Dear Readers,

When I wrote earlier this week about how companies using Bitcoin as part of their investment strategy instead of as money is not ideal, I had no idea that the market would prove my point so quickly. Of course, most people probably didn’t anticipate this week’s chaos that hit the market for the Luna cryptocurrency and the TerraUSD stablecoin it was tailor-made to support.

Coming Back Down To Earth

TerraUSD was wildly popular over the past several months, with its market cap catapulting into the top ten cryptocurrencies as a result of its growing prominence.

As a stablecoin, its goal is to maintain price parity with the U.S. dollar. But unlike collateralized stablecoins like USDC and Tether that maintain their peg by (supposedly) holding actual dollars and dollar equivalents, TerraUSD is an algorithmic stablecoin that attempts to hold its peg through a series of incentives built into the code. One TerraUSD is always supposed to be redeemable for one dollar’s worth of its sister cryptocurrency Luna. So if the value of TerraUSD falls below $1, market participants are supposed to be incentivized to buy a TerraUSD, redeem it for $1 worth of Luna, and then make a profit on the arbitrage.

Unfortunately for holders of TerraUSD and Luna, the incentives system appears to have not held up. The markets for both cryptocurrencies have been rocked as TerraUSD has completely lost its peg, sitting at around $.12 as of this writing, and as Luna lost over 99% of its value in just the seven-day period leading up to Thursday evening. A rough time to be a “LUNAtic” (as they like to call themselves), to be sure.

Call In The Bitcoin Reserves

Perhaps in recognition that under-collateralized stablecoins are notoriously risky, the Luna Foundation Guard (LFG), a nonprofit organization that seeks to support the Luna and TerraUSD ecosystems, announced several weeks ago that it would be purchasing as much as $10 billion dollars’ worth of Bitcoin as reserves backing TerraUSD’s peg. Many in the Bitcoin space were thrilled by the announcement since it added a significant amount of demand for Bitcoin. To a certain degree, it made sense as well given Bitcoin’s growing status as the world’s reserve currency. After all, if countries like El Salvador and The Central African Republic are using Bitcoin for their reserves, why wouldn’t we expect organizations inside and outside of crypto to do the same?

LFG’s plan to use Bitcoin as a reserve asset for TerraUSD is a double-edged sword though. When times are good, the organization is a net buyer of Bitcoin, as it had been up until the past few days. But when times are bad, like when TerraUSD fell massively off its peg this week, LFG becomes a net seller of Bitcoin. And after acquiring several billion dollars’ worth of Bitcoin in just a few weeks’ time, LFG had a lot of Bitcoin to dump on the market.

LFG and its founder Do Kwon have not been very transparent on the topic of Bitcoin liquidations though, in my opinion. Vague plans were recently announced on Twitter that large loans of Bitcoin would be made to “OTC trading firms to help protect [TerraUSD’s] peg”, but it was not made clear by any means that this course of action would directly lead to the sale of LFG’s Bitcoin. But after a bit of digging, we can see that’s exactly what the plan was all along. As Do Kwon explains in one of his tweets, LFG intends to buy TerraUSD by selling its Bitcoin anytime TerraUSD’s price drops below $1:

If there’s anything we can learn from Bitcoin interactions from groups like LFG and people like Elon Musk, it’s this: there are no heroes in Bitcoin. Any supporter can quickly turn into a detractor if circumstances lead them down that path.

But Bitcoin keeps chugging along, block after block.

Stablecoins Are Anything But Stable

Stablecoins have been hailed as revolutionary in many corners of the crypto space, but the reality often seems to be the opposite. After all, using the term “stable” to describe assets that track the price of fiat currencies that are perpetually declining in value thanks to inflation is a misnomer of epic proportions. And to top it off, it seems more and more likely that most, if not all, stablecoins will be regulated out of existence and replaced with central bank digital currencies that will be directly controlled by governments.

When I look for a stable place to put my wealth, I continuously come back to Bitcoin. Through all the chaos of the past week, one Bitcoin still equals one Bitcoin.

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