The head of one of Wall Street´s most prominent crypto-focused investment funds, Mike Novogratz, finally commented on the recent debacle of the algorithmic stablecoin UST and Terra’s native token LUNA – the latter being one of his most touted investments in the past.

In a letter that addressed both the shareholders of Galaxy Digital – the company he presides – and the crypto community as a whole, Novogratz reflected on the instances that led to the collapse of the project while he also commented on the outlook for the crypto market.

In regards to the situation with LUNA and UST, Novogratz stated that this incident has “dented confidence in crypto and DeFi”. “Whenever money is lost in such an abrupt fashion, people want answers”, he added.

Novogratz emphasized that the macro backdrop has deteriorated tremendously in 2022 and this has put the valuation of top crypto assets under pressure while the riskiest tokens – also referred to as altcoins – experienced up to 80% drops from their all-time highs as the market has adopted a risk-off attitude.

The combination of this relatively hostile environment and the tremendous growth that UST’s market capitalization experienced amid the elevated interest rates offered by DeFi solutions such as the Anchor Protocol led to a “run on the bank” once the value of reserve assets started to drop precipitously. Before the incident, this protocol paid 18% per year to depositors of the Terra stablecoin.

Novogratz implicitly said that his fund had been taking profits on its LUNA investment before the collapse of the token. The fund started to incorporate LUNA into its balance sheet in the fourth quarter of 2020 after the research team heard about the success of the Chai app – a Terra-based DeFi app that reportedly had over 1.8 million users in South Korea.

The investor’s support for LUNA is well documented on social media. In a tweet published on 4 January this year, Novogratz uploaded a picture of a permanent tattoo on his left arm that depicted a wolf and the word “LUNA”. He accompanied the picture with the phrase “I’m officially a Lunatic!!”.

Novogratz: Investors Should Not Expect a “V-Shaped” Recovery

In regards to what the future looks like for the ecosystem, Novogratz emphasized that “crypto is not going away”.

However, he warned investors that they should not expect a V-shaped recovery as the Federal Reserve will have its hands tied until inflation in the United States falls. “So, liquidity is important”, the top executive of the asset management firm said. “Being realistic is important”, he added.

“It will take restructuring, a redemption cycle, consolidation, and renewed confidence in crypto. Crypto moves in cycles, and we just witnessed a big one”, the letter concluded.

Funds with Exposure to the Crypto Realm Will Likely Struggle This Year

valuation of cryptos
Source: CoinMarketCap

Investment funds that focus on digital assets will have a tough time this year considering that the valuation of the entire ecosystem has dropped precipitously amid a strong shift in macroeconomic conditions.

According to data from CoinMarketCap, the market capitalization of cryptocurrencies as a whole has declined nearly 44% in 2022 to $1.24 trillion.

That said, some tokens have experienced much sharper losses and this would make the performance of different investment funds relatively asymmetrical depending on the specific assets that comprise their portfolios.

Funds have been vocal when it comes to disclosing their exposure to LUNA. It is still unclear if Galaxy Digital’s LUNA position was fully liquidated before the collapse or if the company was still holding on to a portion of its initial position.

Galaxy published its financial results covering the first quarter of the 2022 fiscal year on 9 May. This means that investors may have to wait until the next quarterly report comes out to find out if the fund’s losses expanded beyond expectations amid the collapse of Terra’s native token.

Cryptoassets are a highly volatile unregulated investment product. No UK or EU investor protection.