Billionaire investor and Galaxy Digital CEO Mike Novogratze weighs in on Terra collapse

On May 18, Billionaire investor and CEO of crypto merchant bank Galaxy Digital Mike Novogratze published a shareholder letter to discuss lessons he learned from the UST, Luna and Terra Blockchain collapse and voice his faith in the broader crypto economy. 

He broke the silence on Twitter for the first time since May 8, and wrote ‘After much thought, it's time to talk about the last week and, more importantly, the weeks ahead.’ 

The tweet is embedded with a link to a blogpost in which Novogratz mentioned that it has been a ‘brutal macro backdrop’ for risk assets in 2022. ‘There is no good news in what happened in markets or to the Terra ecosystem,” the investor wrote in his letter. ‘In Luna and UST alone, $40bn of market value was destroyed in a very short amount of time. Both large and small investors saw profits and wealth vanish. The collapse dented confidence in crypto and decentralized finance. Whenever money is lost in such an abrupt fashion, people want answers. I am going to try to add some insights to the ongoing discussion.’ 

‘This macro backdrop put pressure on Luna and the reserves held back UST. UST’s growth had exploded from the 18% yield offered in the Anchor protocol, which eventually overwhelmed other uses of the Terra blockchain. The downward pressure on reserve assets coupled with UST withdrawals, triggered a stress scenario akin to a 'run on the bank.’he continued. 

Next he moved on to discuss Galaxy’s principal investments in Luna starting in Q4 2020 and that the team noticed that the project boasted more than ‘more than 1.8m users and was a top 5 finance app in South Korea that we considered had significant growth potential.’

He continued to reflect on the ‘core tenets of investing’, saying it’s important that ‘it’s important that less experienced market participants only risk what they are comfortable losing.’ 

‘Reading the stories of retail investors who lost their savings in one investment is heart- wrenching,’ Novogratz explains. ‘A core tenet in the crypto belief system is equal access to markets. But 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 loss incurred from the Terra Blockchain collapse could have come at a better time for Galaxy, which is suffering a net loss of US$ 111 million according to its report on May 9. Compared to its US$ 858 million profit in the same period last year. 

He concluded the letter by citing the financial health of Galaxy and his unwavering belief in the crypto market. ‘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,’ Novogratz wrote. ‘Crypto moves in cycles, and we just witnessed a big one.’

He resolved to keep his Luna tattoo from when he was still a Terra Luna believer, ‘My tattoo will be a constant reminder that venture investing requires humility.’

Photo: Getty, Mike Novogratz