It was the largest bankruptcy in corporate history…
On September 15, 2008, Lehman Brothers filed for bankruptcy. More than $619 billion in debts went up in smoke.
Lehman’s collapse directly contributed to a domino effect that led to the Great Financial Crisis of 2008.
The credit market’s liquidity evaporated… The S&P fell by half.
Thirty million jobs disappeared… U.S. households lost $16 trillion worth of financial wealth… More than a million homes went into foreclosure.
Fear and panic spread…
Some said the stock market was going to zero… or that it was the end of capitalism. Others said it was the end of human civilization.
Then the U.S. government rushed in with a $700 billion bailout package for banks deemed “too big to fail.”
With the stroke of a pen, taxpayers were on the hook for Wall Street’s reckless behavior.
But it didn’t stop at $700 billion…
The Federal Reserve injected $3.7 trillion more into the financial system over the next several years… and Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to prevent another crisis like Lehman.
Here’s why I’m telling you this…
Crypto recently had its own “Lehman moment.”
It didn’t become the “Great Crypto Financial Crisis” of 2022. It didn’t need a multibillion-dollar government bailout. It didn’t require any congressional hearings.
I’d even argue crypto emerged stronger because of it.
Crypto’s Lehman Moment
Last month, crypto saw its biggest collapse ever. That’s when the Terra (LUNA) ecosystem crashed and burned.
Terra was a blockchain for issuing stablecoins and creating decentralized financial infrastructure.
TerraUSD (UST) is a stablecoin designed to maintain a 1:1 match to the U.S. dollar. LUNA is the asset that backs UST.
On May 9, UST started to see heavy selling, causing it to trade for less than $1.
I don’t want to get too deep in the weeds. But here’s what happened…
The pressure on UST came from Anchor Protocol, a savings and lending platform in the Terra ecosystem.
In a very short time, users withdrew $2 billion worth of UST from a platform on the Terra blockchain. That led to increased selling.
Around the same time, other token holders sold hundreds of millions of dollars of UST on a different decentralized exchange.
Once that selling started, Binance and other exchanges saw heavy UST selling as well… and the token’s value fell even further below $1.
That’s when the Luna Foundation Guard – a nonprofit that supports the Terra ecosystem – stepped in.
It loaned $1.5 billion in bitcoin and UST to shore up UST prices. It also sold about $3 billion in bitcoin to try and preserve the 1:1 match.
But by then, it was too late. LUNA dropped to well below a penny, and UST traded at just a few cents.
Today, LUNA has a grossly inflated supply and an ecosystem left in shambles.
At its height, LUNA had a market cap of $60 billion. Today, it’s worth $639 million.
That said, the LUNA crash illustrates something the mainstream media is missing: The resiliency of the crypto in general and bitcoin in particular.
The True Nature of Capitalism
It may seem counterintuitive… but I’m encouraged by how bitcoin and the entire crypto ecosystem handled the collapse of UST.
Nearly $40 billion in value was vaporized when UST crashed.
To put that in perspective, when Lehman Brothers went under, its market cap collapsed from $46 billion to essentially zero.
So in pure market-cap terms, we had a crypto crash bigger than Lehman’s crash.
You’ll see traditional Wall Street pundits and regulators wag their fingers and admonish crypto for the Terra crash…
But Terra proves that crypto is far less fragile than the traditional financial space.
Here’s what I mean…
If another major financial firm went to zero overnight as Lehman did… it would cause such a level of havoc in the financial markets that the Fed would have no choice but to intervene.
Every lawmaker in the country would be demanding new regulations… And the media headlines would be screaming of a global collapse.
Yet, if you look at the spillover effects from Terra, it’s been relatively muted.
Crypto didn’t need the Fed to come to the rescue. It didn’t need dozens of congressional hearings. It didn’t take taxpayer bailouts.
There was no stock market crash… Or millions of foreclosures… Or the loss of 30 million jobs.
If you were affected by the LUNA crash, I don’t want to minimize any losses you may have incurred. And even if you made profits from LUNA, they probably should’ve been more.
The important thing is this: While the UST-Terra blow-up was an awful experience… it hasn’t destroyed markets like the collapse of Lehman did.
That shows the growing strength of crypto.
Had something like Terra happened in 2018, I believe you would’ve seen the entire marketplace drop at least 90%. It would’ve been devastating.
Yet, since the LUNA crash, the crypto market is only down about 60%.
Sure, that’s uncomfortable. But it’s par for the course in crypto. As I wrote yesterday, we’ve seen bitcoin drop 50% or more four times since I began recommending it in 2016.
Each time, it rallied to new highs.
Friends, I know it’s difficult to see an entire crypto project blow up. But that’s the creative destruction of true capitalism at work.
Every day, we see new businesses born, and old businesses die. We’ll see the same with crypto projects.
That’s true capitalism at work.
Let the Game Come to You!