A crypto CEO’s mea culpa: Head of TSX-listed Galaxy Digital apologizes after US$40-billion collapse of two currencies – The Globe and Mail


Mike Novogratz, founder and chief executive officer of Galaxy Digital Holdings Ltd., at the Bitcoin Conference 2022 in Miami Beach, Fla, on April 6.MARCO BELLO/Reuters

The chief executive of Galaxy Digital Holdings Ltd., a leading cryptocurrency company listed on the Toronto Stock Exchange, has issued a mea culpa for his role in the collapse of two popular currencies – and warned that the sector is likely to struggle in the near future.

Risky assets in general have fared poorly over the past six months because of rising interest rates, with the tech-heavy Nasdaq Composite Index tumbling 29 per cent, and the prices of bitcoin and ether have dropped about 60 per cent each. But the prices of two popular cryptocurrencies, Luna and TerraUSD, have crashed even more violently in the past few weeks, wiping out US$40-billion.

Mike Novogratz, the outspoken CEO of Galaxy Digital, was one of the top promoters of both assets, and had gone so far as to get a tattoo of a wolf howling at the moon with the tag “Luna” on his arm in January. He tweeted the pic and added the line “I’m officially a Lunatic!!!” in a show of total belief in their future.

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Yet after the value of Luna collapsed last week, he seemed to disappear – a rare silence for someone who is normally a hard core defender of the crypto sector. On Wednesday, Mr. Novogratz re-emerged with a public letter that acknowledged his poor judgment in backing Luna and TerraUSD so forcefully. “It was a big idea that failed,” he wrote.

Galaxy Digital has already disclosed it is facing a US$300-million loss this quarter because of the crypto sector’s crash, and Galaxy’s shares have declined by 80 per cent since November. But in his letter, Mr. Novogratz stressed that Galaxy had taken some profits off the table while Luna was on its meteoric rise.

Many unsophisticated investors, however, did not. “Reading the stories of retail investors who lost their savings in one investment is heart-wrenching,” he wrote.

Mr. Novogratz also cautioned about the near-term future for the crypto sector. While he believes in the long run value of cryptocurrencies, he stressed that they are risky assets that suffer the most when interest rates are rising – and he expects rates to rise for quite some time.

“At a high level, it’s important to understand that volatility is likely to continue, and the macro situation is going to remain challenging,” he wrote. “There is no cavalry coming to drive a V-shaped recovery. The Fed can’t ‘save’ the market until inflation falls.”

On Wednesday, inflation hit a 31-year high in Canada, while prices are rising at the fastest pace in 40 years in the United States and the United Kingdom. The Federal Reserve recently hiked its benchmark interest rate by 0.5 percentage points, and is expected to do that again at both of its next meetings in June and July. The last time rate hikes came so quickly was in 2000, the year of the dot-com crash.

The recent collapse in prices of risky assets has completely reversed the fortunes of the crypto sector, which exploded over the past two years. Coinbase Global Inc., a popular crypto trading platform, went public in 2021 with a US$86-billion valuation after its first day of trading, but it has since lost 82 per cent of its value.

Bitcoin and ether remain the two most popular cryptocurrencies, but Luna gained tremendous popularity in recent months, and it was inextricably tied to TerraUSD. TerraUSD is what is known as a stablecoin, used as an intermediary for transferring in and out of cryptocurrencies without having to convert into U.S. dollars. But trouble arose because TerraUSD wasn’t actually pegged to, or backed by, the greenback.

Typically, stablecoins have U.S. dollar reserves in a bank account, but TerraUSD was backed by Luna and a fund of other cryptocurrencies, including bitcoin. When the prices of these cryptocurrencies dropped, the bottom fell out.

“The downward pressure on reserve assets coupled with [TerraUSD] withdrawals, triggered a stress scenario akin to a ‘run on the bank,’” Mr. Novogratz wrote. “The reserves weren’t enough to prevent TerraUSD’s collapse.”

The total value of money invested in crypto assets globally hit US$3.2-trillion last November, according to the FT Wilshire Digital Asset Index, but has plummeted 59 per cent to US$1.3-trillion over the past six months.

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