3 / In this model, I added a parameter that specified how much (0% to 50%) of the LUNA burn (increase in UST daily value) would be diverted to $BTC purchases for the reserve. The LUNA burn thus decreases as higher proportions of BTC is purchased. All charts use $UST MC on x-axis
4 / With some minor tweaks to the LUNA demand function parameters, I got stable LUNA supply levels with varying levels of Bitcoin purchases for the reserve
5 / As with the prior model configuration, it's possible to also look at confidence intervals around LUNA supply projections. This chart shows 90% confidence intervals for LUNA supply while 40% of the potential burn is used for Bitcoin purchases.
6 / Yes, I know about now you are thinking that I'm not stopping the Bitcoin buying at $10-billion. That's right - keeping it right through to UST $400-b market cap... More on why in the Substack piece (and below)
7 / Pricewise, continuing with a 50% BTC purchase allocation to $100-b UST market cap would lead to a LUNA price of around $650. But that would take the reserve to $45-b worth of BTC purchases, not $10-b. Stopping purchases at $10-b would have much less LUNA price impact.
8 / $1000 LUNA price is projected to be reached by UST $127-b market cap (late-August 2023 with current UST growth trajectory), even when 50% of UST supply growth is allocated for Bitcoin purchases rather than LUNA burn
9 / At the far right of the x-axis, LUNA price ranges from $15,000 (50% allocation to Bitcoin purchases) to $49,000 (all LUNA burn) at $400-b UST market cap (a little lower than prices that @invest_answers found yesterday in his LUNA model)
10 / It is also possible to look at LUNA price in terms of confidence intervals for any particular % BTC allocation. This one shows the 90% confidence intervals for a 40% BTC allocation.
11 / For example, at $100-b UST market cap, the results show that LUNA price will land in the $600 to $1000 range for 90% of all model runs. At $350-b UST market cap, the 90% confidence interval range is $8,400 to $21,200.
12 / If BTC buying is sustained over time, the reserve can get really large (not even counting BTC price appreciation potential).
13 / This chart allows for calculation of when the $10-b reserve level would be reached. At 50% allocation to Bitcoin purchases, the $10-b reserve is fully in place by the time UST reaches a $31-b market cap (end of July 2022 when translating to calendar time).
14 / For lower levels of allocation to BTC purchases, the $10-b reserve could be filled when UST market cap reached about $34-b, $40-b, $52-b, and $87-b for allocation rates of 40%, 30%, 20%, and 10%, respectively.
15 / Assuming BTC contributions cease at $10-b and all the UST growth is then directed exclusively to the LUNA burn, the supply and price projections above are conservative from a modeling perspective
16 / This model is primarily driven by supply-side UST minting, not demand-side investor demand or macro factors. LUNA prices will be volatile but the supply shock should provide strong upward price pressure so long as UST demand increases.
17 / Some people may be a little disappointed with the possibility of delayed (but still really great) price appreciation. But that view misses the impact of the BTC reserve of LUNAs expected value (EV)
18 / Protecting the peg reduces the odds of LUNA going to $0 over time. Even a small % reduction in downside risk can have a large effect on EV when the upside price targets are so high
20 / For more details on the evolution and structure of this price model, please visit my Substack page. murrayrudd.substack.com
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