The recent crash by TerraUSD (UST) and LUNA has no doubt caught many flatfooted, including Galaxy Digital C.E.O Mike Novogratz.
After almost two weeks of Twitter numbness, surprisingly following the historical crash, Mike bounced back on Wednesday with a letter to shareholders and the crypto community, sharing his take on the highly publicized meltdown.
In the letter, Mike who typically tweets once or twice a day noted that he had “spent the past week reflecting on the economy and macro markets, our industry, and Galaxy’s place in it.”
He went on to further explain what had caused the crash which saw over $40B of market value destroyed in record time, setting some investors back to square one. According to him, apart from internal managerial snags by the Terra team, UST and Luna were also victims of the ongoing global macro backdrop as well as the “free money forever” ethos which had caused ballooning inflation.
“This macro backdrop put pressure on Luna and the reserves held to 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 and UST withdrawals triggered a stress scenario akin to a “run on the bank.” The reserves weren’t enough to prevent UST’s collapse.” Mike wrote.
Mike, an early investor in various crypto projects has been a staunch supporter of the Terra ecosystem, at one time even tattooing the name “LUNA” on his arm during the token’s brighter days. Galaxy digital had made some investments in the Terra ecosystem in September and had $400M worth of Luna under its belt as of December 2021.
However, despite Galaxy digital Holdings LTD losing about 12% of its total equity during the “bank run,” the firm seemed to have jumped ship before its holdings were exposed to the drop. Mike went on to state that they survived the crash because they did four things: diversified their portfolio, frequently took profits along the way, employed a risk management framework, and understood that all investments happen in a macro framework.
“Galaxy did all of these with regards to our investment in LUNA.” Mike stated before adding, “Reading the stories of retail investors who lost their savings in one investment is heart-wrenching…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.”
As for what goes next for crypto, Mike stated that his firm was well-positioned for long-term growth as it had a substantial capital and liquidity position. “Crypto is not going away.” He said.