Lessons from Terra’s UST stablecoin

Thursday, May 19, 2022
Lessons from Terra’s UST stablecoin


Recently, the TerraUSD (UST) stablecoin lost its $1 peg, leading to broad-based losses across the crypto markets. The success story of the Terra ecosystem with stablecoin TerraUSD and Terra LUNA coin has come to an end – at least for the time being: the Terra blockchain has been halted. The troubles began on May 7, 2022 with several large withdrawals of UST from the Anchor Protocol. The Anchor Protocol is a decentralized protocol offering high yields for UST deposits. These withdrawals totaled $2.8 billion, taking the total value locked from $14 billion to $11.2 billion. Because UST is an algorithmic stablecoin tied to Terra’s native LUNA token the value of LUNA began dropping as well. By May 9, 2022 investors in both UST and LUNA began to worry, increasing the redemptions and withdrawals of both UST and LUNA and creating a scenario similar to a bank run. 

Despite efforts to shore up UST by Terra and its Luna Foundation Guard (LFG) the stablecoin continued to decline and eventually the blockchain was halted as Terra realized there was no way to regain the peg. Part of those efforts included the sale of roughly 80,000 BTC by the LFG, which exacerbated the drop in the broader crypto markets. 

Overall, the crypto markets have lost over $800 billion since the de-peg of the TerraUSD Stablecoin. 

Stablecoins are cryptocurrencies that are pegged to the value of certain assets, for example fiat currencies. The Terra Stablecoin UST should reflect the value of the US dollar 1:1. The reasoning behind a peg is to stabilize exchange rates, which is seen as important in a volatile asset class like cryptocurrencies. The UST stablecoin was designed to maintain a value of $1 at all times. That was its only purpose. The loss of this peg has damaged the confidence of many investors in the system and will most likely lead to risk aversion in the crypto sector as a whole.


BTC Lock and Key

How can investors respond to this event?

SMART VALOR believes the best response is, as always, a long-term mindset. We’ve long been a proponent of accumulating the best crypto assets and holding them for the long term. We know that cryptocurrencies are volatile, however when you take a long view at the asset class it has greatly outperformed every other asset class in existence. We recently highlighted this fact in our blog post Bitcoin vs. Traditional Assets. There you can see Bitcoin’s outperformance versus many other assets, including stocks, bonds, gold, and other commodities. Bitcoin has been the top performing asset in nine of the past 11 years. Of course there have been ups and downs, but in the long-term solid assets like Bitcoin have delivered the results investors want in their portfolios. 

Always do your own research 

“Do your own research”, frequently referred to by its acronym DYOR, is a mantra we’ve long adhered to at SMART VALOR. Rather than rushing into the latest, popular token it’s best to take the time to dig into the project you’re considering investing in before adding it to your portfolio. In the case of UST you would have found many critics of the algorithmic stablecoin. The 20% yields offered by the Anchor Protocol for staking UST were obviously unsustainable. Thus ruther not an asset a prudent investor wants to add to their portfolio, no matter how tempting the yield might sound. 

SMART VALOR’s co-founder Olga Feldmeier helped to develop the Framework for Token Confidence, a DYOR scorecard in the paper How Value is Created in Tokenized Assets. This scorecard, based on the Timmons Model of Entrepreneurship, can be used to rigorously evaluate the strengths and weaknesses of a token. This makes for a good starting point in doing your own research and can serve to identify those tokens that are worthy of further research. 

Look for opportunities 

While any downturn in the market can be painful, it also presents opportunities. Just take Warren Buffett as an example. The legendary value investor is taking advantage of the opportunity in equity markets, which are on pace for their worst year since 2008. Interestingly enough, Buffett's Berkshire Hathaway has splashed out $41.5 billion on stocks in the first quarter of 2022 – the most cash Buffett has spent on stocks in a single quarter since that same 2008. 

Just as Buffett is snapping up equities on sale, you should also think with the mindset of a value investor. That means snapping up cryptocurrencies when they are on sale. While it’s possible Bitcoin and otherwise solid cryptocurrencies like ETH (Ethereum) could fall further, in the long-term they will rebound; at least if history is our guide.


BTC coins

Focus on the long-term 

Investors should know by now that the crypto space is a volatile one. However, smart long-term investors will hold onto their assets during the ups and downs. While unstable periods have shown themselves to be inevitable over the years, the crypto market continues to move higher in the long-term. 

For example, Bitcoin was established 13 years ago, having first been mined in January of 2009. The asset has the largest market capitalization of any digital currency. And in spite of its volatility it has outperformed every other asset class by a wide margin nearly every year since its creation (2014 and 2018 were exceptions). It thus maintains a high level of confidence amongst investors. 

For this and other reasons, it makes sense to hold your crypto holdings for a long-term investment strategy. In the end, as a crypto investor, you know you are dealing with a developing market. To make sure that your investment portfolio does not resemble a roller coaster, good diversification is the best strategy. Also, do your own research, stay educated and don't deviate from what works well for you.  

SMART VALOR is committed to helping you maintain that investor mindset. Sign up today and see what we have to offer.