Daily Briefing: Classic Manipulation

Key Takeaways

• Terra Classic, which only exists as the failed remnant of a once-vibrant ecosystem, has somehow enjoyed some support from the market since the project split in May.
• While it’s possible there are still true believers out there, it seems more likely that the price action is the result market manipulation.
• Several major exchanges have gotten in on the action, but it only seems to set the stage for tragedy.

Over the past few weeks, the casual crypto investor sphere has been obsessed with Terra Classic. Abandoned by its original creator and relegated to “classic” status in favor of the new Terra 2.0 chain, Terra Classic was widely expected to fade into obscurity, never to be heard of again.

But things are never so simple in the wild world of crypto. If a project has managed to cultivate a strong community during the good times, many of those people will be so emotionally attached that they will stick with it even when it drops 99%. So-called “dead” projects can often be great short-term investments. A single bullish catalyst, real or imagined, can be enough to rally a failed project’s bagholders and get them to pump a token to unreasonable heights. This is precisely what’s happened with Terra Classic.

As a ghost chain with little to no development, it was easy for the Terra Classic community to take control of its direction. In the aftermath of the chain’s May collapse, there were over 3.9 trillion LUNC tokens in circulation from UST redemptions, far too many compared to the 300 million or so before the crash. To “rectify” this, the Terra Classic community voted to implement a 1.2% burn tax on all on-chain LUNC transactions. Madness ensued.

Just the vote to implement a token burn was enough to inspire buyers. The narrative is painfully simple: fewer tokens in circulation equals an increase in value, at least that’s what Terra Classic’s faithful believe. In less than a month, LUNC soared over 550% as social media was set ablaze with calls of “LUNC to $1.” To put the absurdity of LUNC going to $1 into perspective, it would need to increase over 3,000% from its all-time high.

Of course, becoming a multimillionaire is rarely so simple. Besides the fact that a burn tax would disincentivize use, the vast majority of LUNC trading takes place on centralized exchange order books. Even if trading volumes are high, no tokens will ever get burned unless holders send funds to on-chain non-custodial wallets. And if no tokens are getting burned, why would people continue to believe the price will go up?

Realizing this in a moment of rare clarity, the Terra Classic community started petitioning big exchanges such as Binance to manually burn 1.2% of their customers’ traded LUNC tokens. Since the whole burn tax idea sounds a lot like a Ponzi scheme (it necessitates new buyers to keep tokens burning and prop up LUNC’s value), you would imagine exchanges might be apprehensive about promoting or supporting such a scheme. That, unfortunately, hasn’t been the case. 

Several major exchanges, including Binance, Crypto.com, Kucoin, and MEXC Global, used the LUNC burn tax hype to recklessly fuel the fire. They all put out blog posts or press releases stating that they would “support” the burn—in actuality, all they were doing was acknowledging that users sending LUNC to and from their exchange wallets would be hit by the 1.2% on-chain tax, something these exchanges have no control over.

Worst of all was Binance, who, not content with pumping LUNC once, released a follow-up announcement stating it would start burning Terra Classic “trading fees” from all transactions. Binance neglected to mention how the trading fees were calculated or the expected number of tokens that would be burned. At this point, it’s painfully apparent Binance is doing this to milk LUNC bulls one last time before the whole hair-brained scheme collapses—and it’s sad to watch.

I think there are two main takeaways from the Terra Classic debacle. First, be wary of centralized exchanges. Although I don’t usually respect what SEC Chair Gary Gensler says, he’s got a point about wanting to regulate crypto exchanges to the same extent as traditional equities exchanges. Second, don’t fade hype. LUNC’s pump and subsequent dump were prime long and short trade opportunities—as long as you understood what was going on. You don’t have to believe in the fundamental value of an asset to trade it, but make sure you’re not left holding the bag once the excitement dies off.

Disclosure: At the time of writing, the author of this piece owned ETH, BTC, and several other cryptocurrencies. The information contained in this article is for educational purposes only and should not be considered investment advice.