What is the Terra Project?

The Terra project manages the LUNA token and the UST stablecoin. Theoretically, the UST stablecoin is pegged to a value of $1.00 USD by a mechanism that UST is always redeemable via a swap for $1.00 of the LUNA token. For example, if the LUNA token is trading at $50.00, 50 UST could be swapped for one LUNA token; conversely when 1 UST is minted, $1.00 USD of LUNA is burned (destroyed).

The system relies on a network of traders and arbitrageurs who seek to profit due to price anomalies who keep the peg for UST at nearly $1.00. This is what is known as an algorithmic stablecoin as opposed to a collateralized stablecoin. An algorithmic stablecoin operates by minting coins relative to other cryptocurrencies, which is an exciting proposition since the entire operation can exist on the blockchain and can be fully decentralized. Where a collateralized stablecoin such as Tether’s USDT requires the firm to administer the redemptions against their assets, which introduces more centralization into the system.

The danger is that an algorithmic stablecoin may have a tail-risk event such as the one LUNA experienced over the recent few days, which breaks the pegging mechanism.

What happened?

Two days ago, the peg broke and UST closed at a value of $0.77 USD instead of the expected $1.00 USD. At the same time, the LUNA token dropped by 52% from $64 to $30. There are many explanations as to why this occurred, but the cryptocurrency market has been in a broad-based sell-off over the same period, which may have introduced concerns that this novel stabilization strategy will fail. Indeed, LUNA’s price has fallen from a high of around $116 USD to $1.05 USD at the time of this writing for a decline of 93%.

Figure 1: LUNA/USD through May 11, 2022 – Data from TradingView

Today on May 11, 2022 the UST token dropped even further intra-day to around $0.26, a 75% discount from its intended $1.00 price point before rebounding to $0.78, which has been the prevailing price for the past few days.

Figure 2: UST/USD through May 11, 2022 – Data from TradingView

What does this mean for UST and LUNA?

The current market cap for the LUNA token is $1,638,728,601 and 10,357,661,717 for the UST token, which makes the value of the outstanding UST is 6.3x the value of the LUNA market. This is sometimes referred to as an “overhang” in that there are more of the derivative token outstanding than there is market value to redeem it. If an investor were able to redeem all outstanding UST, there would not be enough LUNA available to redeem against.

Thus far, while some UST holders have been willing to exchange their tokens at a discounted price, many have not. Especially since the swap is for LUNA, which has had a 99% drawdown over the past few days. UST holders seem to be weighing their options. Because of the large drawdown in LUNA, it appears that investors are discounting the value of UST, perhaps because the primary value of UST is that it can be swapped for LUNA.

Investor behavior may come into play and LUNA die-hards may hold theirs in the hopes of a return to higher prices. The ecosystem becomes solvent again at around $6.70 LUNA, which is substantially higher than today’s price, but given the size of the arbitrage opportunity could be imagined. The most important question is: why aren’t arbitrageurs purchasing UST at a 25% discount and swapping it for LUNA that they could sell on the open market? Perhaps because the price of LUNA is declining so quickly they are uncertain that the 25% arbitrage opportunity is lower than the risk of holding LUNA for a few minutes – a dire conclusion if true.

Figure 3: Three Month UST Market Capitalization – Data from CoinMarketCap

Figure 4: Three Month LUNA Market Capitalization – Data from CoinMarketCap

Conclusion

It is always important to understand the mechanics of assets investors are purchasing and while Decentralized Finance is a promising technology, there will be many false starts and few projects will survive. These tail risk events are not new to fans of market history who remember when George Soros and other hedge fund managers were able to de-peg the Great Britain Pound or when oil futures fell below zero in March of 2020.

The popular notion that high-yield stablecoins are riskless is rapidly fading – as it should. Perhaps the best comparison in the traditional financial market is to high-yield debt, where the yield is understood to be a risk premium. Allocators must recognize the difference between risk premium and free money so they can develop an investment strategy that works even when tail-risk events occur.

Sources

• Terra Money: Stability and Adoption. Evan Kereiakes, Do Kwon, Marco Di Maggio, Nicholas Platias. April 2019
• About the Terra Protocol
• CoinMarketCap: Today’s Cryptocurrency Prices by Market Cap
• Forbes Flashback: How George Soros Broke The British Pound And Why Hedge Funds Probably Can’t Crack The Euro
  
• Oil Futures Go Negative in Historic Rout
  

GENERAL DISCLAIMER

This presentation is not an offer to sell securities of any investment fund or a solicitation of offers to buy any such securities. Securities of TrueCode Capital Crypto Momentum Fund LP (the “Fund”) managed by TrueCode Capital LLC (the “General Partner”) are offered to selected investors only by means of a complete offering memorandum and related subscription materials which contain significant additional information about the terms of an investment in the Fund (such documents, the “Offering Documents”). Any decision to invest must be based solely upon the information set forth in the Offering Documents, regardless of any information investors may have been otherwise furnished, including this presentation.

Joshua Peck (the “Principal”) has developed, tested, and refined an algorithmic investment strategy through investments in an incubator account that is separate from the Fund (the “Incubator Account”). The Incubator Account began trading on or around December 19, 2019 and has been trading ever since. The Principal modified the trading strategy of the Incubator Account on or around May 12, 2020 (the “Adaptive Risk Revision”) and February 23, 2021 (the “Asset Selection Revision”). All performance data shown in this presentation is that of the Incubator Account, net of fees at the highest level that the Fund will charge, and was calculated and reviewed by NAV Consulting, INC. Although the Fund’s strategy will be based off of the Asset Selection Revision to the Incubator Account trading strategy, there is no guarantee that the Fund’s performance will mimic that of the Incubator Account.

An investment in any strategy, including the strategy described herein, involves a high degree of risk. There is no guarantee that the investment objective will be achieved. Past performance of these strategies is not necessarily indicative of future results. There is the possibility of loss and all investment involves risk including the loss of principal. Securities of the Fund are not registered with any regulatory authority, are offered pursuant to exemptions from such registration, and are subject to significant restrictions.

The information in this presentation was prepared by the General Partner and is believed by the General Partner to be reliable and has been obtained from public sources believed to be reliable. General Partner makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this presentation constitute the current judgment of General Partner and are subject to change without notice. Any projections, forecasts and estimates contained in this presentation are necessarily speculative in nature and are based upon certain assumptions. It can be expected that some or all of such assumptions will not materialize or will vary significantly from actual results. Accordingly, any projections are only estimates and actual results will differ and may vary substantially from the projections or estimates shown. This presentation is not intended as a recommendation to purchase or sell any commodity or security. The General Partner has no obligation to update, modify or amend this presentation or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, project on, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

This presentation is strictly confidential and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person without the express consent of the General Partner.

Disclosure # 1:

The description herein of the approach of the General Partner and the targeted characteristics of its strategies and investments is based on current expectations and should not be considered definitive or a guarantee that the approaches, strategies, and investment portfolio will, in fact, possess these characteristics. In addition, the description herein of the Fund’s risk management strategies is based on current expectations and should not be considered definitive or a guarantee that such strategies will reduce all risk. These descriptions are based on information available as of the date of preparation of this document, and the description may change over time. Past performance of these strategies is not necessarily indicative of future results. There is the possibility of loss and all investment involves risk including the loss of principal.

Disclosure #2:

Certain scenarios described herein are for illustrative purposes only and the assets described are not actual assets held by the Fund. These scenarios show the Principal’s investment in the Incubator Account. Inclusion of such scenarios is not intended as a recommendation to purchase or sell any assets and performance of the Incubator Account in these scenarios does not guarantee that the Fund will experience similar investment results or earn any money whatsoever.

Disclosure #3:

Performance results are that of the Incubator Account and are presented for information purposes only and reflect the impact that material economic and market factors had on the Principal’s decision-making process. No representation is being made that any investor or portfolio, including the Fund, will or is likely to achieve profits or losses similar to those shown.

The returns shown are net of all fees to the investor, at the highest level the Fund will charge; however, performance of individual investors may vary based upon differing management fee and incentive allocation arrangements, and the timing of contributions and withdrawals. Performance numbers were prepared by the General Partner and have been reviewed by NAV Consulting, INC. Performance estimates are subject to future adjustment and revision. The information provided is historical and is not a guide to future performance. Investors should be aware that a loss of investment is possible.

This presentation cannot and does not guarantee or predict a similar outcome with respect to any future investment. The General Partner makes no implications, warranties, promises, suggestions or guarantees whatsoever, in whole or in part, that by participating in any investment of or with the General Partner you will experience similar investment results and earn any money whatsoever.

Disclosure #4:

Any projections, forecasts and estimates contained in this document are necessarily speculative in nature and are based upon certain assumptions. In addition, matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond the Fund’s control. No representations or warranties are made as to the accuracy of such forward-looking statements. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary significantly from actual results. Accordingly, any projections are only estimates and actual results will differ and may vary substantially from the projections or estimates shown.

Disclosure #5:

The graphs, charts and other visual aids are provided for informational purposes only. None of these graphs, charts or visual aids can and of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.

Disclosure #6:

The summary provided herein of the Fund’s terms and conditions does not purport to be complete. The Fund’s Memorandum should be read in its entirety prior to an investment in the Fund.