Terra: a cycle has ended for Novogratz

Mike Novogratz was a big supporter of the Terra project, to the extent that his Galaxy Digital had invested in it. 

Mike Novogratz believed strongly in the Terra project

In January, he even displayed a very explicit tattoo on his personal Twitter profile, saying “I’m officially a Lunatic”.

I’m officially a Lunatic!!! Thanks @stablekwon And thank you my friends at Smith Street Tattoos. pic.twitter.com/2wfc00loDs

— Mike Novogratz (@novogratz) January 5, 2022

Yesterday, however, he published a long account of the incident addressed to Galaxy Digital‘s investors. 

After much thought, it’s time to talk about last week and, more importantly, the weeks ahead. https://t.co/m2pnzpe9Lu

— Mike Novogratz (@novogratz) May 18, 2022

Novogratz pointed out that the implosion of LUNA and UST burned through $40 billion in market capitalization in a matter of days, and both large and small investors saw their profits and part of their assets vanish. 

He warned that what has happened is not a bottom that can be immediately restarted from, because this collapse would erode confidence in cryptocurrencies and decentralized finance. 

This is why he speculates that a restructuring period is needed before starting with a new cycle of redemption, consolidation and renewed confidence. 

He wrote: 

“Crypto moves in cycles, and we just witnessed a big one”. 

In reality, the fact that a cycle had ended was assumed as early as January, seeing that in the past the year after Bitcoin’s halving there has always been a strong bull run, shortly followed by a full-blown bear market the year after. But LUNA peaked at the beginning of April this year, so there were still those who hadn’t noticed. 

Novogratz’s view on what happened

Novogratz recalled that the strong growth in the use of UST had been generated by an 18% annual return offered on Anchor, eventually overwhelming the other uses of the Terra blockchain. 

These numbers were unsustainable, and combined with the pressure that generated declines on its reserve assets (first and foremost LUNA itself) triggered a kind of “run on the bank”. 

The reserves at that point were no longer sufficient to prevent UST’s collapse.

It is no coincidence that the problems started at the beginning of April, as soon as LUNA reached its highest point and started to fall from there. 

Novogratz also took the opportunity to point out that less experienced market participants would be better off only risking funds that they feel comfortable possibly losing, and that people should only allocate between 1% and 5% of their resources to cryptocurrencies. 

He concluded by saying that he is still a staunch supporter of the crypto sector, but it will take time for these wounds to heal. 

It is worth mentioning that LUNA’s parabola over the past few months has probably clouded the reasoning not only of the less experienced, but also of the industry’s great professionals like Novogratz, since that annual return of over 18% on a stablecoin seemed objectively unsustainable over the long term.

If there is one mistake that definitely can be stated, it is the underestimation of risks that were actually pretty obvious.