The Jump/LUNA investment
UST/LUNA begins to self-collateralize
The worst-kept secret in altcoin dealmaking is finally out: a who’s who of crypto players, led by Jump Crypto and Three Arrows Capital, bought $1 billion of LUNA from the Luna Foundation Guard. The LUNA will unlock linearly over 4 years (25% at the end of each year).
In return, LUNA will convert the $1 billion of cash they received (up front) into BTC. The BTC will form a sovereign wealth fund to defend the UST currency peg and mitigate the death-spiral tail risk that nearly killed UST in May 2021.
I’d heard the deal had been finalized in December at around $40 per share, when LUNA was double its current price. It could well have been renegotiated, but I haven’t heard any confirmation thereof.
At those levels, the buyers were buying a massively in-the-money 2-year (on average) call option on an extremely volatile asset. (LUNA’s supply, and thus price, is the volatility absorber amid fluctuations in UST demand, giving LUNA a structural volatility that’s astronomical even by altcoin standards).
At that time, ETH had an implied volatility of around 100. By comparison, BABA had an implied vol of 40, and a calmer megacap like MSFT had an IV closer to 20. LUNA is significantly more volatile.
At that level of volatility, LUNA’s buyers deserved to buy in at a massive discount to the current price. On the other hand, because LUNA’s market cap was cut in half over the past 6 weeks, the buyers were potentially able to buy a much larger % of LUNA stake than they’d originally negotiated for.
We can’t tell if a) the investment syndicate went by older terms, or b) the investment syndicate renegotiated the deal to lower the de facto strike price of the LUNA they bought. Either way, it’s a huge vote of confidence by the smartest players in crypto, and speaks to the excitement around LUNA among institutional investors who see, in LUNA/UST, the first self-sovereign “eurodollar of crypto” — an offshore USD-equivalent which happens to have no interaction with USD.
Even if UST becomes more collateralized over time, it’d be truly different from (for example) DAI, which is collateralized by a mixture of centralized stablecoins like USDC as well as some bitcoin. Because of DAI’s USDC connection, the US government could theoretically force DAI to dox, expel, or de-bank any holder of DAI (although the cost of doing so would be significantly higher). The US government cannot do the same to UST, unless UST became backed by centralized stablecoins like USDC (which I think will be viewed as the de facto American CBDC over time). I wouldn’t expect USDC to ever enter the LUNA/UST treasury.