What To Learn From The Flash Crash Of Terra Ust, Luna


The flash-like crash of Terra UST and LUNA reinforces a few core tenets of investing especially in the crypto market, as per Michael Novogratz, founder of crypto merchant bank Galaxy Inc.

On May 18, in a letter to shareholders, friends, partners, and the crypto community, Novogratz acknowledged that Terra UST and LUNA ” was a big idea that failed.”

Novogratz said, “There is no good news in what happened in markets or to the Terra ecosystem. In Luna and UST alone, $40 billion 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,” he added.

Novogratz explains that 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.

Further, Novogratz went on to talk about the global backdrops. He said central banks are in the early stages of unwinding a massive liquidity bubble – fueled by unprecedented fiscal and monetary policy injections into economics across the globe, including in the US – that had propped up all risk assets.

He added that 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. Many assets had meteoric rises in the period since Covid have suffered meaningful and correlated corrections.

According to Novogratz this macro backdrop put pressure on LUNA and the reserves held back to UST.

“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,” he explained.

Following this, the Galaxy founder highlighted four core tenets of investing in crypto after the flash crash of LUNA/UST. These are:

– keep a diversified portfolio,

– take profits along the way.

– have a risk management framework, and

– understand that all investments happen in a macro framework.

“Galaxy did all of these with regards to our investment in LUNA,” the founder said.

Talking about the future of crypto, Novogratz said, “Crypto is not going away. The amount of human capital moving into space isn’t slowing down. The focus on building decentralised infrastructure that allows value and ownership to follow as freely as information on the internet, isn’t slowing down. The GDP of the metaverse is heading one way. Our community is resilient, has a shared belief in a new way of doing things, and the assurance that this is the very early innings.”

He also added that 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. Adding he said, “crypto moves in cycles, and we just witnessed a big one.”

As per CoinMarketCap’s real-time performance, the global crypto market cap is $1.31 trillion, a 1.58% increase over the last day. Also, the upside was recorded in the crypto volumes to $67.63 billion in the last 24 hours surging by 17.78%.

Meanwhile, the total volume in DeFi is currently $8.40 billion up by 12.41% of the total crypto market 24-hour volume. The volume of all stable coins is now $58.81B, which is 86.96% of the total crypto market’s 24-hour volume.

Bitcoin was near $30,421.54 up over 1%. Bitcoin’s dominance is currently 44.29%, a decrease of 0.27% over the day. Counterpart Ether traded at $2,069.08 higher by 2%.

In the last seven days, both BTC and ETH have recovered from the first two weeks’ crash of May and surged by more than 2%.

Terra UST also climbed nearly 13% and traded around 6 cents. However, Terra LUNA slipped over 12% and was around $0.0001819 currently.

Terra UST lost its peg and has been struggling since then. Its weekly decline is by around 50% now. LUNA has dived 100% from its all-time highs of April.


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