Sometimes grand experiments succeed…becoming the new normal and creating vast wealth for their early adopters.
And sometimes, they fail and fall by the wayside.
For many months, the crypto world writ large had embraced Terra as the former—a big success that would help shape the future of finance.
But we now know that this project has failed.
For that reason, I am sending you this alert with a recommendation to exit Terra.
Recommendation: Immediately sell Terra at the market price.
We are taking a big loss on Terra (symbol: LUNA). What was once one of the top cryptocurrencies has plunged dramatically.
The reason: The recent Federal Reserve-induced crypto crash set off a chain of events tied to Terra and its associated stablecoin, known as TerraUSD or UST.
Stablecoins are supposed to maintain a $1 price…to track the U.S. dollar on a 1-to-1 basis.
Many of them do so by backing each crypto token they produce with dollars or other traditional assets of equivalent value.
UST, however, is a unique experiment in stablecoins because it is algorithmic. This means it isn’t backed directly by dollars or equivalent assets, but rather to a mechanism in which LUNA is created or burned as necessary in order to maintain its peg to the dollar.
That algorithm worked well and the crypto markets widely embraced it. Terra was approaching stablecoins in a unique way at a moment when these cryptos have become central to what’s known as decentralized finance, or DeFi. Indeed, recently LUNA and UST were both among the top 15 cryptocurrencies in the world by market capitalization.
Then came the crypto market downturn…
Investors this week panicked about the Federal Reserve’s most recent 0.5 percentage point interest rate hike. Crypto, as a risk asset, has been badly impacted.
It was an unexpected cascade of events.
LUNA fell hard—from the $80s to the $60s. Because of that, the UST algorithm lost its dollar peg…which caused investors to dump LUNA even quicker…which caused the peg to destabilize even more…which caused investors to dump LUNA even quicker.
The only move now is to exit Terra. (Note: All other major stablecoins are performing well, including the one I regularly highlight, U.S. Dollar Coin, or USDC. So, if you have investments in these stablecoins, there is no cause for concern.)
We are taking a loss with LUNA, but I remain fully confident on our other investments despite the recent downturn, and I see brighter days ahead for crypto.
As I always note: Crypto is the future, but it is still new and immature. This is the bleeding edge of technology. Entrepreneurs every day are creating new ways of using crypto. Many of those will succeed and create big wealth for early investors. Some will hit unexpected obstacles, as Terra did.
As I said when I launched Frontier Fortunes: “The service I’m launching today—the kind of crypto investments I’ll be recommending—it’s built specifically for readers who understand and accept that crypto can be a wild ride… This is a whole new frontier—and sometimes you have to ‘hold on for dear life’ with these investments.”
Of course, sometimes it’s better to walk away and that’s what we’re doing in the case of Terra.
But I still believe that over the long term, we’ll come out ahead with our portfolio.
The future of finance and business is being built today in the cryptoconomy. The crypto market will rebound.
Right now, the market’s current focus is on the Fed’s next move, which is likely to be another one or two interest rate hikes this summer.
But the Fed ultimately is limited in how high it can push up interest rates, given the levels of debt that exist at the governmental, corporate, and consumer level in the U.S.
With these rate hikes, the Federal Reserve is risking a recession later this year, which will ultimately result in the Fed reversing course and cutting rates to stave off an economic decline.
That will be a boon to risk assets such as crypto.
And since crypto prices regularly move with lightning speed, losses can turn to gains quite quickly.
In the meantime, I will continue to monitor what’s taking place in our portfolio. It’s ugly right now, but again that’s a function of Fed actions that are destabilizing financial markets.
Those actions will soon end and our assets will move sharply higher.
