Some investors got rich before a popular stablecoin imploded, erasing $60 billion in value


WASHINGTON — In May, the collapse of one of the most popular U.S. dollar-pegged stablecoin projects cost investors tens of billions of dollars as they pulled out in a panic that some have compared to a bank run. But before that, the stablecoin known as terraUSD (or UST, for short) and its sister token luna, had experienced a pretty spectacular run-up — and some investors made a killing before it all collapsed.

Venture capital firm Pantera Capital tells CNBC it earned a 100-fold return on its $1.7 million investment in luna. Hack VC and the Winklevoss-backed CMCC Global didn’t share their exact gains, but CMCC told CNBC that it closed its luna position in March, while Hack reportedly got out in December.

The scheme relied largely on faith and the promise of future returns, plus a complex set of code, with very little hard cash to back up the whole arrangement.

Unlike USDC (another popular dollar-pegged stablecoin), which has fiat assets in reserve as a way to back their tokens, UST was an algorithmic stablecoin created and administered by Singapore-based Terraform Labs. It depended on computer code to self-stabilize its value by creating and destroying UST and luna in a sort of supply-and-demand seesaw effect.

For a while, it worked.

UST held its dollar peg and the luna token soared. The luna token rose to more than $116 in April, up more than 135% in less than two months. Traders were able to arbitrage the system and profit from deviations in the price of the two tokens. But perhaps the greatest incentive of the entire scheme was an accompanying lending platform, called Anchor, which promised investors a 20% annual percentage yield on their UST holdings — a rate many analysts said was unsustainable.

Widespread buy-in — and public PSAs — from respected financial institutions lent credibility to the project, further driving the narrative that the whole thing was legit.

Most everyone was happy until it all came crashing down in early May.

Although the project had amassed about $3 billion worth of bitcoin in its reserves as a backstop for UST, when the price of luna became unstable, investors rushed out of both tokens, sending prices off a cliff. The Luna Foundation Guard tried to restore UST’s $1 peg by spending almost all of the bitcoin in its reserve. It didn’t work.

At their height, luna and UST had a combined market value of almost $60 billion. Now, they’re essentially worthless.

The entire episode has laid bare the advantages of experienced large-scale investors over retail investors gambling on hope.

One person posted on Reddit that they didn’t think they would have enough money to pay for their next semester at school after losing money on luna and UST. Another investor affected by the crash tweeted that she and her husband sold their house and bet it all on luna, noting that she was still trying to digest whether it was actually happening or just a nightmare.

Others are contemplating suicide after losing all they’ve got.

“I’m lost, about to commit suicide in a chair,” one commenter posted to Reddit. “I lost my life savings in the investments of (LUNA UST) the worst thing is that 3 weeks ago I proposed to my girlfriend. She doesn’t know anything, I lost 62 thousand dollars. I’m here I don’t know what to do.”

Who cashed out, and why

Among the winners of the UST flash crash are Pantera Capital, a hedge fund that saw a 100x return on its investment.

Joey Krug, the fund’s co-chief investment officer, told CNBC that in the primary fund where they held and traded luna, they sold about 87% of their position from Jan. 2021 through Apr. 2022. Pantera then sold another 8% in May once it was clear the UST peg had broken. At the end of it all, Krug says that Pantera “got stuck” with about 5% of their position.

All that liquidation translated to a return of $171 million on a $1.7 million initial investment, assuming the remaining luna they own continue to be worth nothing.

Even as the fund was selling, Pantera Capital CEO Dan Morehead joined CNBC in Dec. 2021 to talk about his top altcoin picks, which included the Terra blockchain’s luna token. At the time, luna was up more than 15,800% in 2021.

“We think it’s one of the most promising coins for the coming year,” Morehead said of luna. “So many people are just discovering it and just starting to trade it.”

But Krug says the firm’s initial decision to liquidate came down to risk management and rebalancing the fund.

“For the large portion which we sold over 2021 and part of 2022, it was a really simple risk management reason,” said Krug. “It kept becoming a larger and larger part of the fund and so we had to de-risk it since you can’t really run a liquid hedge fund with one position being a super large portion of the fund.”

When Pantera noticed the UST $1 peg breaking in May, it sold again.

“It was really just seeing the peg break by a few cents and pattern matching it to historical currency pegs,” continued Krug, who noted that generally when a currency breaks peg, it gets hammered. Even though the firm owned a bunch of luna as opposed to UST, when UST trades under its peg, the dynamic is such that more luna is minted, lowering the value of each coin overall.

“So basically, you want to sell it so you don’t end up getting diluted,” explained Krug.

Hong Kong-based venture firm CMCC Global was one of Terraform’s first seed investors back in early 2018.

CMCC Founder Martin Baumann tells CNBC it divested its stake in March because of concerns resulting from ongoing due diligence. The decision to sell was partly to do with the tech behind UST, but his chief concern had more to do with regulation.

“As opposed to asset backed stablecoins, which are derivatives of existing USD in circulation, UST was effectively increasing the money supply of USD in existence,” a job that Baumann notes is reserved for the Federal Reserve.

“We figured, while an interesting concept, regulators would not tolerate tampering with money supply of the USD,” continued Baumann.

The rapid growth of UST accelerated CMCC’s concerns.

When CMCC sold, the luna token was trading at about $100. When asked about the profit on that sale, Baumann said the firm does not comment on returns or performance of individual investments.

Crypto-centric venture fund Hack VC reportedly exited its Luna stake in December.

CNBC reached out to Hack VC partner Rodney Yesep, but he didn’t respond to our request for comment on the profitability of that sale. Yesep did say in a recent interview on the DeFi Decoded Podcast that they were seed investors in Terra from “back in the day” when it was “like a different entity.”

“It sucks to see a bunch of people get impacted by this sort of stuff,” Yesep said in the podcast. “We were no longer holding a position by the time the downturn happened, but a lot of people were, and a lot of people were pretty impacted.”

Then there’s Galaxy Digital, the crypto merchant bank founded by billionaire investor Mike Novogratz.

In a public letter addressed to “shareholders, friends, partners, and the crypto community,” Novogratz — who got a luna tattoo on his arm to memorialize his status as an official ‘Lunatic’ — opined on where the project went wrong, but also noted that Galaxy took profits along the way.

In its Q1 earnings filing, Galaxy noted that the largest contributor to its net realized gain on digital assets of $355 million was sales of luna.

Other major backers of Terraform Labs included some of the biggest names in venture capital, including Lightspeed Venture Partners and Coinbase Ventures. Three Arrows Capital and Jump Crypto bought into the luna token. CNBC has not learned how these firms fared.

A road to redemption?

Terra’s backers have voted to revive the failed venture. The proposed re-build involves a new Terra blockchain and getting rid of the beleaguered stablecoin that helped trigger the meltdown of the original project. It could also mean redemption for the institutional and retail investors who got wiped out.

For those who saw a big loss, the re-launch could potentially translate into an opportunity to recoup losses on initial investments.

Delphi Digital, for example, has disclosed that it it is “currently sitting on a large unrealized loss” after miscalculating the risk of a death spiral event coming to fruition, and Coindesk reporting shows that Seoul-based Hashed Ventures has lost over $3.5 billion.

The terra 2.0 proposal includes a plan to distribute tokens to holders of the old luna (soon to be renamed “luna classic”) and UST tokens. If the rebranded coins take off, that could be a form of redemption for investors who suffered a loss.

But for those who got out before things went south for UST, they are steering clear.

“With the new chain, it looks like a good chunk of the airdropped tokens will be vested over a number of years,” Pantera Capital’s Krug told CNBC. “We have projects in our portfolio which have integrations with Terra. I’d love to see something community driven succeed here, but we’re a fairly chain-agnostic fund.”

CMCC Global’s Baumann said the fund has decided not to make new investments into the revived terra ecosystem at this time.

Days before the UST collapse, Terraform Labs founder Do Kwon — who has bragged that he doesn’t “debate the poor” — said in an interview that 95% of coins would “die” but there is “entertainment in watching companies die, too.”

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