5 Key Points of the LUNA-UST Incident


The hottest topic in the financial market in the past week is nothing more than the explosion of LUNA and UST. I believe that there is no need to spend more time introducing LUNA and UST. There are a lot of reports on the market about the mechanism of this algorithmic stablecoin and its explosion. On the contrary, this column intends to focus on the UST incident and the five take home messages brought out.

(1) Set the maximum percentage of asset allocation: Almost every time I mention cryptocurrency operations, I also remind investors that they should not allocate more than 20% of their portfolio funds to the currency market.

The reason behind this is that cryptocurrencies are inherently volatile, with historical volatility ranging from about 60% to 80%, which is 3 to 4 times that of the stock market.

According to the risk parity method, since the currency market is 4 times more volatile than the stock market, if 50% to 60% of the portfolio is in stocks, then 15% is the maximum allocation percentage of cryptocurrencies.

As long as the maximum allocation ratio is well controlled, even if there are only three or five coins in hand, the maximum position of each coin is only 3% to 5%. Even if LUNA or UST is zeroed, the loss can be controlled within 3% to 5%.

(Image source: Binance official website)

Do not open positions with contract leverage

(2) Only do spot, not contract: This is also the point that the author is crazy to mention. Retail investors have little principal but love high returns, so they often open positions with contract leverage.

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But the problem is that if the leverage is 10 times, the price will drop by 10% and the position will be liquidated. It is very easy for the currency market to go up and down by 10%, and the chance that leveraged contracts can last for a long time is very small.

Many friends pointed out that because LUNA fell sharply and UST was decoupled, the bitcoin and ether in their hands suffered losses.

In fact, as long as it is not held with contract leverage, there is no problem at all. Nine out of ten cases where big losses are often seen online are also leveraged contracts.

Once the price hits the liquidation price, there will be “no revenge”, even if the price rises after the fact, it will not help.

Big coins can also be zero coins

(3) Be careful with high interest rate returns: There are often options for high interest rate returns in the currency circle. For example, the UST in this incident had a high-profile publicity of its 20% annual interest rate before the explosion, which caused a large amount of funds in the market to pour into UST and LUNA.

Unfortunately, profits often bring risks, and high profits come with high risks. After all, the wool comes from the sheep, or the coin is a Ponzi scheme, or the risk behind it is abnormally high.

Another example is AXS, a well-known token in the Play to earn section, with an annual pledge rate of over 100%, which makes many people in the currency circle pledge AXS. Unfortunately, AXS has dropped from a high of 166 yuan to 20 yuan at the time of writing, a drop of 88%.

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