Lessons to Learn from TerraLuna
The TerraLuna crash and UST depegging has devastated the entire cryptocurrency space. The sudden loss of over billions of dollars worth of investments in TerraLuna has caused financial ruin and serious fear regarding everything associated with blockchain and web3. While tokens have been known to lose their value for a variety of different reasons, the effects of Luna crashing are much more impactful because the Luna token and ecosystem was known as a top 10 cryptocurrency which had a massive amount of users known as Lunatics. The Anchor protocol and their stablecoin, UST, were incredibly profitable for most users until recent events caused the price of Luna to fall from $100 to under a penny in just one week. While it’s unknown what exactly caused this crash, it’s paramount that we take away a few lessons from what happened so that in the future, losses can be mitigated.
Keep your portfolio diversified
Diversification is one of the most important strategies that we can use to safeguard our liquidity in a volatile market. The practice comes from investing in stocks and is a common tactic used on Wall Street for this very reason.
Having one investment take up over 50 or 60 percent of your crypto portfolio can create a hazardous situation like we saw with Luna where your entire crypto valuation can disappear in an instant; and for many Luna investors this is what happend.
While it’s easy to sit on an investment and watch it grow exponentially, that is the best time for investors to pull out liquidity from their investment and spread it across other cryptocurrencies to prevent major losses during price crashes.
Spreading out investments is known as one of the safest ways to protect capital investments and something that we should all begin to practice more often. As the saying goes - don’t keep all your eggs in one basket.
Not all stablecoins are created equal
Another factor to consider, is to take a closer look at what makes a stablecoin stable. In this case, UST, while pegged to the US dollar, was not backed by actual USD, but rather through algorithms that kept its price mathematically fixed to $1 through Luna token.
This is in sharp contrast to other popular stablecoins such as USDC, USDT, & BUSD which are all backed by fiat currency reserves that are used to maintain the $1 peg. When algorithms are used over fiat backing, the ability to exploit the mathematics becomes possible and can cause a catalyst similar to UST’s depegging event.
Research the team
Finally, and most important, is to know who’s leading the project you are investing in. Knowing the team behind a cryptocurrency is a significant factor that traders need to consider in order to determine their trust in the network. This trust is crucial because it can help traders decide how much they are willing to invest in a project and its ecosystem.
Doxxed teams (a team that has made themselves publicly known) are important because it allows investors to research their past to see what their history with blockchain and cryptocurrencies are.
Knowing if a team is associated with rugpulls or has created division among other crypto communities is a major factor and a red flag that lets traders know to be hesitant about investing.
In this case, the founder of TerraLuna, Do Kwon, has had a poor relationship with his community and critics in the past. He has made public available tweets disrespecting criticisms and concerns coming from the Lunatic community; calling many members “poor” and “retarded” which is an unacceptable level of arrogance.
Being this divisive and insulting is not a winning mentality that should make an investor comfortable with a project’s team.
Try to learn from these mistakes
As we all know, hindsight is 20/20 and there will always be a nagging voice that tells us how we could have done something differently. In this case, with the fallout from TerraLuna, many investors are suffering from extreme anguish.
These sorts of losses are not normal and we need to take steps in the right direction to protect ourselves from allowing this to happen again.
Though we can’t prevent another major market crypto from tumbling down over 90%, we can still learn from this disaster to protect ourselves and our finances more effectively through diversification and awareness of the company and how it establishes value.
