In January, Mike Novogratz strolled into a tattoo parlor in New York.
The 57-year-old billionaire crypto investor and former partner at Goldman Sachs (GS) got the top of his left arm inked with a wolf howling at the moon.
Next to the wolf, there’s a banner with one word in all caps – “LUNA.”
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Novogratz shows off his LUNA tattoo. Source: @novogratz on Twitter
It’s a reference to a cryptocurrency called Terra (LUNA).
Novogratz had bought hundreds of millions of dollars’ worth of LUNA at his crypto investment firm, Galaxy Digital.
Terra is a blockchain that uses “stablecoins” for payments. These coins are cryptos whose values are tied to those of fiat currencies. That helps merchants and customers because it cuts out the volatility we associate with most cryptocurrencies.
As Terra grew its user base, Luna soared more than 1,000% in six months.
But in May… just a few months after Novogratz tweeted out the photo of his new tattoo… Terra’s main stablecoin, TerraUSD (UST), suddenly became unstable.
It slipped in value versus the dollar. Investors panicked. And LUNA crashed to zero.
Steep losses across the board in crypto slashed his net worth from $8.5 billion to $6.8 billion today.
If anyone should be tempted to throw in the towel on crypto, it’s a guy with a LUNA tattoo who just lost almost $2 billion to the crash.
But Novogratz is a veteran fund manager with thick skin. And he didn’t build a personal net worth that’s still nearly $7 billion by being a dummy.
Despite his ill-fated LUNA investment… and the punishing losses that ensued for Galaxy Digital… he sees the crypto industry continuing to grow.
And his painful experience can teach you three key lessons to help better take advantage of the next wave of crypto profits.
We don’t know how exposed Galaxy Digital was to LUNA. But judging by Novogratz’s tattoo… his loss of personal net worth… and his bullish comments in the media… it was significant.
In a recent interview with Forbes, he admitted having too much exposure to LUNA when it crashed.
LUNA was also an open recommendation in the model portfolio at Teeka’s Palm Beach Crypto Income advisory when the token went under.
Fortunately, Teeka has a strict risk management strategy for his subscribers.
He advises they put no more than 5% to 10% of their investable wealth into the crypto recommendations he makes in the model portfolio.
Altcoins are coins other than bitcoin (BTC). For these, he recommends you invest no more than $200 to $400 in each if you’re a smaller investor… and $500 to $1,000 in each if you’re a larger investor.
And although Teeka had issued a profit alert about a month before the crash… with LUNA up 76,034% in two years in the model portfolio… he recommended subscribers sell only a fraction of their positions.
As he put it to them after the fall…
On our end, our biggest mistake was not taking more profits on LUNA along the way. When the prospects of a project remain bright, it’s hard to sell, even if you’re up on the investment.
But we should’ve better protected the gains we made in LUNA by taking more profits during its run up.
The crash was tough for subscribers who’d invested in LUNA on Teeka’s recommendation.
But those who followed his advice… and kept their position sizes small… it minimally affected their overall wealth.
What matters most as an investor isn’t what assets you buy. It’s what you pay to own them.
The lower the price, the less you can lose. As Novogratz told New York Magazine…
It’s important for people to understand that the investments they make change in character; they change in valuation. Buying Tesla (TSLA) when it was $100 is a far different bet than buying it when it’s at $1,300.
The same goes for crypto…
If you were happy buying bitcoin last fall at $60,000 and up… you should be even happier buying it today at about $20,000.
That’s a steep discount. It’s a bargain if you believe bitcoin will continue its path toward mainstream adoption.
Novogratz blames forced liquidations for much of the heavy selling pressure in crypto lately.
Investors just dumped more than 550,000 bitcoin below $20,000 a coin.
Something similar happened with Ethereum (ETH).
That’s not because people have changed their minds about crypto. It’s because they borrowed too much and had no choice but to sell.
In the crypto market, bitcoin and Ethereum are the most common collateral.
Much of this lending happens on DeFi (decentralized finance) apps. These apps often automatically liquidate positions that don’t meet margin calls. This brings a cascade of selling pressure to the market… and prices crash.
Here’s Teeka with more…
Using bitcoin and Ethereum as collateral is great for the adoption and staying power of these tokens. It shows people have faith in them.
But if investors borrow too much against even the best collateral in the world… and buy subprime assets… it opens the door to massive margin call selling. That can cause big drops in prices, like we saw last weekend.
That’s actually good news for long-term investors. Because it means we’re facing an overleveraged greed problem, not a problem with the underlying protocols or use cases of bitcoin or Ethereum.
In other words, this sell-off is temporary.
That’s based on what happened with stocks during the 2008 crash.
We got sharp rallies… then more financial firm blow-ups.
That doesn’t mean you should dump your crypto and head for the hills. Instead, you should view this as an opportunity. I’ll let Teeka have the last word on that…
Don’t let the price action scare you into panic selling your premier assets like BTC and ETH. I’ve been using the recent lows to buy more of both. And I have buy orders stacked up beneath current market prices.
If you’re getting swayed, turn off your computer. Go outside and enjoy your summer. If you’ve followed my strategy of investing small amounts you can afford to lose, you’ll be able to weather this storm.
We’ve seen violent sell-offs like this before. And just like those times, bitcoin, Ethereum, and the broad crypto market will recover to new all-time highs.
Until tomorrow,
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Chris Lowe
June 29, 2022