What Happened to Investors During The UST Crash?

The crash of algorithmic stablecoin UST continues to be a head spinning mess.

Many big investors in the Terra blockchain and its native currency Luna claim to have cashed out of their holdings, some for a striking profit. But there doesn’t seem to be much respite for retail investors in the token. Luna, the underlying token responsible for maintaining UST’s peg, is practically worthless. Even then, numbers for Luna wallets on the Terra blockchain seem to have multiplied since last week.

UST is still awry from its peg and in danger of being eliminated completely. Terra co-founder Do Kwon’s revival plan proposes a hard fork of the blockchain. That means creating a completely new system with a fresh set of transactions that begin with a new genesis block.

As of this writing, a majority of the Terra community is in favor of the fork. But the heavy hitters on Terra’s blockchain i.e., the validators with the biggest share of votes, are yet to weigh in on the question.  

How Did UST’s Collapse Affect Investors?  

When they are not wringing their hands or pontificating about the future of crypto markets, some UST investors are counting their profits.

An example is Galaxy Capital. Even though its founder is a confirmed Lunatic, the firm itself does not seem to share in the enthusiasm. After reporting $407.6 million Luna tokens on its balance sheet last quarter, the firm said sale of Luna tokens (it did not specify the amount) were the biggest contributors to its income this quarter.

Meanwhile, its founder was kind enough to explain what caused the UST collapse online. “The downward pressure on reserve assets coupled with [TerraUSD] withdrawals, triggered a stress scenario akin to a ‘run on the bank’,” Galaxy Capital founder Mike Novogratz wrote. “The reserves weren’t enough to prevent TerraUSD’s collapse.” No kidding.

Pantera Capital – another well-known investing firm with deep roots in the cryptocurrency community – said it sold out nearly 80% of its investment in LUNA before last week’s crash. Joey Krug, co-chief investment officer at the firm, said Pantera turned a $1.7 million investment into $170 million. “The market has been fairly frothy over the last year and, thus, we’d exited the majority of our position before any of this happened,” he told The Block.

Losses from LUNA

Not all investors seem to have profited from their transactions in LUNA.  

Delphi Digital, another investor in the Terra blockchain, boosted its holdings of the token, including a $10 million investment in Feb. 2022, from January last year onwards as the token’s price increased. At its peak, LUNA holdings constituted 13% of the firm’s overall portfolio. They haven’t sold any LUNA and have a “large, unrealized loss” on their balance sheet. Hashed, a South Korean early-stage fund and investor in the Terra blockchain, has not disclosed its positions but some estimates peg it at $3.5 billion.       

Arrington Capital, meanwhile, has erased mention of an insurance product that it was offering to investors in cryptocurrencies from its website. Among other things, the product was meant to protect investors from a ‘depegging event’ like the one that happened at UST.  

While Su Zhu, a co-founder of Singapore-based Terra investor Three Arrows Capital, has publicly apologized for recommending the Luna token to users, he has not told of possible losses (or, for that matter, gains) from the investment. Ari Paul, chief investment officer at Block Tower Capital – another investor in Terraform Labs, did not divulge details regarding the firm’s transactions with the company. [He did, however, tweet a long thread advising against using cryptocurrencies as collateral]. Jump crypto and Lightspeed Ventures, other investors in Terraform Labs, have also not made public statements about their Terra holdings.

Losses To Profits?

What do these findings tell us about investor losses or gains with LUNA tokens or from their investment in the Terra blockchain? Very little, unfortunately. Even though investors have provided explanations and issued mea culpas, we still don’t have publicly-identifiable information or records of their transactions with Luna tokens.

Meanwhile, the number of registered Luna wallets on the Terra blockchain has continued a steady ascent, up from 4 million on 2nd May to 4.18 million, as of this writing. The rise in Luna wallet numbers has occurred even as the token’s price has crashed. In similar cases earlier, analysts have pointed to increasing numbers for bitcoin wallets as proof of greater adoption of the cryptocurrency.

Might one derive the same conclusion here? If yes, that would mean the “large, unrealized losses” will turn into profits when a hard fork is implemented on the Terra blockchain and LUNA tokens, worthless in price now, shoot up in value.    

What About Retail Investors?

Ethereum co-founder Vitalik Buterin and TRON founder Justin Sun have got the average investors back. As in, they are backing a plan to send 100% of funds remaining in Luna Foundation Guard’s reserves to 99.6% of wallets who lost money in the crash. If only. LFG’s reserves are depleted from asset sales to unsuccessfully prop up the failing UST peg. According to reports, the fund has just 313 Bitcoin left in its reserves and has sold off all its reserves of Circle’s USDC and Tether USDT. Like most things crypto, there is also no clarity on how such a plan would actually work.

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