By the time Michael Novogratz began his first-quarter earnings call with investors of Galaxy Digital Holdings — the company he founded in 2018 with the goal of creating the Goldman Sachs of cryptocurrencies — the price of Luna, one of his favorite coins, was already plunging. It was the morning of May 9, and the crypto world was headed for its biggest reckoning ever.
TerraUSD, the stablecoin on the TerraForm Labs network that Galaxy had backed through its venture capital arm, had fallen below its $1 peg over the prior weekend, causing a run on the bank as traders shorted Luna, the sister coin that was supposed to help TerraUSD restore its peg.
Stablecoins are said to be the backbone of crypto, facilitating the trading of these risky assets. While most stablecoins — like Tether or Circle — use cash, Treasury securities, or commercial paper as a reserve, TerraUSD (also referred to as UST) was known as an algorithmic stablecoin. Its protocol involved swapping UST for Luna in an arbitrage trade used to stabilize the peg. UST also bought some Bitcoin as an additional backup.
The concept of using one crypto coin to act as a reserve currency for another had BMO Capital Markets analyst Deepak Kaushal scratching his head, as he said on that call. “How can a stablecoin use Bitcoin as a reserve when Bitcoin is still a risk asset base?” he asked Novogratz.
That may seem a logical question. But Novogratz sidestepped it. “Listen, UST has risk, but you are paid 18 percent yield on it. And so anyone who went in knew there was some risk — you don’t get 18 percent for nothing, right?” he said. Novogratz argued that Luna had grown so fast “because people were hungry for yield.”
As it turned out, what had pumped Luna’s price up 20-fold over the prior year was leverage: As Novogratz was attempting to explain, a lending program called Anchor, which promised those mouthwatering yields on UST deposits, was attached to the enterprise. Some said it looked like a fraud. “Luna is at best the WeWork of crypto; at worst, the Theranos of crypto,” tweeted Galois Capital founder Kevin Zhou, one of the most outspoken critics of Terra and Luna, on April 25 — just weeks ahead of the crash.
On the May 9 call, Novogratz told investors that whatever happened to Terra would be “a really big test of that whole model of algorithmic stablecoins.” What happened was that the stablecoin and its sister Luna collapsed days later, destroying some $40 billion of market value. And then came the deluge.
With cryptocurrencies already tumbling alongside a stock market downturn, higher interest rates, and skyrocketing inflation, the Terra/Luna demise led to a cascade of disasters. First came Three Arrows Capital, one of the most prominent crypto hedge funds, whose implosion has already triggered $2.8 billion in creditor claims, including $10 million from Galaxy. Three Arrows had bet big on Luna, and when Three Arrows filed for bankruptcy in July, it also brought down crypto lender Voyager Digital (also a minor Galaxy investment). Like so many dominoes, others also tumbled, including Celsius Network. Other crypto firms were forced to halt withdrawals and lay off staff.
Novogratz was soon mocked for the wolf-howling-at-the-moon Luna tattoo on his left bicep that he had boasted about on Twitter — with accompanying photo — in January, when the price of the coin hit $100. “I’m officially a Lunatic,” he had said then, referring to the name Luna investors called themselves.
Over the past year, Novogratz had been one of Luna’s biggest boosters. He had gone on Twitter to talk up the coin at least 30 times, saying it was “a horse to ride.” At one point, he said he had sold some of his Luna to buy his wife a Korean Pomeranian pooch, posting a photo of the tiny dog on Twitter — and suggesting that other investors also take some gains.
“To be clear, I think the $Terra ecosystem that @d0h0k1 is building is one of the most interesting things to follow and invest in globally,” he tweeted on April 21, 2021.
But a little more than a year later, he was offering something of a mea culpa.
You can read the rest of my profile on Institutional Investor here: