Michael Novogratz, the billionaire CEO of Galaxy Digital, was a consistent booster of cryptocurrency during the bull market—and though he remains very supportive of the space, the self-proclaimed “Forrest Gump of Bitcoin” is increasingly acknowledging some missteps.
“I was darn wrong because I didn’t realize the magnitude of the leverage in the system,” Novogratz said at the Bloomberg Crypto Summit Tuesday.
“What I don’t think people expected was the magnitude of losses that would show up in professional institutions’ balance sheets and that caused the daisy chain of events. It turned into a full-fledged credit crisis with complete liquidation and huge damage on confidence in the space,” Novogratz said.
Novogratz is referring to the latest cryptocurrency market downturn, which began in May after the Terra stablecoin fell far below its $1 peg. The domino effect that set off across the industry exposed just how connected many entities were in the cryptocurrency space.
Before the crash, Novogratz was a big promoter of Terra’s so-called algorithmic stablecoin TerraUSD and its cryptocurrency Luna before it fell apart. He called himself a “Lunatic,” as did many other supporters of Luna, and even got a tattoo honoring the cryptocurrency.
Weeks after Terra’s collapse, the entities that were both exposed to it and overleveraged became clear. The largest were the now-bankrupt cryptocurrency lender Celsius Network and the failed hedge fund Three Arrows Capital, currently undergoing a court-ordered liquidation.
Novogratz said the situation was like a crypto version of the failure of investment bank Lehman Brothers and the related mortgage crisis of 2008. He also blamed regulators for not protecting investors. “I don’t know what the SEC should have done, or could have done or might have done, but they didn’t do a lot to protect the retail investors,” he said. The failure of Lehman imperiled the entire financial system, though, and the Terra, Celsius and 3AC failures appear as of now to be limited, with Bitcoin recovering to levels above $20,000 after a dramatic fall.
Novogratz has previously called for regulation in the space, even before 2022’s crypto winter. In June last year, he said that “We have a lot of non-bank banks in the space that if I was the head of the SEC, I would regulate. They take in deposits, they have huge leverage, they have an asset-liability mismatch.”
Looking back, Novogratz said the “lesson learned” is that industry and retail investors had “very, very little concept of risk management.”
Even his doctor, for example, lost money in the crypto winter, Novogratz said. “My heart doctor, I saw just Friday, lost $1 million in Celsius … and was really upset. Now I’m worrying about his heart instead of him worrying about my heart. No one reads the fine print—he assumed it was like a bank account and I was like, ‘Oh, dude.’ So the disclosure amongst taking retail deposits should be much, much higher.”
Despite the chaos, Novogratz said the “worst is over” and still thinks Bitcoin will hit $500,000 in the next five years or so.
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