A 10% Portfolio Investment Error
Often the assets that we think have the least risk are the ones that have the most risk.
This week saw an event that could have spelled the end of decentralized finance (DeFi). Several Hedge Funds, through arbitrage, have set out to sink the price of the Luna stablecoin against the dollar. In the Crypto world, this collapse is called de-PEG.
This means that if you used to be able to exchange 1 dollar: 1UST, now you can only exchange 1 dollar: 0.8 UST. However, this ratio was as high as 1:0.6.
This event has had a very bad reception from the whole investment community. All the naysayers of the Terra ecosystem have taken to the social networks and have reiterated that they warned that this was going to happen.
No doubt we have been caught completely off guard, and it is a mistake we have to take on board. But now, we want to put into context what has happened and how fragile we are.
Before the de-PEG, Luna had approximately a market cap of just over $20B. On the other hand, its stable coin came to have approximately $16B under management. This represents a crypto ecosystem of about $36B.
Well, look, the broker where we currently keep our money, Interactive Brokers, has a market cap of $22.6B, which makes it the 740th largest company in the world. At this company, we kept part of our dollars before moving them to UST, and do you know how much percent was insured? $50k.
With this, we want to reflect on how exposed we are to black swans and what a centralization of assets can entail. From one day to the next, several "whales" can make you lose a lot of money.
This is undoubtedly a very good lesson and one from which we have learned many things:
Our money is totally exposed to black swans, regardless of where it is. It is possible to lose 100% of our savings in a matter of minutes.
Lesson: we must diversify among several brokers, assets, etc.
Algorithmic currencies are often not as "stable".
Lesson: we have seen that today the most reliable stable currency, without a doubt, is DAI. It is a stable coin backed by ETH, which at no point in its life has ever lost that PEG. Even the day ETH dropped 50% in a single day.
We must expose ourselves to asymmetric situations.
Lesson: whoever would have bet against this event would have made an infinite amount of money. This is precisely what we do when buying very OTM options or having BTC / ETH in our portfolio. They are totally asymmetric assets.
What are we going to do from now on?
Obviously, we must take matters into our own hands, and we are going to do several actions that will allow us to make 12% per year for dollars and euros without having to convert them into stablecoins. How?