A few years ago crypto was in the middle of an enormous hype cycle, huge amounts of insatiable greed meant that people were investing in all sorts of things in the crypto space including things that now look utterly ridiculous like the Non Fungible Tokens craze. I first started taking notes on LUNA in early 2022 when people kept mentioning it to me. After a year of crypto being in a bear market it seems people aren't talking about much in this space anymore. That said when capitulation has set in that's probably when you should be buying, not when literally every second person is talking about it. Not that long ago the market cap of LUNA placed into the top 10 list of cryptocurrencies being traded.
The implosion of LUNA is an extremely good example of the dynamics that lead to hyperinflation.
There was a feedback loop in play that effectively meant that the weaker LUNA got the more tokens were minted. This in turn further depressed the price of the tokens that did exist because there were more of them.
Once this reached a critical point a doom loop formed which effectively meant the currency was doomed to hyperinflate due to an exponentially increasing supply. Things move fast on the internet and a few days later it was dead, as the value when measured vs other currencies like the US dollar or Bitcoin fell rapidly towards zero. Eventually the blockchain it was trading on was entirely halted meaning that the system was at this point not just worthless but was entirely defunct.
One of the most fascinating parts of this saga were all the people who had been pavlovian conditioned into "buy the dip" behavior. As the price dropped further and further there were numerous people who had the line of thinking "surely this can't drop further" and threw in money even after the initial 95%+ decline. All these people clearly lacked an understanding of hyperinflation and they lost everything they put in. The amount to which people are unconsciously buying dips these days is shocking, in a protracted bear market this is going to cause anyone using this strategy an enormous amount of pain. And it's looking a whole lot like we are in a bear market at the moment, so you want to really think twice before "buying the dip".
There's a concept that describes this called the gambler's fallacy. Just because something has been losing a lot of value recently doesn't therefore mean it has to turn around. Often things that go bankrupt are going bankrupt for a reason and if that reason doesn't change you shouldn't be investing. I feel some of these concepts are very important lately, I had a friend say he was thinking of investing in Credit Suisse because "it's so low that surely it won't go lower". The thing is the stock is low for a reason, the company has had questionable management for quite some time. He'd have lost a lot of money if he bought Credit Suisse stock a few months ago. Much the same could have been said about Luna, the management there was also very questionable. If you are buying a stock that's plummeting you really need to do your own research.
This post is part 18 of the "MonetaryPolicy" series:
- Finally getting around to publishing some monetary policy articles
- Fast things happen slowly then quickly
- Politics of unproductive debt
- Futures markets lower prices, both in good and bad ways
- Why do stable coins matter
- Why is so much financial advice bullshit
- Bank bail ins
- Where is money created
- Bastiat on legal systems and morality
- Transitory inflation means permanent purchasing power reduction
- Problems with Celsius
- Crypto's Lehman moment
- Crypto crash update May 2022
- The myth of the unbalanced government budget
- The 2006 debasement of NZ coinage
- Demand destruction anecdotes
- Central bank interventions and price discovery
- Luna a modern case of hyperinflation *
- Collateral crisis psychology
- The death of full employment