The Terra Luna Debacle: May 2022

The Rake Review: May 2022

Welcome to the Stormrake Monthly Australian crypto market & education update.
For sophisticated investors who want to expand their crypto knowledge.

Summary:

If you are a busy investor that doesn't have time to read this whole newsletter here is a brief summary:

* UST de-pegs and drags LUNA to near zero
* Financial markets experience large falls (tech stocks & bonds smashed)
* Crypto markets dragged lower - retest lows
* 40+ countries meet in El Salvador to discuss Bitcoin standard
* First crypto ETF debuts in Australia

or Read below for all the detail.

* Mike Novogratz (CEO of Galaxy Digital)

Welcome to another edition of the Rake Review. We'll start off by reminding all you kids reading this newsletter, that getting tattoos while you're young, is not a great idea. Mike Novagratz pictured above is a highly successful CEO of a major fund manager called Galaxy Digital. In 2020 Galaxy invested in Terra (LUNA) and did so well that he decided to get a tattoo to celebrate. Fast forward to May 2022 and LUNA has gone from the 8th largest crypto to 60th in market cap, but effectively zero. Investors that followed Mike have lost almost 100% on LUNA. That tattoo was a source of pride but now it looks like a horrible mistake. Here is what Mike said today in his press release:

"My tattoo will be a constant reminder that venture investing requires humility,"

Full Statement

Now to be clear we have nothing against Mike. We saw him face to face at Bitcoin 2022 last month and he spoke eloquently on the future of Bitcoin and investing in cryptocurrency. In March, Novogratz even made the Rake Review as video of the month. He is a thought leader and someone who is willing to take a risk. Everyone makes mistakes.

As the LUNA saga started to unfold we checked our client holdings and found out we had precisely zero clients in LUNA or UST. The main reason none of our clients held a top 8 coin was that we never believed in the project and never recommended anyone buy it. One of the benefits of the Stormrake brokerage service is we are constantly monitoring situations like this and can alert clients to potential issues.

In fact we had written about LUNA recently in this very forum when LUNA founder "DO KWON" decided to start accumulating Bitcoin as a reserve for UST. Here is an extract from our education section in the March 2022 Rake Review:

"There is no such thing as a free lunch so we’re not comfortable that Terra’s Anchor project is offering 19.48% interest on deposits with a 3.86% borrow rate. Play at your own risk."

In the end those words proved prophetic as the Anchor protocol proved unsustainable. The whole mechanism created a "death spiral" leading to an unstoppable fall. UST never regained the peg and is currently trading below 10c USD. LUNA is worth under $0.0001 from a high of $120 last month (losing 99.9999%).

All in all, around $40 Billion USD worth of value was destroyed between UST and LUNA. We have to remember that this has a real human toll. Reportedly, there were suicides across the globe as people who had too much invested in LUNA lost it all. Some had even leveraged their homes to buy LUNA. It was great while LUNA rocketed to 8th place but it was tragic when LUNA tanked. People who had invested everything and then pushed their friends and family into investing struggled the most.

It's an important reminder that risk and reward go together. Bitcoin might seem boring when some of these protocols are flying, but Bitcoin will be around in 20 years and many proof of stake based projects may not. We know it sounds boring, but there is nothing wrong with getting rich slowly.

* Do Kwon - Founder of Terra Luna reacts to opinion that LUNA may be susceptible in a loss of confidence scenario July 1st 2021.

Let's get into the news and events:

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](https://www.youtube.com/watch?v=DdTyUEfGlPw)

Video of the Month

Let's change topic for a little while. Sometimes its good to step back and look at things from a different point of view.
Yeonmi Park spoke at Bitcoin 2022 last month on a panel on why Bitcoin is Freedom. We found her fascinating and we wanted to share with you.

Markets

Prices are down across the board this month. Bitcoin's total market capitalization is below $600 Billion USD. ETH is hovering just above $2,000 USD. Solana has been hammered and Cardano is back in the top 8 replacing LUNA which has moved from 8th to 60th. We have left the previous top 8 as comparison.

Today:

From 30 April 2022:

* Top 8 Coins by Market Cap thanks to Coin Gecko

Global Financial markets were lower this month due to expectations of higher interest rates coupled with inflation fears, geo-political issues and recession fears. Bitcoin has outperformed on the way down recently with Bitcoin dominance sitting at 42.7% vs 39.3% 19th Jan 2022. That being said, crypto has been hammered generally and investors are feeling the pain. Our clients have to be commended for holding strong and looking to buy the lower price points.

In the NEWS

1. El Salvador hosts 44 countries to discuss Bitcoin

After adopting Bitcoin as an official currency, El Salvador is becoming a leader in Bitcoin adoption by countries. 44 small nations from all continents gathered in El Salvador to look at alternatives to the central banking system and IMF. This is the reason we were so excited about one small central American nation moving to the Bitcoin standard. It's just the first domino.

2. Tech stocks repriced on interest rate expectations

Rising Interest rates in the US and in Australia have forced valuations of "risk" assets to be repriced. Discount cash flow model for valuing stocks has meant that even a small increase in interest rates has a large valuation change for tech stocks. This way of thinking has also flown through to crypto. Large traditional funds still see crypto as a risk asset and have reduced their valuations. We see Bitcoin as a safe haven asset and expect that within a few years those same traditional funds will see it our way also.

3. First ETFs launch in Australia

While Australia tends to lag behind on innovation and regulation, we seem to have jumped the US in the launch of multiple Crypto exchange traded funds (ETFs). It's taken 5 years since the first ETF application but we'll chalk this as a win for Australia. With markets getting hammered this is terrible timing for the launch but "from small beginnings are the launching pad to great endings" - Joyce Meyer

4. Coinbase (COIN: NASDAQ) falls on lower than expected earnings

Coinbase - the listed cryptocurrency exchange, has fallen hard after posting disappointing earnings. Coinbase reported a 35% reduction in earnings a net loss of $1.98 per share. The business is quite cyclical and I wouldn't be writing them off. Coinbase is one of the world's largest exchanges and boasts a huge market share. Shares are 71% lower than their market debut.

Proof of work and the beauty of simplicity

"Everything should be made as simple as possible, but not simpler." - Albert Einstein

In light of the recent collapse of Terra (LUNA), it is a good time to reflect on the different approach of projects in the crypto sphere and how their design decisions have a very real impact on their stability.

LUNA tried (and failed) to create stability through a series of complex mechanisms and game incentives. Unfortunately the collapse of the Luna experiment took down a lot of people's money, which is a timely reminder that the bedrock of the crypto revolution should be built on the most stable and solid foundation possible.

Many other forms of consensus have been proposed and tried, and a significant majority of the crypto tokens do not use proof of work. This is fine. We welcome innovation and development in all forms of financial innovation, except the base monetary unit (Bitcoin). Time will tell if a proof of stake system can be made reliable and resilient enough, for example the following must be solved:

Attacks from powerful entities such as nation states, corporations or political powers.
Exchanges using customer funds to vote (as happened to Steemit)
Power accruing to wealthy holders and these holders subverting the system to gain more power

Satoshi described the bitcoin mechanism in just 9 pages! The continued security of the bitcoin network is secured by a 'bridge' of energy between the digital world and the physical world. In order to sustain an attack on the bitcoin network, you must continually expend energy. Those that contribute energy and help/sustain the bitcoin network, are rewarded with bitcoin rewards. Those who work against the consensus of the network receive no bitcoin reward for their energy expense. This dependable and simple mechanism is extremely resistant to attack, which is precisely the type of stability we want to protect the future of money.

Stock to Flow Valuation:

The Stock to Flow based regression of the Bitcoin price, shows the largest negative deviation from expected price seen since the model started. Either this is a generational buying opportunity or the model is done. What do you think?

Monthly Memes:

Until next month, Happy Investing!

Stormrake Team

custody@stormrake.com

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