A Week For The History Books

The headline says it all. The cascade of events that have recently unfolded in the world of crypto will be talked about for years to come. Take it or leave it: It’s truly been a historic week.

But unlike many of the “milestones” or breakthrough announcements we’ve covered over the years, this week’s news, unfortunately falls on the wrong side of history – one that’s filled with pain, regret, and in many cases, utter disappointment.

Is there any good news? Of course. But we’re not here to sugercoat anything, but rather to only outline the facts. So gear up.

The Bubble Goes “Pop!”

Terra… followed by Celsius… followed by Three Arrows Capital (3AC)… to Babel Finance… BlockFi… the list goes on and on and could very well grow from here.

For those who haven’t been paying attention, respectfully so, each one of the companies listed above has been the latest victim of today’s evidently systemic liquidity crisis. By that we mean that each one, despite having billion-dollar valuations only months ago, have lost so much money to the point where they are (or were) at risk of insolvency… or even worse, on the brink of losing all of their users’ capital.

On the heels a falling market, rising inflation, and a horrendous economic backdrop, the near collapse of these companies has caused a massive ripple effect, where one sinking ship caused another to capsize and so forth.

The selling cascade has impacted retail investors like us, venture capital funds, governments, and even stocks trading on traditional markets…

The Latest Development

Sparking both controversy and praise all across Wall Street, has been the collaborative effort to bail out ailing crypto companies in this time of crises.

Unlike the 2008 financial crisis, however, the government isn’t the one stepping in… this time, it’s none other than FTX’s Sam Bankman-Fried, or “SBF” for short.

Yesterday, FTX, SBF’s crypto exchange, agreed to provide crypto lender BlockFi with a $250 million revolving credit facility. Then today, Alameda, SBF’s quantitative trading firm, also committed $500 million in financing to Voyager Digital, a crypto brokerage that had a ton of expsoure to 3AC.

As a result, SBF has emerged as something of a savior for the crypto market as it battles a deepening liquidity crunch.

Now, did SBF actually save these companies? Probably…

Did he help prevent further catastrophe? Absolutely…

Lastly, did he save the entire crypto market? Time will tell…

In the meantime, we have some other stuff we’d like to get off our chests…

Our Thoughts:

There’s no beating around the bush… as covered above, there’s a lot of bad news in the markets right now.

And yes, FTX/SBF/Alameda are stepping in to “save the day” with some individuals cheering about how private companies bailing out private companies “is how capitalism is supposed to work.”

And yes, we agree that the private option is significantly better than the government using taxpayers dollars to bail out companies.

But we still can’t help but point out that the point of crypto is decentralization. SBF being the “lender of last resort” for multiple companies may be good for them, but we need to ask, how is it good for the users?

But let’s back it up a bit…

As of now, you might be thinking… how the heck did all this happen anyway?We’ll save you the company-specific details, but to sum it up, this crisis was simply ignited (and fueled) by the misuse of leverage.

Legendary investor Charlie Munger once said “there are only three ways for a smart person to go broke: liquor, ladies, and leverage”. Although we haven’t heard of any big names in crypto going broke due to liquor or ladies (yet), the past couple of weeks have made it clear that Mr. Munger was spot on about leverage.

For those unaware, leverage is using borrowed money to invest, which allows one to invest more than they actually have. This is an extremely powerful tool that on the upside has the potential to exponentially multiply gains, but also carries the downside of exponentially multiplied losses.

Using leverage in this way works really well in a bull market because the value of the collateral is going up, which means there is no risk of liquidation. However, in a bear market where the value of the collateral is going down, liquidation suddenly becomes a very real possibility.

This is precisely what started taking place when prices started to go south last month and it’s why we are where we’re at today. There was way too much leverage.

Moving on, one thing that is glaringly obvious is that this whole cascade is giving crypto bad PR.

But we want to be the first one’s to tell you that this isn’t the fundamental crypto projects, specifically Bitcoin, that’s doing the damage.

So it is necessary that we all take a step back and take note of how we got here:

1. Certain companies – commonly known as CeDeFi firms, as we discussed last week – luring retail investors to trust them with their hard earned cash by promising overly high yields (APYs) through taking hidden, ridiculous risks.

2. VC’s with perverse incentive structures that only fund short-vesting projects with a goal to quickly flip and extract value from a bull market.

3. Founders cashing out, while their customers lose their life savings

And of course, we have to point a finger at the group of octogenarians and academics, that fill the halls of government and central banks, printing money and forcing people to search for any hope of returns.

But ultimately, many of the glaring problems that we have been pointing to in CoinSnacks are the same ones that led to the market’s recent woes.

To quote our newsletter from May 19th: 

We aren’t in this game to move numbers around on a ledger. And promises of changing the future aren’t the same as actually doing it.

There’s a saying that goes, “to figure out how something works, figure out how to break it”. We’ve obviously done the breaking… let’s hope we’ve better figured out how this whole crypto thing should work.

In the end though, bitcoin, ethereum, and other real-world use cases – although down on a price basis – are still bringing financial freedom to hundreds of millions of people around the world. THIS is why we crypto.