Mike Novogratz first went silent.
And this lasted almost 10 days. And then he opened up and explained.
He, like a large number of institutional investors and retail investors, watched the prices of the UST stablecoin and its sister token Luna tumble and then crash. From May 9 to May 13, at least $55 billion of market cap disappeared, causing colossal losses to many investors. On social media, testimonies of financial ruin have followed, as reported here by TheStreet's Rob Lenihan.
The crypto space was in a panic because beyond the people who lost their savings, the trust that the market had built in recent months with Main Street and regulators took a big hit in this flash crash of UST, also called TerraUSD, and Luna.
For Novogratz, the impact is important and may take several months to quantify. The billionaire, who is chief executive of Galaxy Digital, was a big fan of Luna, which he promoted by going so far as to tattoo the brand on his left arm.
How Novogratz, in His Words, Became a 'Lunatic'
"I’m officially a Lunatic!!! Thanks @stablekwon And thank you my friends at Smith Street Tattoos," the former hedge-fund manager wrote on Twitter in January, showing off the still-fresh tattoo.
Galaxy Digital invested in Luna in fourth-quarter 2020, Novogratz wrote in a letter published on May 18. The firm did not make this investment lightly, the billionaire said, while many users on social media wondered whether Novogratz had done his due diligence before starting to promote Luna.
Luna and UST are native tokens of the Terra ecosystem. Besides the very popular bitcoin and ether, nearly 13,500 digital currencies have been created, according to data firm CoinGecko. And coins are minted, or created, almost every day.
"Our team’s initial thesis for investing in Luna was centered around the expansion of blockchain native payments systems," Novogratz said.
"At the time, we understood that the Chai app, which was built on Terra, had more than 1.8m users and was a top 5 finance app in South Korea that we considered had significant growth potential.
"We were intrigued by this project as an example of crypto finding a real-world use case."
He then explained that since Galaxy Digital's investment, the project behind Luna had evolved in the right direction: "The initial idea was gaining serious traction."
Two years later, Novogratz explained that inflationary pressures and fears of recession caused the debacle of UST, an algorithmic stablecoin whose value was tied to Luna instead of to traditional currencies like the dollar or traditional assets such as gold.
'Crypto Is Not Going Away'
"The downward pressure on reserve assets, coupled with UST withdrawals, triggered a stress scenario akin to a 'run on the bank,'" the former banker said. "The reserves weren’t enough to prevent UST’s collapse."
He said he would keep his tattoo so he'd never forget this disaster. He says he also learned the necessary lessons for those who venture into the young and volatile industry that is the crypto/web3/metaverse galaxy.
"My tattoo will be a constant reminder that venture investing requires humility," Novogratz said.
He recommends that investors:
1. keep a diversified portfolio,
2. take profits along the way,
3. have a risk-management framework, and,
4. understand that all investments happen in a macro framework.
He urged future investors to risk only what they could afford if they want to avoid financial train wrecks of this sort.
"It’s important that less experienced market participants only risk what they are comfortable losing. I’ve often said people should allocate 1%-5% of their assets to the space," the billionaire said.
Galaxy Digital warned on May 13 that it expects to post a net loss of approximately $300 million in the quarter that will end on June 30, compared to March 31. The company did not directly link this loss to its investment in Luna, but the timing of the revelation coincides with the fall of the cryptocurrency.
Through it all, Novogratz remains a big supporter of crypto. He explained that while the industry would continue to experience storms like the current one, he had no doubt about its future.
"Crypto is not going away," Novogratz said. "This does not mean the crypto market will bottom and head straight back up. It will take restructuring, a redemption cycle, consolidation, and renewed confidence in crypto. Crypto moves in cycles, and we just witnessed a big one.
"The crypto community -- and Galaxy’s -- mission isn’t changing. I firmly believe now more than ever that the crypto revolution is here to stay. Together, we’ll weather this storm and come out stronger on the other side."