This is a port-mortem about my investment in the crypto token $LUNA.
The token came on my radar after I read The Generalist briefing about it. I started reading The Generalist just a few months prior, after their infamous trilogy on FTX. I would not say at that point I was ready to trade my mom for a tip from Mario (the guy behind TG) but what he said resonated a lot with me. And I still like him 😉
Actually, one of the reasons why I wanted to write this post is because two months ago I read his latest trilogy about Multicoin Capital. Multicoin is the fund that made a gazillion money investing early in Solana (30% of a gazillion is still a gazillion, no?). The piece is great and while reading it I wondered, where I was when they started? Well, I was making fun of ICOs and all the people that lost money with them and Bitcoin. I did not stop and analyze what was going on back then mainly because (now, I realize) criticizing was less onerous than thinking. I was the guy riding a horse and looking at a car prototype said “ahah, what’s that s**t”. And I did because doing so you are right 90% of the time.
Today I listened to Animal Spirit and Ben said “tv writers pose problems while financial planners have to find solutions. The former is way easier than the latter”. This is true in general. Think about politics: the opposition can criticize (pose problems) while the ruling party has to legislate (find solutions); this is why democracies are often a ping-pong between parties, because who lost the latest election has a debating advantage over who won. …and then you have populists but that’s for another time.
Investing is the same. Finding problems is easy: three months ago stocks were too expensive and now you cannot touch them because they are in free fall. For any investment, at any point in time, anyone can find a potential issue. Which happens by design: risk and reward. No risk, no reward.
This does not mean any risk will bring a reward.
What went wrong
I have a bad memory, I do not have a proper trading diary other than this blog…and I do not think I ever wrote my thesis about buying $LUNA. It is difficult to say if what I recall now is what I was thinking. My understanding is that Terraform Labs was building practical products; for example, they were trying to build an alternative to Visa/Mastercard. Now follow me: Visa applies a fat fee to any transaction they process, therefore if $TERRA takes part of their business can generate real revenues. Those revenues, instead of going to Visa shareholders in the form of dividends, can go and pay the 20% interest on the Anchor protocol. Maybe this was just a narrative and I got duped but I do not think the reality was like everyone now is depicting it, like “ahah obv it was Ponzi, 20% interest out of nowhere?”.
It might be that an algo stable coin will never exist but if you remove that mental constraint, you then realize that in order to achieve success you have to build a base. And one of the few ways to do it is to (temporarily) pay for it. The 20% interest = Ponzi is again a lazy shortcut to not doing homework.
What happened? Allegedly, someone shorted 1 billion worth of $BTC and bought 1 billion of $UST in a pre-arranged transaction, to prevent a spike in $UST on the upside; then it sold that stash in three tranches, a massive amount that caused the de-peg using the ongoing $BTC crash as a catalyst for panic. This brought not-so-Lunatics to sell their $UST holdings and the rest, the price death spiral, is history. I knew a death spiral was possible (see later) but I thought $UST was more a utility token (“build practical products”, remember?) than something people bought just to get 20% interest. Clearly, the latter group was way bigger than the former. If people used the token for utility purposes, why would they dump it all at the same time? I am not an expert but probably a utility token doesn’t need a giant float but to achieve a stable one, the bigger the better.
I was surprised when Do started to buy $BTC with treasury funds because, like many, I thought the purpose of the treasury fund is to invest in uncorrelated assets, otherwise you increase the probability of the death spiral instead of decreasing it. On this, Coffeezilla offered a great theory (actually, a guest on Coffeezilla): Do bought $BTC to win over that part of the crypto community and intentionally create a systemic risk so that all crypto participants, not only Lunatics, would have an incentive to see $UST thriving. You can see it now: $UST crashed but brought with it the whole crypto market (it is even crazier when I watch the NBA because every game I think: would that sponsor be there the next game?). An additional reason why Do did not buy any fiat asset was that, as recently revealed to the Russian Central Bank, your control over the dollars you own is not 100% permission-less. In order to have a real ‘free’ crypto, you cannot defer to any other entity’s consent.
Reflecting on it, I was, eagerly but not consciously, looking so much for a real, practical application for crypto that I bought the story without too many questions.
I lost 50% of my investment.
What went right
I had a strategy. I know that this is usually the part where the reader goes “eh, now it is easy to say because you know how it went”. I would do the same: if someone wrote about an investment and claimed he lost way less than the generally advertised loss, I would not believe in it. So take it as you want, I’d not blame you.
My target is to invest in crypto 2-3% of my portfolio and I am still getting there because I took a Dollar Averaging approach. I will continue to invest this month and the next and… c5% of that 2-3% was invested in $LUNA. I lost 5bps of my overall portfolio. The obvious downside of this strategy is that I will never buy a Lambo with my crypto, so this is not a riskless strategy. The amount is small because, well you just read that I do not know what I am doing. But any amount is a push enough for me to study and hopefully, this work will bear some kind of fruit in the future.
Outside $BTC, $ETH and $SOL, I decided to trade based on trend. Price goes up, I buy more, price goes down, I get out. In April, Matt Levine on his Bloomberg column and SBF on the Odd Lot podcast made me aware that my understanding of $LUNA was…not correct. It was indeed closer to a Ponzi than I thought. This is the moment where traders/investors make a crucial mistake: I spent a few days thinking they did not get what $LUNA was about instead of revisiting my thesis. Why do they never mention the products linked to the project? Why do they insist on the 20% interest rate? I have huge respect for Matt, I learned so much reading his writing in I do not know how many years and here I was, unable to admit I might have missed something. Then I remembered this post from Corey: even if you know something will eventually go to zero, it does not mean it cannot be traded profitably. Instead of selling, I tried to ride the wave and tightened my stop.
Then it was Monday the 9th of May. During the weekend I read some posts on Twitter about the $UST de-peg. I did not sell immediately because I was still stuck in that stupid phase when you hope everything will go back ‘to normal’: I saw $LUNA’s price as a bargain and not as the ultimate chance to salvage part of my investment. Everyone has a plan until they get punched in the mouth. I did not think about that but I definitely had that feeling. It hurt like a motherfu**er but at least I knew it was coming, thanks to Matt. It was not a sucker punch and that’s what saved me. I sold and saved 50% of what I invested.
If at this point you are still thinking “it was a stupid investment from day one, you should have never bought it” then you can move on and go read something else. Maybe $LUNA itself was a bad investment and I am not here advocating (yet?) the idea that investing in a Ponzi is fine as long as you are early enough and have an exit strategy. I thought that what Do was trying to build was different and I think there is a profitable way to invest in this type of very speculative, non-Ponzi, bet. There is a section in this post about what it worked because:
- I sized the bet correctly
- I changed my mind when I got new information
- I stuck to my plan and sold (almost) where I should have
The lesson should not be that crypto is a gigantic waste of capital, human included.
Conclusion
I spent more than a decade of my life dealing with one of the most boring topics out there: money market funds regulation. MMFs are considered the safest and most liquid investment available. A new regulation introduced after the Great Financial Crisis arrived at the conclusion that there cannot be any formal guarantee that a MMF unit price will always be $1 or €1, unless 99.5% of the fund is invested in government assets like T-Bills in the US. It is easy to see the devil-pact here: I guarantee let you mark-to-model your position as long as you invest only in assets that I issue.
Not even a heavily regulated environment, with Credit Rating Agencies’ oversight, can guarantee liquidity and a constant unit price. The system works because all participants understand there is a mutual benefit in it. When rates went to zero, fund managers reduced their fees and, for a period, operated at a loss. When I have to make big transfers, I give my contacts a heads-up. It is a relationship business. The fund manager can refuse your funds and if someone tries to attack a MMF, it has ultimately to deal with the FED or the ECB.
The system also works because MMF managers can legally ‘gate redemptions’, i.e. if in one day more than 10% of the fund is sold, the fund manager can liquidate only a part of it. In other words, the system works because it is heavily centralized. To build a 100% decentralized version of it is no small feat. Maybe it is really impossible to achieve such a result but for sure acting like Nelson does not require much, do not expect lots of credits for it:
Community
My journey with $LUNA started because Mario Gabriele wrote about it. 90% of the financial content I read, I discovered because 12 years ago an analyst I was working with offered me Barry Ritholtz’s book Bailout Nation. As a teenager, I learned about trading by reading an Italian forum, FinanzaOnLine. Nothing adds more value than being part of a great community.
A few days ago bankeronwheels wrote me about the forum he launched on his …blog?, platform?, and I am pumped about it. My son was born two days ago (I was joking with friends that if it was a girl, I had to call her Luna), so I am not sure how much time I’ll be able to dedicate to it in the short term but I’ll definitely read it…once the NBA playoffs are over.
There is a justified bad rap around getting financial ideas, tips, and suggestions, call it as you want, online. It is hard to separate the professional investors-occasional entertainers from the Jim Cramers (f**k I promised myself not to think about Pietro anymore!) and the Jordan Belforts. Just remember to always do YOUR homework. For example, the first time I heard about Chamath was because Barry interviewed him on Masters in Business; given Barry track record and no-bullshit-evidence-based attitude, at first I believed Chamath could really be the ‘next Buffett’, as he portrayed himself. Little I knew… But then you learn. When a year later he interviewed Dave Portnoy, I came prepared 🙂 Both characters have indeed an interesting story, you have to be able to separate the useful insights from the cheap self-publishing.
What I am reading now:
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