the lessons that this debacle leaves us

We have the latest crypto financial scandal: The Terra Luna and Terra UST debacle. It was a project to make a stablecoins, that is, a cryptocurrency without volatility, with a convertibility with the dollar. And yet after recent events it has lost this parity and left many people without their investments.

The truth is that the design of the stablecoins it is anything but easy. They claimed that with an ingenious mechanism they could have a stable currency without having to accumulate dollars, using an arbitration mechanism with incentives for investors. Even the most simplified explanations they are difficult to understand. And this leads us to an inevitable conclusion.

Do not invest in what you do not understand

The first lesson is that if something is too complicated it is better not to invest in it. It is not a new lesson: in 2008 it was possible to see that those products that assured that an intelligent design of the same could mix triple A debt with garbage and become triple A, the miracle of loaves and fishes, were lying.

If we package a financial product, there may be an apparent sense of security, but what is really happening is that the complexity prevents us from understanding its flaws. And therefore it is better not to invest in them.

The collapse of the Terra Luna cryptocurrency and its stablecoins UST leads us to the same conclusion: if the product ensures that it is safe due to its complexity and it is difficult to understand the consequences of certain movements it is better not to invest. Or do it only with money that you do not want to lose and not bet everything as it seems that many people have done.

Las stablecoins they are a chimera

But it is not the only lesson that this collapse leaves us. The second is that the stablecoins they are a chimera Sticking one currency to another, regardless of whether they are crypto or not, required to withstand impressive levels of liquidity stress.

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This, once again, is not new. Argentina suffered in 2001, when it was unable to keep the peso attached to the dollar. And now UST suffers. And also the price of Bitcoin, since the mechanism to try to keep the cryptocurrency attached to the dollar had to sell billions of dollars in Bitcoin thus dragging the price of the currency.

Yes, it’s true, there are stablecoins who accumulate fiat money as collateral. But if there is not a dollar for each crypto issued, there can be tensions. And if they accumulate enough reserves, what do we want such crypto for? For that, it is better to have dollars directly.

Let’s never bet everything on an investment

Diversification is essential when investing. Not putting all your eggs in one basket is the golden rule. It does not matter if the Nasdaq goes up like foam, it can go down. No matter how hot the real estate market is in one area, they can build a landfill next door. It does not matter if the bonds are triple A, the issuer can go bankrupt.

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These are lessons that should be very clear. But they are not, because what is seen in some forums about Terra Luna. And it is that, in addition, investments in this type of speculative products, such as crypto, should be a small, very small portion of the capital.

If something can break, there will be someone who will try

Some of the complaints from those affected by this event say that there has been an explicit attack on Terra Luna. And it is true, an attack from someone who has been able to see the weaknesses of the design and that has been enriched along the way.

But the financial markets are like that. When Gowex had holes in her business model they took it down and got rich along the way. But it is that the markets clean up fraud this way, frauds sometimes so complex that regulators are unable to uncover.

Better that Terra Luna and UST have had their problems today than in a few years. If a product like this continues to work longer, the ball gets bigger. So let the markets do their thing. Better, obviously, if the regulator prevents it before, but if not, let’s not complain about attacks: if Terra Luna and UST had had a solvent design it would have withstood an attack. But we already know what the story has been.

Source: El Blog Salmón by

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