Galaxy's Mike Novogratz talks Terra collapse in new shareholder letter

Mike Novogratz, the billionaire CEO of crypto investment manager Galaxy Digital, opined on the recent crisis in the Terra blockchain ecosystem, which saw the market collapse of both the LUNA token as well as the algorithmic stablecoin UST. 

The shareholder letter penned by Novogratz comes days after Galaxy released an update on its liquidity position. Galaxy is an early backer of Terraform Labs, the developer of the Terra blockchain, having taken part in a $25 million funding round announced in January 2021. 

"There is no good news in what happened in markets or to the Terra ecosystem," Novogratz wrote. "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. Whenever money is lost in such an abrupt fashion, people want answers."

Novogratz went on to note that "[o[ur principal investments team invested in Luna in Q4 of 2020," saying that Galaxy felt drawn to invest because of the focus on payments. 

He contended in the latter that last week's market event occurred in the context of a "brutal" macroeconomic environment, citing a decline in global asset prices since the start of 2022, a highly inflationary environment, and central bank actions to unwind "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," he wrote. "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," Novogratz added.

Novogratz concluded the letter by stressing the financial health of Galaxy and his belief in the broader ecosystem.

"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."

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