Be weary of buying the bounce – A warning

Share:

TLDR: So long as the UST peg remains off. People are financially incentivized to increase the supply of Luna by burning UST and decreasing the relative value of your investment in Luna. If UST somehow repegs and there is no longer a financial incentive to mint Terra, maybe Terra will find a bottom. Maybe you can look at buying but even that is risky as an asset with a market cap of roughly 3B is supporting a stablecoin with a (if it was pegged) marketcap of roughly 15B

————

This is a follow up post I made last night which discussed why UST and Luna was heading faster into a death spiral. Luna was around $16 UST was around $.82 when I posted. I wasn’t expecting it to happen so quickly .

However I’m seeing people discuss buying the dip for Luna and I wanted to explain why you shouldn’t, unless you’re looking for a very quick and very risky trade.

UST can be converted to Luna relative to it’s peg price + a fee. A few days back it took about 80 UST to get 1 Luna. Thats currently down to about 2-3 UST per 1 Luna. At the moment the self correcting algorithm that is UST/LUNA encourages people to buy UST and convert it to Luna – UST currently has a price of about $.50 per $1 of Luna. Meaning where allowed supply is going to continue to increase as traders with risk appetite buy UST – convert it to Luna and sell trying to make a quick profit.

I’m not saying Luna will never recover – I’m saying so long as the peg is off people are financially incentivized to buy UST convert it and sell Luna. Supply is going to continue to increase and the price will drop (everything else being equal)

To anyone thinking of doing this – it’s incredibly risky. In the time it takes to buy UST -> send -> convert -> send -> sell – the Luna could have decreased in value by other people doing this or selling that you could actually lose money. That also assumes exchanges continue allowing you to buy/sell/send/receive UST/Terra (some exchanges have already began restricting this). There are lots of ways this could go wrong and is incredibly risky. Which is why the price of UST continues to fall and is currently around $.50 – meaning $.50 of UST is worth about $1 of Terra.

submitted by /u/GabeSter
[link] [comments]