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What happened to LUNA? – The risks behind cryptocurrency investment. Yusuf Suleman The appeal of cryptocurrencies… Over the summer months of 2021, vast numbers of “investors” took the plunge into the cryptocurrency market. Some have argued that this came as a result of lockdown restrictions first implemented on the 23rd of March; with consumers stuck at home, there was a new-found urge to rotate the funds they once spent on consumer goods on gambling through the crypto market. Others have argued that certain influential individuals convinced people to buy in. Figure 1 The Market Cap of Cryptocurrencies over the summer months ($1.25T - $2.75T) Once there was a vast number of new investors looking for a quick flip of a coin, prices of cryptocurrencies soared. The demand for these coins was essentially endless, whilst the supply would always be fixed. Throughout social media, hundreds of stories circulated of people who had made fortunes through relatively small amounts, consequently tempting further investors into the market due to a fear of missing out. For example, an anonymous One coin that increased exponentially in both popularity and price was the LUNA coin of the terra network. From 2021 to the early months of 2022, LUNA saw a year of impressive growth. Backed by various investments made by its owner “Do Kwon”, a wellknown figure in the space, it looked like a secure store of value for its investors. investor in the coin SHIBU INU saw his long-term So what happened? investment; go from $8,000 to worth over $5bn. In April 2022, LUNA hit an all-time high of £95 per Some have argued this may have been the creator coin. However, in May of the same year it was of said coin, whatever the case; events like these sitting at an average price of £63.5 per coin, a may have played a part in creating a “perfect market cap of £22.68Bn and a daily trading volume storm” for a crash. of £2.43Bn. For any investor this would seem like characteristic price action of a cryptocurrency following a fruitful summer in 2021; a relatively small fall in value was Despite this price difference seeming relatively not out of the ordinary. What was not apparent to miniscule, when conducted at a mass-scale, those both Institutional and retail investors alike, was who saw this opportunity were able to profit what would follow… greatly. In a matter of days billions of dollars worth of LUNAs value was eradicated. As a result, Terraform, the team behind LUNA, prevented conversions between the two coins – making LUNA essentially worthless. At this point the damage was done; LUNA could not recover, leading to investors selling for any price they could get - in hopes of raking back some of their Figure 2 The price of LUNA from the 15th of March to the 13th of May (USD). investment. Mass undercutting ensued and by the 13th of May, 1 LUNA was equivalent to $ 0.000167. On the week commencing 9th of May, LUNA began its descent towards zero, due in part to the de-peg The aftermath of its corresponding stablecoin. A stable coin is a The extent to which this was an unexpected event coin that is backed by a substantial amount of real- should not be underestimated. Do Kwon, the world capital, allowing for the conversion of fanatical leader behind the coin had rather cryptocurrencies into virtual dollars or pounds. comedically, the month prior, named his newly- Examples of such include USDC, USDD, and in born daughter Luna, stating “my dearest creation LUNA’s case, UST. Their primary function is to act named after my greatest invention”. He had at as an intermediary between real-world currencies one point; bet the twitter influencer and cryptocurrencies meaning their exchange @AlgodTrading $1 million USD that LUNA’s value rates are supposed to be fixed at $1 per 1 would not fall beneath $88. The funds are in still in USDC/USDD/UST. escrow despite there being a clear winner to the UST was subjected to a large-scale attack on the bet at the time of writing. 7th of May, where hundreds of millions worth of The financial times published an article following UST were dumped on to the market in order to the crash, giving Do Kwon the nickname of “the force the price down. The problem with this was most hated man in Korea” and a “Lunatic leader”. that regardless of the price of UST, it was able to Finally, LKB & partners, a prominent law firm in be converted 1-1 with $1 worth of LUNA. So when South Korea has filed both criminal and civil law the price fell to ¢0.91 per UST, investors were able suits against Kwon. to buy at this price, convert to $1 of LUNA - making ¢0.09 profit in the process. They would then dump LUNA after making their profit, forcing it down in hand, with UST. In economics, this is known as arbitrage. The story behind Luna is one that should be taken as cautionary tale behind cryptocurrency investment, a tale of a man who got too rich too fast, and of the overconfidence that toppled an empire. No financial body is ever “too big to fail”.