made money an ultimate thing. While it’s natural to be sad/upset/disappointed/angry over money, danger lies when money leads to the sort of despair that breaks your spirit. A person with a broken spirit is already at rock bottom and further self-induced pain doesn’t feel like agony. I have no doubt that money makes a cruel master.
Final Thoughts
I first got into the crypto space in 2017. I experienced the crypto crash of 2018 that saw Bitcoin drop from $19k to $3k and Ethereum drop from $1,300 to $80. After the crash, I lost interest in the space. The euphoria was gone. Nobody talked about crypto anymore. All of the “I told you so” people came out of the woodwork. I stopped dollar cost averaging. I stopped researching. I focused all of my energy in other areas. In hindsight, this was a very costly mistake, one that I am keen to not repeat again this cycle. The crypto space has been through many cycles of booms and busts just like we’re experiencing right now. In fact, this is the 4th one since the inception of Bitcoin. While these market crashes are tough to deal with emotionally, the crypto space has always come out the other side stronger. I have no doubts that this time won’t be any different.
The fall of Terra Luna will likely lead to *sigh* much needed regulation in the space. Over $50b of value was wiped out from the market in literally a few days. There has never been an event like this that has done this much damage in such a short period of time. While some think that regulation goes against the ethos of crypto, regulation is also needed for widespread adoption and to thus realize Satoshi’s vision of a truly decentralized peer-to-peer electronic cash system. Yes, new regulations will likely lead to slower growth in the space, but in doing so, regulation also legitimizes cryptocurrencies as an asset class.
Thanks for reading. I hope you’re staying safe out there with all the red on the charts. Make sure to take time away from the markets to do things you love doing — things that bring you life.
