Terra’s cataclysmic collapse has left some of the space’s so-called “smart money” investors holding the bag.
The full extent of Terra’s dramatic implosion is unknown, it’s believed that many top venture capital firms lost big. We explore how the crypto industry’s “Lehman moment” could impact the future of the space.
Venture Capital Caught Out
Terra’s collapse has left an unsightly mark on the portfolios of some of crypto’s most respected venture capital firms.
Terra, founded in 2018 by entrepreneurs Daniel Shin and Do Kwon, rose from relative obscurity in the Layer 1 space to become the sixth biggest crypto project by market cap in just a few months. Terra’s dollar-pegged UST stablecoin lured retail investors in with promises of 20% yearly returns via Anchor Protocol, but it also captured the attention of some of the brightest minds in the space at top venture capital firms. Many of these funds allocated to the project by investing in the blockchain’s volatile token, LUNA.
On May 9, Terra’s believers had their conviction tested when UST started to lose its dollar peg due to mass sell-offs. UST and LUNA were designed to work in tandem through a dual token burning mechanism to help UST maintain its peg, but once it was trading below $1, LUNA entered a death spiral. Less than 72 hours later, the price of LUNA had plummeted from over $80 to less than $0.01, effectively killing the project and wiping out more than $27 billion in value.
Galaxy Digital and Pantera Capital were two of the largest firms to back Terra, with both contributing to a $25 million funding round in January 2021. Six months later, they doubled on their investments by contributing to a $150 million Terra ecosystem fund along with other prominent VCs like BlockTower Capital and Delphi Digital.
As early-stage investors, Galaxy and Pantera were able to invest in Terra for cents on the dollar. Although the exact details of Terra’s fundraising have not been released to the public, similar deals often involve backers receiving token allocations at deep discounts with long lockup periods. As tokens unlock, firms often sell a portion of their allocation to recoup their initial costs. However, in the case of Pantera and Galaxy, it’s not clear whether they had been able to lock in any profits before LUNA flatlined.
However, it is clear that both firms maintained a bullish outlook on the Terra ecosystem up until its collapse. Galaxy chief Mike Novogratz was an outspoken Terra advocate, going so far as to get a LUNA-themed tattoo earlier this year as the token touched $100. “I’m officially a Lunatic!!!” he tweeted alongside a photo of his new ink. Novogratz later bragged about his tattoo and described Terra’s plan to establish a Bitcoin reserve fund as “a really interesting experiment” to a captivated audience onstage at Bitcoin 2022. Less than five weeks later, LUNA tokens are now virtually worthless, and Novogratz has been silent on Twitter since May 8.
How much LUNA and UST Galaxy was exposed to is not yet known. The firm shared a press release on May 13 noting that it had seen losses of $300 million in the first quarter of the year, but it didn’t clarify whether LUNA accounted for the losses. Investment research firm BTIG told its clients that fears over significant losses incurred by Galaxy due to LUNA exposure were “clearly unwarranted.” Despite this, Galaxy has seen its stock price plummet more than 31% since the LUNA death spiral began.
Like Novogratz, Pantera CEO Dan Morehead was also wildly outspoken about his belief in Terra. In a CNBC interview on Dec. 29, 2021, Morehead said that he thought Terra would be one of the top-performing crypto ecosystems in 2022 alongside Polkadot. “We think it’s one of the most promising coins for the coming year,” he stated, explaining that he thought LUNA had “plenty of room to grow,” (it had a market capitalization of around $31 billion at the time).
While older investors publicly expressed their positive outlook on Terra, there was no shortage of newer investors lining up for a slice of the action. In February, a $1 billion raise for Terra’s Luna Foundation Guard attracted several more highly-respected funds. Jump Crypto, Three Arrows Capital, and DeFiance Capital all contributed to the raise, purchasing LUNA tokens at an undisclosed discount. It’s almost certain that these late investors paid a higher price for their tokens than those who backed Terra early. When the raise went public, LUNA traded for around $54 and quickly shot up to highs of $91 less than a week later.
Since Terra’s downfall, Three Arrows Capital co-founder Su Zhu has been one of the few VCs to speak out about his fund’s decision to invest in the ecosystem. In a short Twitter thread, Zhu acknowledged that Terra should have moved slower and said that it had been an “incredibly humbling week” to see it fall apart.
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