“[We’re] going through what feels a bit like a long-term capital management moment in crypto,” the founder and CEO of investment management firm Galaxy Digital said in an interview.
LTCM nearly collapsed in 1998 and was set to expose Wall Street’s largest banks to over $1 trillion in default risks. The highly leveraged firm received a $3.6 billion bailout arranged by the Federal Reserve, with the central bank rounding up 14 banks and brokerage firms to invest in the company to prevent a blowout from triggering a potential global financial crisis.
[“When] began to relax, there were repercussions everywhere. And you know, we’re seeing that in the crypto space right now with both Celsius” and the implosion of the Terra Luna ecosystem, he said.
Crypto lender Celsius Network froze withdrawals, trades and transfers between accounts over the weekend after crypto prices plunged, with bitcoin shedding more than 20%. In May, the TerraUSD algorithmic stablecoin lost its peg to the US dollar which extended to its sister token Luna. The collapse of TerraUSD prompted the company behind it to split its blockchain into two new parts that would issue new native tokens.
“That is causing a lot of damage throughout the system. That is causing accelerated deleveraging,” Novogratz said.
The crypto market has now fallen below $1 trillion in value for the first time since early 2021. Bitcoin is down more than 50% this year. On Tuesday, it was down 2.5% at $22,651.
“We’ve hit levels that I think should be near the bottom: $20,000 in bitcoin, $1,000 in ethereum,” he said. “There’s been a lot of capitulation and fear, so it’s generally not a good area to sell. It doesn’t mean we can’t go lower. I think the macro environment is still pretty challenging here. But there’s been a lot of damage done. .”
Other so-called risky assets, such as stocks, have been hit hard as the Federal Reserve rapidly raises interest rates to rein in runaway inflation. The S&P 500 closed Monday in a bear market. Investors were now considering that the Fed could raise interest rates by 75 basis points on Wednesday after last week’s searing inflation reading of 8.6% for May.
“Bitcoin will pull the markets out of this Fed tightening. The moment the Fed shudders, the moment [Fed Chair Jerome] Powell pauses because the economy is really starting to pick up, you will see Bitcoin explode to the north,” Novogratz said. “As long as the Fed is aggressive, it’s hard for any risky asset to do really well.”