Mike Novogratz Speaks: Terra’s UST Was “A Big Idea That Failed”

After 10 long days, Mike Novogratz broke his silence on the Terra/ Luna situation. Considering that he was one of the protocol’s main proponents and even got a Luna tattoo, the community’s interest in Novogratz’s opinion is justified. “My tattoo will be a constant reminder that venture investing requires humility,” Galaxy Digital’s CEO said in a statement. 

In Bloomberg’s article about Novogratz‘s disappearance from Twitter since the Terra/ Luna collapse, the publication told the story about the investor’s last public appearance:

“On May 9, after TerraUSD lost its peg to the dollar, Novogratz said on Galaxy’s earning call that he expected the cryptocurrency market to be “volatile and difficult” and acknowledged that so called algorithmic stablecoins were set for a “really big test.”

Sadly for Novogratz and thousand of retail investors, algorithmic stablecoins failed that test. The USD collapse was one for the books, and Novogratz tries to make sense of it all in his letter. At the same time, though, he tries to distance himself and Galaxy from any responsibility in the situation. “Last week we provided a public update on our liquidity, capital, and operating performance through May 11, including confirmation that Galaxy’s Treasury does not utilize algorithmic stable coins,” he claimed.

Related Reading | Terraform Labs’ Legal Team Quits After UST Crash – Another Blow To Kwon

In general, Novogratz blames the whole situation on the unstable macroeconomic environment we’re in. He never acknowledges any wrongdoing on his or Galaxy’s part. “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,” Novogratz wrote. 

What Did Mike Novogratz Say Exactly?

The Galaxy Digital CEO starts by describing the situation, “$40bn of market value was destroyed in a very short amount of time.” And to the possible consequences, “the collapse dented confidence in crypto and DeFi.” Quickly, Novogratz shifts to claiming that the Terra protocol was open-source and everyone had access to the code and could do their due diligence. 

“What’s important to understand about Terra/Luna is that the mechanism that was intended to keep UST stable was public, transparent, and hotly debated in many forums. UST was an attempt at creating an algorithmic stable coin that would live in a digital world. It was a big idea that failed.” 

All of this is true, but, does it justify the promotion of a product that hurt so many people? According to Novogratz, Galaxy invested in Luna because of solid fundamentals.“We understood that the Chai app, which was built on Terra, had more than 1.8m users and was a top 5 finance app in South Korea,” he claims. “Terra, the underlying blockchain, had hundreds of projects being built on it and a world class list of investors.“

Then, Novogratz blames it all on the macroeconomic environment:

“To start, the global macro backdrop has been brutal for all risk assets this year. Growth stocks with negative cash flow are down as much as 50-70% this year. Crypto has been under pressure, with core assets like BTC and ETH down about 58% each from all-time highs– and altcoins are down an average of 80% from all-time highs.”

And, to tie it all together with a ribbon on top, he throws Anchor under the bus: 

“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.”

LUNA price chart on FTX | Source: LUNA/USD on TradingView.com

Novogratz’s Advice To Young Entrepreneurs

Before getting into Novogratz’s advice, let’s analyze this phrase. “The “free money forever” ethos of the last decade has left us staring in the face of the biggest bout of inflation since the 70s.” That’s a great piece of writing, because it doesn’t accuse any person or institution, but shifts the blame somewhere else. What did Novogratz mean with the “free money forever” ethos of the last decade”? Is it something you can relate to?

Related Reading | South Korean Politician Demands Parliament To Investigate TerraUSD’s Collapse

In any case, Novogratz wants to use this situation to reinforce “a few core tenets of investing (especially crypto investing)” 

1.  Keep a diversified portfolio

2. Take profits along the way

3. Have a risk management framework

4. Understand that all investments happen in a macro framework.

To close it off, Novogratz thinks that “crypto is not going away” but pretty much declares the start of the bear 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. Crypto moves in cycles, and we just witnessed a big one.”

Featured Image by Andrew Russian on Unsplash  | Charts by TradingView