How a Trash-Talking Crypto Bro Caused a $40 Billion Crash

Speaking in South Korea’s Trash, entrepreneur Dr. Kwon called the cryptocurrency he created in 2018 “my biggest discovery.” In numerous tweets and interviews, he trumpeted the changing potential of the currency, Luna, in the world, bringing together a group of investors and supporters he proudly called “Lunatics”.

Mr. Kwon’s company, Terraform Labs, raises more than $ 200 million from investment companies such as Lightspeed Venture Partners and Galaxy Digital to fund crypto projects built with the currency, although critics questioned its technical basis. Luna’s total value exceeded $ 40 billion, creating a frenzy of excitement among day traders and start-up founders as well as wealthy investors.

Mr. Quo dismissed concerns with criticism: “I don’t argue with the poor.”

But last week, Luna and other currencies that Mr. Kwon developed, TerraUSD, suffered a spectacular collapse. Their meltdown has dominated the rest of the cryptocurrency market, lowering the value of Bitcoin and accelerating a નુકસાન 300 billion loss in value across the crypto economy. This week, the price of Luna remained close to zero, while TerraUSD continued to slide.

The fall of Luna and TeraUSD offers a case study in crypto hype and who holds the bag when it all breaks down. Mr. Kwon’s rise was enabled by reputable financiers who were willing to support highly speculative financial products. Some of these investors sold their Luna and TeraUSD coins early, making significant profits, while retailers are now facing catastrophic losses.

Pantera Capital, a hedge fund that Mr. Kwon’s efforts, after selling about 80 percent of its Luna holdings last year, yielded nearly 100 times the return on its initial investment. Said Paul Veradittakit, an investor in the firm.

Pantera turned $ 1.7 million into about $ 170 million. The recent accident was “unfortunate”, Mr. Said Veradittakit. “Many retail investors have lost money. I’m sure many institutional investors have. “

Mr. Kavanagh did not respond to messages. Most of his other investors declined to comment.

Kathleen Breitman, founder of the crypto platform Tezos, said the rise and fall of Luna and TerraUSD was driven by the irresponsible behavior of organizations supporting Shree. Kwon. “You’ve seen people try to trade in their reputation to make quick money,” she said. Now, she said, “they are trying to comfort people who are watching their life-saving slips. There is no defense for him. “

Mr. Kwon, a 30-year-old Stanford University graduate, founded Terraform Labs in 2018 after working as a software engineer at Microsoft and Apple. (He had a partner, Daniel Shin, who later left the company.) His company claimed that it was creating a “modern financial system” in which users could conduct complex transactions without having to rely on banks or other intermediaries.

Mr. Shin and Mr. Kwon started marketing Luna currency in 2018. In 2020, Terraform began offering TerraUSD, also known as Stablecoin, a type of cryptocurrency designed to serve as a reliable means of exchange. Stablecoins are generally linked to fixed assets such as the US dollar and do not fluctuate in value like other cryptocurrencies. Traders often use Stablecoin to buy and sell other risky assets.

But TerraUSD was also dangerous by the standards of experimental crypto technology. Unlike the popular Stablecoin tether, it was not backed up by cash, treasuries or other conventional assets. Instead, it derives its supposed stability from algorithms that combine its value with Luna. Mr. In the obscure world of decentralized finance or DeFi, Quan uses two related coins as a basis for a more elaborate lending and financing project.

From the beginning, crypto experts suspected that the algorithm Mr. Kwon’s twin cryptocurrencies are stable. In 2018, a white paper outlining the Stablecoin proposal reached the desk of Cyrus UNC, an analyst at crypto investment firm Scaler Capital. Mr. UNCE sent a note to its boss, explaining that the project could enter a “death spiral” in which a reduction in Luna’s price would bring down Stablecoin with it.

“I was like, ‘This is crazy,'” he said in an interview. “Obviously this doesn’t work.”

As Luna was captured, the helplessness grew louder and louder. Charles Cascarilla, founder of Paxos, a blockchain company that offers competitive stablecoins, expressed doubts about Luna’s underlying technology in an interview last year. (Mr Kavanagh retorted on Twitter: “WTF is Poxos. “) Hedge fund manager Kevin Zhou repeatedly predicted that the two currencies would break.

But any investment venture came to fund a project built on Luna’s underlying technology, such as services for exchanging cryptocurrencies for the public or TerraUSD borrowing and lending services. Investors, including Arrington Capital and Coinbase Ventures, invested more than $ 200 million between 2018 and 2021, according to the fund-tracking pitchbook.

In April, the price of Luna rose from a low of $ 1 in early 2021 to a high of $ 116, citing a generation of crypto millionaires. A community of retailers formed around the coin, Shri. Kwon as a cult hero. Mike Novogratz, chief executive of Galaxy Digital, which invests in Terraform Labs, expressed his support for the acquisition. Luna themed tattoos,

Mr. Kwon, who works outside of South Korea and Singapore, is happy on social media. In April, he announced that he had given his name Newborn daughter LunaTweeting, “My favorite creation is named after my greatest discovery.”

Brad Nickel, who hosts the cryptocurrency podcast “Mission: Definition”, said, “It’s a cult of personality – bombastic, arrogant, du quin attitude – that sucks people up.”

Earlier this year, a nonprofit that Mr. Kwon also operates a નું 1 billion luna sale to investors, using the proceeds to buy Bitcoin stock – a reserve designed to keep the price of TerraUSD stable if the market ever falls.

At the same time, some venture capital firms that supported Mr. Kwon began to worry. Hack VC, a crypto-focused venture firm, sold its Luna tokens in December because “we felt the market was for a broader pullback,” said Ed Roman, the firm’s managing director.

Martin Bowman, founder of the Hong Kong-based venture firm CMCC Global, said his company sold its holdings in March for about $ 100 per coin. “We’ve got growing concerns,” he said in an email, “from the tech side as well as the regulatory side.” (CMCC and Hack VC declined to comment on their profits.)

But Mr. Quo publicly hinted at the possibility of crypto collapse Joke That some crypto ventures could eventually go down. He said he found it “fun” to see companies crumble.

Last week, falling crypto prices and challenging economic trends caused panic in the markets. Luna’s price dropped to almost zero. As predicted by analysts, the price of TeraUSD fell from its $ 1 peg to 11 cents this week. In a few days, the crypto ecosystem Mr. Kwon was built it was essentially useless.

“I’m sorry for the inconvenience caused to all of you by my discovery,” he said Tweeted Last week.

Some Mr. Kwon’s big investors have lost money. Changpeng Zhao, chief executive of Crypto Exchange Binance, which invested in Terraform Labs, Said His firm bought Luna for 3 million, rising to a peak of $ 1.6 billion. But Binance never sold his tokens. Its Luna holdings are currently valued at less than 3,000.

That loss is still just a drop in the bucket for a company as big as Binance, whose US arm is valued at $ 4.5 billion.

Mr. Said Nickel. “They would have thought they could cash in on the back of retail.”

Many of the pains of collapse are experienced by regular traders. On the Reddit Forum for Luna Evangelists, users shared a list of suicidal hotlines, as those who dumped their savings into Luna or TerraUSD expressed frustration.

The tragedy has also devastated enthusiasts who were building start-ups using the crypto infrastructure developed by Mr. Kwon.

Neil Somani, 24, quit his job as a quantitative researcher at Citadel, a hedge fund, in February to work on a project that would link the blockchain under Luna to another crypto system, Ethereum.

In April, Mr. Somani joined Terra Hacker House, a month-long program at the Chicago office sponsored by Terraform Labs and its investors. Kwon’s technology. In a few weeks, Mr. Somani lined up $ 10 million for venture funding commitments valued at પ્રોજેક્ટ 65 million for his project, Terranova. He was close to hiring three employees, he said, and 40 customers were excited by the idea.

After Luna and TeraUSD tumbled, Mr. Somani and his fellow hackers initially thought that Mr. Kwon and his partners can turn things around. But by last Tuesday, Mr. Somani realized that it was over, and was relieved that he had not yet accepted the funds. He lost about $ 20,000 to Luna, he said, which didn’t bother him because he made money on other risky stocks and crypto bets.

In the last week, the desk of the hacker house has become empty. A telegram group called Rebuilding Terra, with about 200 members, is actively discussing projects and how to save funds.

Mr. Somani is a monk. “For those of us who are crypto builders, the festival and famine mentality really comes naturally, and that’s probably what draws us to the community,” he said.

On Thursday, it plans to pitch its existing obsolete technique on Hacker House Demo Day. Most other groups have dropped out of the program, he said, so he expects less competition for the $ 50,000 first place prize.

“It’s in US dollars,” he said. “I asked.”

Kirsten Noyes Contributed to research.

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