Carnage in Cryptolandia Leaves Losers Clamoring for Scapegoats, Contemplating Suicide

What economists call an asset bubble burst this week, and it was not pretty.A cryptocurrency named TerraUSD and an affiliated coin named Luna collapsed. About $40 billion in value evaporated within a span of days. Needless to say, it wasn’t the way things were supposed to happen.Fingers are being pointed. Conspiracy theories are being floated. Some victims are said to be suicidal, and a chief executive is reportedly under police protection in Korea. There are also lessons that, if history is any indication, would be largely forgotten by the time the next mania comes along.TerraUSD, developed by Terraform Labs and its Korean CEO, Do Kwon, is, or was, a so-called algorithmic stablecoin, a relative newcomer to the crypto scene. These stablecoins — also known as “undercollateralized stablecoins,” which should have been telling — are meant to be pegged to a fiat currency like the U.S. dollar.Unlike other stablecoins, which are backed by hard assets like dollars held in reserve by the issuers, algorithmic stablecoins are propped up by an algorithm that manipulates the supply of an affiliated coin — named Luna in the case of TerraUSD — if the main stablecoin’s price loses its parity with the dollar.On May 7, Terra’s peg began to wobble and it slipped below one dollar. The algorithm attempted to correct that by destroying Terra coins and minting Luna coins, decreasing the supply of the former and increasing it of the latter.As supply of Terra dropped, the price should have gone back up. It didn’t, and the algorithm began churning out more and more Luna coins — to the point where 6.5 trillion of them were floating around, so to speak, before things collapsed. Because the potential supply of Luna is limitless, a hyperinflationary spiral began. Traders noticed, and began selling in earnest.On May 7, Luna closed at $68.25. On May 8, $64.08. On May 9, $32.00. On May 10, $17.52. On May 11, $1.07. By the end of the day Thursday, each Luna was worth $0.0035. Friday, traders couldn’t buy (or sell) a Luna coin even if they wanted to. It was delisted from all the major exchanges.That means it has lost close to 100 percent of its value. To put that in perspective, it is an even steeper fall than the collapse of the United States dollar since the 1970s. Between the end of the Bretton Woods era, when the dollar was valued at a 35th of an ounce of gold, the greenback has lost 98.7 percent of its value in terms of gold.In any event, Terraform Labs tried to reboot the network on Friday — essentially turning it off and on again in a futile Hail Mary — but it didn’t help. It was eventually turned off entirely. On Twitter, the company stated simply, “More updates to come.” Here is where the conspiracy theories come in.Online, many crypto enthusiasts began looking for scapegoats. Some whispered that BlackRock and hedge fund giant Citadel Securities orchestrated a “coordinated attack” to bring down the cryptocurrencies after shorting them. Both companies vehemently denied the rumors, saying they do not trade in stablecoins at all, even one called — seriously — Magic Internet Money, which on Friday was holding its peg to the dollar.Attention also turned to the Terraform Labs CEO. One of cryptolandia’s main news outlets, Coindesk, reported that Do Kwon was anonymously behind another, earlier failed stablecoin called Basis Cash and referred to him as crypto’s version of Elizabeth Holmes, the biotech executive convicted of criminal fraud after the collapse of Theranos.In Korea, the press reported Friday that Mr. Kwon’s wife had requested police protection after someone broke into their apartment in Seoul inquiring after the chief executive.Others went so far as to pin the blame on actors Matt Damon and Larry David, both of whom appeared in ads touting cryptocurrencies during this year’s Super Bowl. Mr. Damon’s ad featured the tagline, “Fortune favors the bold.” Many noted that viewers who invested in Bitcoin, the best-known cryptocurrency — which also fell precipitously this week, but recovered slightly on Friday — had lost half their money at the close of business Thursday.Among Luna’s investors, along with the anger came angst. Subreddits frequented by crypto enthusiasts on the popular Reddit social media platform were sprinkled with comments about suicide and the phone numbers for suicide-prevention hotlines. Another common refrain: “What do I tell my wife?”Most of the losers in this saga will remain anonymous. One who came forward was a British rapper and Youtube sensation, JJ Olatunji, also known as KSI, who poked his head up on Twitter Thursday with a staggering admission.“What a week,” Mr. Olatunji wrote. “I went to my hamster’s funeral, performed in front of thousands of people at Wembley Arena with Anne Marie, my 3 million dollars worth of Luna is now worth a few $100. And it’s only Thursday.”The losses come on top of $5.1 million in losses earlier this year. Mr. Olatunji said a therapist was helping him through his issues. “During my time, I made a lot of money, and lost a lot of money,” he said. “I went from euphoric to depressed. But soon I became numb to it all and realised that money simply isn’t everything.” The entire episode is something of an I-told-you-so moment for regulators and crypto skeptics. The U.S. Securities and Exchange Commission boss, Gary Gensler, who once referred to the crypto world as the “Wild West,” reiterated a belief he expressed earlier in the week that cryptocurrencies need to be regulated by his agency as securities.“The fact is, most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits. That’s the hallmark investment contract or security under our jurisdiction,” he said Wednesday at a meeting of the International Swaps and Derivatives Association. “That issuer regime is core to our remit, because we protect the public through full and fair disclosure, anti-fraud and insider-trading regimes.”Another crypto skeptic, Sherrod Brown, the chairman of the Senate Banking Committee, cited the incident as yet more evidence that regulators must get more involved in the industry.“These products, which are far more complex than they let on to consumers, put Americans’ hard-earned money at risk and have the power to impact the rest of the economy,” Senator Brown said in a statement.

Carnage in Cryptolandia Leaves Losers Clamoring for Scapegoats, Contemplating Suicide

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