On Wednesday (May 18), former LUNAtic Mike Novogratz shared his latest thoughts on the $LUNA / $UST debacle.

Former hedge fund manager Novogratz is the Founder and CEO of Galaxy Digital, “a technology-driven financial services and investment management firm that provides institutions and direct clients with a full suite of financial solutions spanning the digital assets ecosystem.”

Yesterday, in an open letter to his firm’s shareholders, friends, partners — as well as the crypto community — Novogratz, who had been mostly silent about Terra during the previous week, said that there was “no good news in what happened in markets or to the Terra ecosystem.”

Below are a few highlights from 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 DeFi.
  • Our principal investments team invested in Luna in Q4 of 2020 using balance sheet capital. Our team’s initial thesis for investing in Luna was centered around the expansion of blockchain-native payments systems.
  • … the global macro backdrop has been brutal for all risk assets this year… Central bankers are in the early stages of unwinding a massive liquidity bubble…
  • 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 coupled with UST withdrawals, triggered a stress scenario akin to a ‘run on the bank.’ The reserves weren’t enough to prevent UST’s collapse.
  • With hindsight things always look clearer. My tattoo will be a constant reminder that venture investing requires humility.
  • At a high level, it’s important to understand that volatility is likely to continue, and the macro situation is going to remain challenging. There is no cavalry coming to drive a V-shaped recovery. The Fed can’t ‘save’ the market until inflation falls. So, liquidity is important. Being realistic is important.
  • Crypto is not going away. The amount of human capital moving into the space isn’t slowing down… 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.

Also, yesterday, crypto research, venture capital firm, and software R&D firm Delphi Digital published a blog post (titled “Learnings From Last Week”) that talked about the lessons they had learned from the recent failure of the Terra ecosystem.

Here are a few highlights from that blog post:

  • We always knew something like this was possible, and we tried to stress the risks to a system like this in our research and public commentary, but the fact is we miscalculated the risk of a “death spiral” event coming to fruition. We’ve taken some heat for this over the last week, and we deserve it. The criticism is fair and we accept it.
  • Delphi Ventures Master Fund purchased a small amount of $LUNA (~0.5% of our NAV) on the secondary market in Q1 2021. Net, we only increased our exposure since our original purchase and are currently sitting on a large unrealized loss.
  • Unsurprisingly, Delphi Labs, our software research and development company, was where most of our Terra exposure was concentrated. We decided to build on Terra because we believed that decentralized money had the greatest chance of succeeding if it were to be integrated at the L1, focused on real world adoption, and built on a relatively scalable and interoperable blockchain.
  • Ultimately, we believed in the Terra ecosystem, we made a big bet on it, and it didn’t turn out as expected, costing us significant money and time. Fortunately, Delphi is fully self-funded, and when we make high-conviction bets like this it’s our own capital at risk.
  • We understood the risks of the algorithmic model upfront and sought to be transparent about them throughout; however, it’s clear we miscalculated the risks. To the vocal critics of Terra’s algorithmic design–you were right and we were wrong.

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The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.