Almost nine months ago we asked the question, how stable are stablecoins. This was after the collapse of the algorithm protected TerraUSD blockchain and its Luna token. At the time our focus was on how inadequate the algorithmic approach was in maintaining a one to one parity between the dollar and their token. A lot of people lost a lot of money when this happened. And, because of how interconnected crypto is, it started a ripple effect that contributed, along with crypto winter, to the fall of other crypto businesses. But now we see that there is more to the Terra story. Namely, where did your Terra stablecoin assets go?
Where Did the Money Go When TerraUSD Collapsed?
According to Coinbase, a Luna token today is worth about $0.000168. This is the “stablecoin” that was supposed to maintain parity with the dollar and once traded as high as $119.18! The easy answer for where the money went is that it simply evaporated as the market price of Luna, the TerraUSD token, went to near zero. Since the crypto peak in November 2021, Bitcoin and the rest lost about two-thirds of their values versus the dollar. So, were all of the TerraUSD assets in Luna? According to Bloomberg, they were not and the SEC (Securities and Exchange Commission) is tracking a 10,000 BTC “hoard” that Do Kwon, the TerraUSD CEO, took out of the Terra “ecosystem” and is currently accessing with the help of a Swiss bank. The SEC is filing a lawsuit against Kwon and the company in regard to shady dealings related to the $40 billion in losses in the TerraUSD collapse.
Hiding Crypto in a “Transparent” System
We were interested to read about how FTX CEO Bankman-Fried hid $50 million by purchasing a small rural bank with 3 employees in Washington state. Getting assets out of the crypto realm probably seemed like a good idea until regulators found the transactions involved. Likewise, converting Luna to Bitcoin, putting them in a “cold wallet,” keeping them out of any of the digital asset exchanges, and from time to time turning them into cash via a friendly Swiss bank probably seemed like a great idea too. The SEC says that about $100 million in standard (fiat) currencies has been obtained by these transfers.
Crypto Boss on the Run
Unlike Sam Bankman-Fried who is on house arrest in his parent’s home as he awaits court proceedings, Mr. Kwon disappeared and was last believed to be in Serbia. Giving credit where credit is due, putting ill-gotten crypto gains in a cold Bitcoin wallet from which it can be accessed anywhere with an internet connection was a better idea than having to sneak into a rural Washington State bank to make a withdrawal provided that you are on the run!
What Should We Have Learned From the TerraUSD Mess?
Crypto Potato offers several excellent pieces of advice in regard to the demise of TerraUSD and, in retrospect, other fallen crypto businesses. They say, as we did, that stable reserves (in dollars, euros, yen, etc.) are necessary for a stablecoin to be stable. A computer algorithm is only as good as its coding and is not protection against a systemic collapse like we have seen time and time again during the crypto winter.
Greed Versus Fear Versus Crypto Hype
High market price does not necessarily indicate high value. Stock market investors have known this for years. You really do not have a profit until you take a little “off the table.” The famous and successful investor, Warren Buffett, has said to be fearful when the market is greedy and only be greedy when the market is fearful. He never invests in anything that he does not fully understand and which is likely to generate steady income for years to come. None of that applied to TerraUSD except the part about the market being greedy and how investors should have been fearful. There is always a lot of hype in the crypto world and investors need to be wary.
Death of the Crypto Dream
Unfortunately, not all decentralized finance businesses are really decentralized. Decisions, bad ones, relating to TerraUSD (and FTX plus others) were made by mere handfuls of people and the true nature of their financial difficulties were hidden from investors. This could well have been the same time that Kwon and others sequestered 10,000 BTC in a private wallet and made plans to disappear. While we have had some concerns about crypto regulation, we believe that had companies like TerraUSD and FTX been in a robust regulatory system collapse and fraud would have been substantially less likely not to mention such huge monetary losses.
Pride Goeth Before a Crypto Fall
Pride goeth before a fall. This saying comes from the Book of Proverbs which was compiled around 1000 BC. Hundreds of years later the Romans gave military heroes a parade during which a slave stood on a chariot behind the conquering hero and whispered in his ear that all glory is fleeting. The unbridled arrogance of folks like Kwon before their fall reminds us that perhaps the entire crypto “aristocracy” needs to be rounded up and given these two pieces of advice. Crypto Potato simply says to remain humble even if you are rich.
Where Did Your Terra Stablecoin Assets Go? – SlideShare Version
Where Did Your Terra Stablecoin Assets Go? – DOC