The collapse of the third largest stablecoin, UST, caused cascading events to occur across the crypto markets this week. Yesterday, our team attempted to exit our position in Terra (LUNA) before the exchanges halted trading. For clients who still hold LUNA, these positions are worth $0.00001 as of the time of writing, so this is effectively a 100% loss as of today; if exchanges begin trading LUNA again, we will sell it on clients' behalf ASAP.
We also took the opportunity to trim Ethereum (ETH), and several altcoins in exchange for more Bitcoin (BTC) and cash. We published an update late Wednesday night about the Terra/UST situation, which you can read here.
We’re running through a full post-mortem on LUNA now, and we’ll share our thoughts as soon as possible. Without question, I believe we’ll look back at this event in 10 years as a defining moment for this nascent asset class. We are humbled by the situation, and thankful for the support and long-term focus our clients have expressed this week.
The crash of LUNA and UST has caused widespread contagion in crypto markets, driving the price of LUNA to effectively $0. With UST still trading well below its pegged price of $1, trust has been broken. With UST’s inability to hold its peg, LUNA becomes essentially worthless given the inflationary tokenomics of the project.
Portfolio management and position sizing go hand in hand in investing. Buying LUNA with 10% of the portfolio for the first time in November, we quickly saw gains in excess of other holdings leading to the position growing to more than a ~21% weight*. As we scaled back risk in January, we took gains and reduced this position by over 75% to a ~4% weight. Again, there is no bright spot in this situation, but we’re thankful we had LUNA sized the way we did or negative attribution could have been far worse.
Again, we’ll be out with our post-mortem next week, but please know that we are working tirelessly to ensure we never find ourselves in this situation again.
Bitcoin was not spared from the sell-off this past week either. As a reminder, the Luna Foundation Guard (LFG) had been buying billions worth of Bitcoin to bolster and decentralize their treasury’s reserve. In a last-ditch effort to restore UST’s peg at $1, the Luna Foundation Guard (LFG) began dumping Bitcoin to buy UST – crushing Bitcoin’s price.
On Thursday, we elected to shift overweight Bitcoin and build a 10% cash position as well. If we do find ourselves in a prolonged downtrend, we believe BTC will remain the go-to defensive asset in crypto. Looking at historical drawdowns, there could be more room to fall, and with this cash reserve, we’ll be tactical buyers as opportunities arise.
Sentiment across crypto is about as bleak as it can get right now, but we believe long-term crypto fundamentals remain intact.
We previously had sized up our Ethereum position ahead of the Merge, but as the data changes, so does our positioning. We believe the shockwaves of negative sentiment after the sudden downfall of LUNA may outweigh the bullish tailwinds we expect to see with ETH ahead of the Merge. Even after trimming our position, we have over 25% of the portfolio in ETH.
Altcoins tend to be far more speculative than their blue-chip peers, and in periods of uncertainty, investors are often less likely to speculate. Our long-term thesis remains intact in Solana, Avalanche, Polygon, and Cosmos; thus we’ve elected to maintain small positions in each despite what may be a choppy couple of months ahead. We couldn’t be more confident that the destination is bright for each, but we may encounter some turbulence on the route there.
This will be a week we remember forever, no matter how badly investors may want to forget it. The crypto markets have been through the gamut over the past few days. With our new defensive positioning, we believe we’re ready to ride out whatever storm lies ahead. Please let us know if you have any questions about these moves.
Titan Investment Team
*Corrected as of May 31, 2022.
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