Portfolio Updates: Luna Bear Case Prevailing

5/11/2022 | Domain Money Advisors | Investment Memo |

Find below the Domain Money Advisors Investment Team commentary regarding the situation unfolding in the UST stablecoin and Luna cryptocurrency, the latter of which is held in select Domain Money portfolios. 

Update on Luna Developments

Since we sent our update on Luna last night, markets have shifted substantially. The peg between UST and U.S. dollar fell from $0.90 to $0.69 and in response, Luna dropped 92.5% from $20 to $1.50 as of writing.  In our view, the market is sending a signal that it has lost confidence in the ability for UST to maintain its peg. 

Yesterday, there were reports that indicated that the Luna Foundation Guard was seeking to strike a deal with investors to raise capital to defend the peg between UST and the dollar, but it appears as though that deal fell through. Accordingly, Do Kwon, the founder of Terraform Labs which is responsible for Luna and UST, announced on Twitter that the mint-and-burn process (explained in our note from 5/10) would be the only way for this situation to be resolved by allowing capital to flow out of UST.  

Additionally, he endorsed the community proposal to scale back the “speed-bump” that was preventing the mint-and-burn process from operating at the volume needed to better handle the current market conditions in UST. 

Nevertheless, Luna has continued to decline, which we believe is indicative of the fear that a substantial amount will need to be minted (created) in order to facilitate outflows of capital from UST (more than 800 million Luna have already been minted today).

The Investment Team's View Going Forward

As a result of general market dynamics, increasing the supply of Luna available in the market should cause downward pressure on the market price. There is currently $7.7 billion of UST (worth about $15 billion at parity between UST and USD) much of which we think will flow out of UST.  This will put further downward pressure on the price of Luna for the foreseeable future, as Luna will need to be minted in order for capital to flow out of UST.

Our view was that this was likely avoidable had either the speed-bump moderation been implemented sooner or the peg was re-established earlier via another liquidity mechanism. As of yesterday (May 10) when UST was still trading above $0.90, we thought this was still possible. Now we believe too much time has elapsed without the peg being re-established to restore confidence.  Our view is that the response of Terraform Labs is not sufficient to save Luna or UST in the short run. 

Over the long run we think it is possible for Terra and UST to recover, but only after substantial re-engineering. 

Accordingly, we are updating our portfolio strategy. No new purchases of Luna will be executed as part of our actively managed portfolios.  Any new inflows will not result in additional purchases of Luna. 

Domain Money portfolios that already own Luna will continue to do so given the very modest weight remaining.

This information is provided for informational and educational purposes only. Domain Money Advisors, LLC (“DMA”) is an investment adviser registered with the U.S. Securities and Exchange Commission and an affiliate of Domain Money Inc. (“DM”). The information contained herein is not investment advice nor intended for any investor or type of investor and does not constitute an offer to sell, a solicitation of an offer to buy or an offer to purchase or sell any securities or cryptocurrency, or investment product or service. While DMA believes that the information contained herein is reliable and derived from reliable sources, it makes no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information. DMA and DM expressly disclaim any liability or loss incurred by any person who acts on the information or ideas discussed. Investing comes with inherent risks and volatility and you should always invest within your means and risk tolerance. No representation is made that any investor will achieve its objectives or will make any profit or avoid losses. Past performance is not an indication of future returns and you should always consult a financial advisor prior to making investment decisions. Cryptocurrencies involve exposure to higher volatility.  Please see important disclosures at https://domainmoney.com/legal

* Domain Money Advisors, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission and an affiliate of Domain Money, has (as of this writing) the following assets mentioned in this communication as part of its  Managed Portfolios: LUNA

*Important disclosures: Price and market information is sourced from Yahoo! Finance, Coinmarketcap.com and DM Advisors analysis.