How a $40 billion crash was caused by a cryptocurrency founder who talked trash.
A South Korean businessman named Do Kwon made a lot of noise about the cryptocurrencies Luna and TerraUSD. Some traders have lost a lot of money because of their failures, but not the firms that cashed out early.
Do Kwon, a South Korean businessman who talks trash, said that the cryptocurrency he made in 2018 was “my greatest invention.” In many tweets and interviews, he talked about how the Luna currency could change the world. He called his investors and supporters “Lunatics” to show how proud he was of them.
Mr. Kwon’s company, Terraform Labs, raised more than $200 million from investment firms like Lightspeed Venture Partners and Galaxy Digital to fund crypto projects built with the currency, even though critics questioned its technological foundations. Luna’s total value went up to more than $40 billion, creating a frenzy of excitement that drew in day traders, people who started new businesses, and rich investors.
Mr. Kwon laughed off worries by saying, “I don’t argue with the poor.”
But Luna and TerraUSD, another currency that Mr. Kwon made, both crashed spectacularly last week. Their crashes had a domino effect on the rest of the cryptocurrency market, sending the price of Bitcoin through the floor and speeding up the $300 billion loss of value in the crypto economy as a whole. This week, the price of Luna stayed close to zero, and the price of TerraUSD kept going down.
The crash of Luna and TerraUSD is a good example of the hype around cryptocurrencies and who is left holding the bag when it all falls apart. Respected financiers who were willing to back highly risky financial products helped Mr. Kwon rise to power. Some of these investors sold their Luna and TerraUSD coins early and made a lot of money, while small traders now have to deal with huge losses.
Paul Veradittakit, an investor at the firm, said that Pantera Capital, which put money into Mr. Kwon’s work, made about 100 times its initial investment by selling about 80 percent of its Luna shares over the past year.
Pantera made about $170 million from $1.7 million. Mr. Veradittakit said that the recent crash was “sad.” “Many people who invest their own money have lost money. I’m sure a lot of big investors have as well.”
Mr. Kwon did not respond to messages. The majority of his other investors didn’t want to say anything.
Kathleen Breitman, one of the people who started the cryptocurrency platform Tezos, said that the rise and fall of Luna and TerraUSD were caused by the institutions that backed Mr. Kwon’s bad decisions. She said, “You’ve seen a lot of people try to use their good names to make money quickly.” Now, she said, “They’re trying to comfort people whose life savings are being taken away from them. There’s no way to explain that.”
After working as a software engineer at Microsoft and Apple, Mr. Kwon, who is 30 years old and graduated from Stanford University, started Terraform Labs in 2018. (He worked with Daniel Shin, who left the company later.) His company said it was making a “modern financial system” that would let people do complicated deals without banks or other middlemen.
In 2018, Mr. Shin and Mr. Kwon started selling the Luna currency. Terraform started giving out TerraUSD in 2020. TerraUSD is a stablecoin, which is a type of cryptocurrency made to be a reliable way to exchange money. Stablecoins are usually tied to a stable asset like the U.S. dollar, and their value shouldn’t change as much as other cryptocurrencies. Traders often buy and sell other, more risky assets with stablecoins.
But even for crypto technology that was still being tested, TerraUSD was risky. It was not backed by cash, government bonds, or other traditional assets like the popular stablecoin Tether. Instead, it was supposed to be stable because of algorithms that connected its value to Luna. In the murky world of decentralized finance, or DeFi, Mr. Kwon used the two related coins as the basis for more complicated borrowing and lending projects.
Crypto experts were skeptical from the start that Mr. Kwon’s twin cryptocurrencies could be kept stable by an algorithm. In 2018, an analyst at the crypto investment firm Scalar Capital named Cyrus Younessi got a white paper about the stablecoin proposal. This paper explained how the stablecoin would work. Mr. Younessi sent a note to his boss explaining that the project could go into a “death spiral” in which a drop in the price of Luna would also drop the price of the stablecoin.
In an interview, he said, “I was like, ‘This is crazy.'” “It’s clear that this doesn’t work.”
As Luna became more popular, the doubters got louder. In an interview last year, Charles Cascarilla, one of the founders of Paxos, a blockchain company that offers a competing stablecoin, cast doubt on the technology behind Luna. (Mr. Kwon’s answer was to tease him on Twitter by asking, “Wtf is Paxos?”) Kevin Zhou, who runs a hedge fund, said over and over that the two currencies would fall.
Even so, venture capital came pouring in to fund projects based on Luna’s technology, such as services that let people exchange cryptocurrencies or borrow and lend TerraUSD. PitchBook, which keeps track of funding, says that investors like Arrington Capital and Coinbase Ventures put in more than $200 million between 2018 and 2021.
In early 2021, the price of Luna was less than $1. In April, it reached a high of $116, making a lot of people crypto millionaires. A group of retailers who sold the coin got together and called Mr. Kwon a cult hero. Mike Novogratz is the CEO of Galaxy Digital, which put money into Terraform Labs. To show his support, he got a tattoo of the moon Luna.
Mr. Kwon, who runs his business from South Korea and Singapore, bragged about it on social media. In April, he tweeted that he had named his new daughter Luna.
“The bombastic, cocky Do Kwon attitude is what draws people in,” said Brad Nickel, who hosts the cryptocurrency podcast “Mission: DeFi.”
This year, a nonprofit that Mr. Kwon also runs sold $1 billion of Luna to investors. The money was used to buy a stockpile of Bitcoin, which was meant to keep the price of TerraUSD stable if the markets ever dropped.
At about the same time, some of the companies that had given Mr. Kwon money started to worry. Crypto-focused venture capital firm Hack VC sold its Luna tokens in December. One reason was that “we felt the market was due for a broader pullback,” said Ed Roman, the firm’s managing director.
Martin Baumann, one of the people who started the Hong Kong-based venture firm CMCC Global, said that the company sold its holdings in March for about $100 per coin. “Both from the tech side and the regulatory side,” he wrote in an email, “we were getting more and more worried.” (CMCC and Hack VC both refused to talk about how much money they made.)
Even Mr. Kwon made a joke about the possibility of a crypto collapse, saying that some crypto businesses might fail in the end. He said that it was “fun” for him to see businesses fail.
Last week, the markets were thrown into chaos by falling crypto prices and tough economic trends. The price of Luna went down to almost nothing. Critics had predicted that the price of TerraUSD would fall at the same time, and they were right. This week, the price went from $1 to as low as 11 cents. In just a few days, Mr. Kwon’s crypto ecosystem had lost almost all of its value.
Last week, he wrote on Twitter, “I’m so sorry that my idea has caused you all pain.”
Some of Mr. Kwon’s biggest investors have lost money. Changpeng Zhao, CEO of the cryptocurrency exchange Binance, which invested in Terraform Labs, said that his company bought $3 million worth of Luna, which was worth $1.6 billion at its peak. Binance’s tokens were never sold, though. It owns less than $3,000 worth of Luna at the moment.
For a big company like Binance, whose U.S. branch is worth $4.5 billion, that loss is still a drop in the bucket.
Mr. Nickel said, “Most of the V.C.s have the analysts they need to evaluate these things.” “They may have thought that they could make money off of retail.”
Instead, regular traders have felt most of the pain of the crash. On a Reddit forum for Luna believers, people shared phone numbers for suicide hotlines, as people who had put all of their money into Luna or TerraUSD felt hopeless.
The crash has also been terrible for the people who were building start-ups with Mr. Kwon’s crypto infrastructure.
Neel Somani, who is 24 years old, quit his job as a quantitative researcher at a hedge fund called Citadel in February to work on a project that linked Luna’s blockchain to another cryptocurrency system called Ethereum.
In April, Mr. Somani joined Terra Hacker House, a month-long program in a Chicago office sponsored by Terraform Labs and its investors to help build projects on Mr. Kwon’s technology. In just a few weeks, Mr. Somani got commitments for $10 million in venture capital funding, which put the value of his Terranova project at $65 million. He said he was almost ready to hire three people and that 40 customers were excited about the idea.
After Luna and TerraUSD went down, Mr. Somani and his fellow hackers thought Mr. Kwon and his partners could turn things around. But by Tuesday of last week, Mr. Somani knew it was over, and he was glad he hadn’t accepted the money yet. He said that he lost about $20,000 on Luna, but that didn’t bother him because he has made money on other risky stock and cryptocurrency bets.
The desks at the hacker house have been empty for the past week. Nearly 200 people have joined a Telegram group called “Rebuilding Terra” and have been talking about how to save projects and money.
Mr. Somani is sanguine. “For those of us who build crypto, the feast and famine mentality comes very naturally, and that’s maybe what drew us to the community,” he said.
He is going to try to sell his old technology at the hacker house’s demo day on Thursday. He said that most of the other groups have left the program, so he thinks there will be less competition for the first-place prize of $50,000.
He said, “It’s in U.S. dollars.” “I asked.”