The Flash Crash of LUNA and UST Reinforces Four Tenets of Crypto Investing
In the letter, Mr. Novogratz pointed out that the downward pressure on LUNA’s reserve assets coupled with UST withdrawals triggered a stress scenario similar to what is traditionally known as a ‘run on the bank.’ According to his analysis, the flash crash of LUNA and UST reinforced the following core tenets of crypto investing:
- Keeping a diversified portfolio
- Taking profits along the way
- Having a risk management framework
- Understanding that all investments happen in a macro framework
Regarding the latter, Mr. Novogratz explained that the ongoing ‘global macro backdrop has been brutal for all risk assets this year.’ He highlighted that the pullback experienced in the stock markets had found its way into crypto, thus affecting Bitcoin and altcoins, further compounding the situation that faced LUNA and UST.
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.
Central bankers are in the early stages of unwinding a massive liquidity bubble – fueled by unprecedented fiscal and monetary policy injections into economies across the globe, including in the US – that had propped up all risk assets, including crypto.
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 that had meteoric rises in the period since Covid have suffered meaningful and correlated corrections. This macro backdrop put pressure on Luna and the reserves held to back UST.
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