Is Strategy Really the Next Terra Luna?

**David Canellis** (0:00)
Welcome back to The Breakdown, everybody. I'm your host, David Canellis, as always. Today, we're going to be looking at strategy, because I'm seeing so many takes out there that strategy is the next Terra Luna, that it's all going to implode, that it's a Ponzi or whatever. So why not take a look at the differences between what Terra Luna did and was, compared to what strategy and the stretch preferred stocks and so on are. And yeah, let's see if there's any similarities, any differences, what the risks really are, what releases we can determine them on this particular podcast and so on. So without further ado, let's get to it. This is The Breakdown.
I think certain of The Breakdown is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only, and any views expressed by anyone on the show are opinions, not financial advice. Hosts and guests may hold positions in the company's funds or projects discussed. Okay, so first, I mean, this video came out at the end of last week, and it just kind of sets the scene for some of the market tension going into this week, now that I think it's two or three weeks now that Stretch has traded under its $100 target. It's currently at about 89.50, which is before the market opens on Monday morning. But yeah, let's just take a look at this really quickly. When we did Stretch, I designed all these with AI.

**SPEAKER_2** (1:19)
I couldn't have done it myself. I literally sat and I used artificial intelligence and I went back and forth with the AI for a few hours. So you were just on that PPT, just like the rest of us, figuring out how to design these different offerings. And arguing with it and saying, can I do this? Can I do that?

**David Canellis** (1:38)
When we did STRETCH.
Okay. So I mean, I'm just, I mean, it's very easy to dunk on Sailor relying on Chatchie PT to design these financial products, especially when I think we've spent the last two or three years unpacking just what a financial wizard Sailor is to design these, these flywheel machines that will pump the price of Bitcoin for, for all eternity apparently. But I'm just gonna put that to one side. This just gives you an understanding of, where some of the market sentiment is right now, in terms of stretch and strategy and so on. But I mean, yeah, the biggest comparison is of course, that this is a flywheel that will eventually tank the price of Bitcoin once it all unravels and there's no more market demand for strategy and stretch and so on for strategy to continue buying.
But I mean, so for to gauge whether that is truly the case, it's worth revisiting exactly what the Terra Luna model was briefly. Okay, so I have this flowchart up on my screen, which again, if you're following with audio only, I'm going to do my best to convey this as cleanly as possible. But when we refer to Terra, what we really mean is the UST stablecoin that was intended to be pegged to the $1. And of course, this was not backed by any real assets. It was just backed by market demand. And it was also backed by this algorithm that was meant to always return UST to a dollar peg. And so when UST fell below that $1 peg, there would be an automatic protocol swap that would rely on arbitrages and also other market participants to burn one UST in return for $1 worth of lunar at the time of the burn. And what this would essentially do is this would contract the supply of UST, which would meant to give upward pressure to the stable coin in order to return it to its $1 peg. And it would also inflate the supply of lunar at the same time. But what would essentially happen is that the arbitrages would feed this below peg stable coin to the algorithm in return for $1 worth of lunar. And of course, what would you do if the price of lunar was not looking like it was going up at the time, which it would be very hard to do if the supply of lunar was always increasing? You would be inclined to sell that $1 worth of lunar, which would effectively mean basically all new lunar that was secreted into the market would be dumped in return to actually capitalize on that arbitrage trade. And you would have the price of lunar falling, which would in turn break confidence or reduce confidence that the UST stable coin could actually retain its peg. And so you would have this negative feedback loop that would affect both the price of lunar and the price of the UST stable coin. And effectively, you would have the algorithm break because we wouldn't be able to satisfy the requirements of its creation in the first place, that the algorithm was meant to prop the price of the UST back to its dollar peg. So what ended up happening is that Terra, through Dirk Huan, said, well, we actually need a more valuable asset to be able to sell in order to return UST to its dollar peg. And eventually, they brought in Bitcoin in order to satisfy that condition. So here I have another flow chart on my stream, and this is the version with Bitcoin as a reserve asset. So what would happen is that once UST depegged below $1, what would be started to be termed as a death spiral would start to happen. But the Lunar Foundation Guard, which is what the Bitcoin Treasury Reserve was styled as, at one point, they had $1.5 billion worth of Bitcoin ready to sell in order to buy UST on the open market and prop the price back up. So we're already no longer at an algorithmic stablecoin. We're at this weird pseudo algorithmic stablecoin that needs a relatively valuable asset in Bitcoin in order to sell in order to prop it back up. But of course, what would end up happening if you know, if the market knows that there is a massive entity out there selling over time $1.5 billion worth of Bitcoin, of course, the price of Bitcoin is going to fall, which then we start entering the world of market contagion. And you no longer have confidence in the price of UST. You don't have any confidence in the price of Luna. You have failing confidence in the price of Bitcoin. And of course, the UST stablecoin is going to depeg even further. And eventually, you will run out of Luna because the price of Luna is effectively going to zero. You run out of Bitcoin because you run out of Bitcoin to sell to prop up the price of Bitcoin. And eventually, you have nothing left at the end of the day. And of course, we all know how it turned out. The price of Luna went to zero, the stablecoin went to zero, and it effectively created one of the longest and most arduous Bitcoin crypto bear markets in its history. I'm actually going to pull this up on my screen here to see the relationship. We can see the relationship between the price of Bitcoin in brown here and the Terra stablecoin in the blue dotted line. So we can see that investor confidence, we know that the market had turned on Terra Luna around April, beginning of April, leading into its stellar collapse in May. And throughout that time, the price of Bitcoin was very weak. It started this whole process around 466K. By the time that the UST collapsed, Bitcoin had fallen to around $30,000. So basically a third retracement. And then by the end of the whole debacle in mid-June, the price of Bitcoin had fallen to $22,500 US dollars down from over 45, 46K. So about a 50% reduction in the price of Bitcoin throughout all of this drama. And of course the Terra situation wasn't the only bad thing had to happen to Bitcoin and crypto in 2022 Because as we can see, I have this up on my screen here, that we can see that the Terra collapse in May, June, set the price of Bitcoin immediately spiraling. But and then it went sideways for a few months, right up until the FTX debacle kicked off and sank it even further. So we all know that 2022 was a very bad year for crypto and Bitcoin. But of course, the Terra Luna algorithm imploding in this death spiral, of course, set it all off for the 2022 bear market. So that's what people are worried about, are going to happen with strategy and Bitcoin this time around, because we also do have this new flywheel that has emerged that is running out of steam right now. So let's now take a look at a very similar flowchart, but for strategy and stretching and Bitcoin to see how they compare. Okay, so for those unfamiliar with stretch, it is a perpetual preferred stock that is essentially a capital raising technique for strategy because initially it sold corporate bonds. I think it raised a few billion dollars worth of corporate bonds, very traditional means of raising capital in order to fund its Bitcoin acquisition. And of course, it basically bought all the Bitcoin that it could afford with those bonds sales and effectively it switched over to this preferred perpetual share system through stretch. And there's a few other ones that are also quite similar, but stretch is by far the biggest. And effectively, the target is for each stretch share to be worth $100.