D YAFFE-BELLANY, E GRIFFITH

Do Kwon, a trash-talking entrepreneur from South Korea, called the cryptocurrency he created in 2018 “my greatest invention.” In countless tweets and interviews, he trumpeted the world-changing potential of the currency, Luna, rallying a band of investors and supporters he proudly referred to as “Lunatics.” Kwon’s company, Terraform Labs, raised more than $200 million from investment firms such as Lightspeed Venture Partners and Galaxy Digital to fund crypto projects built with the currency, even as critics questioned its technological underpinnings. Luna’s total value ballooned to more than $40 billion, creating a frenzy of excitement that swept up day traders and startup founders, as well as wealthy investors.

Kwon dismissed concerns with a taunt: “I don’t debate the poor.” But last week, Luna and another currency that Kwon developed, TerraUSD, suffered a spectacular collapse. Their meltdowns had a domino effect on the rest of the cryptocurrency market, tanking the price of Bitcoin and accelerating the loss of $300 bn in value across the crypto economy. This week, the price of Luna remained close to zero, while TerraUSD continued to slide.

The downfall of Luna and TerraUSD offers a case study in crypto hype and who is left holding the bag when it all comes crashing down. Kwon’s rise was enabled by respected financiers who were willing to back highly speculative financial products. Some of those investors sold their Luna and TerraUSD coins early, reaping substantial profits, while retail traders now grapple with devastating losses.

Pantera Capital, a hedge fund that invested in Kwon’s efforts, made a profit of about 100 times its initial investment, after selling roughly 80 percent of its holdings of Luna over the last year, said Paul Veradittakit, an investor at the firm. Pantera turned $1.7 million into around $170 million. The recent crash was “unfortunate,” Veradittakit said. “A lot of retail investors have lost money. I’m sure a lot of institutional investors have, too.”

Kathleen Breitman, a founder of the crypto platform Tezos, said the rise and fall of Luna and TerraUSD were driven by the irresponsible behavior of the institutions backing Kwon. “You’ve seen a bunch of people trying to trade in their reputations to make quick bucks,” she said. Now, she said, “they’re trying to console people who are seeing their life savings slip out from underneath them. There’s no defense for that.” Kwon (30), a graduate of Stanford University, founded Terraform Labs in 2018 after stints as a software engineer at Microsoft and Apple. His company claimed it was creating a “modern financial system” in which users could conduct complicated transactions without relying on banks or other middlemen. But TerraUSD was risky even by the standards of experimental crypto technology. Unlike the popular stablecoin Tether, it was not backed by cash, treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that linked its value to Luna. Kwon used the two related coins as the basis for more elaborate borrowing and lending projects in the murky world of decentralised finance, or DeFi.

From the beginning, crypto experts were skeptical that an algorithm would keep Kwon’s twin cryptocurrencies stable. In 2018, a white paper outlining the stablecoin proposal reached the desk of Cyrus Younessi, an analyst for the crypto investment firm Scalar Capital. Younessi sent a note to his boss, explaining that the project could enter a “death spiral” in which a crash in Luna’s price would bring the stablecoin down with it.