Risky Business
Bitcoin is up 10% this week, bouncing off lows near $18,000 and rallying back above $20,000. Ethereum is up almost 25% off of its lows near $900.
Overleveraged
Crypto is on the verge of a potential contagion event.
It’s been a volatile month for the industry and a lot of why that is has to do with overleveraged hedge funds and poorly run projects and platforms.
Key events:
Three Arrows Capital faces bankruptcy
Last week, Oliver Knight wrote:
If the collapse of LUNA was cryptocurrency's Bear Stearns moment, Celsius Network threatens to become the industry's Lehman Brothers: the failure that exacerbates a market crisis.
The crypto market is still attempting to recover from the fallout of a Terra unwind that saw the project lose more than $40 billion worth of value. As Terra spiraled to near zero, they sold off 80,000 bitcoin held in reserves. The dramatic bitcoin selloff put immense pressure on markets.
Terra was too good to be true. We can see that clearly now but I would hope that most crypto investors who were here in 2017-2018 would’ve seen that early on. Unfortunately, greed often gets in the way and the promise of 20% returns on your capital was too good for people to pass up.
It wasn’t just small retail investors. When it came to Terra, it wasn’t just the individual crypto investor who was placing high risk bets on the project.
It was large institutional traders and hedge funds. That makes the situation all the more worse because these institutions have exposure across the markets.
3AC
Three Arrows Capital (3AC) was one of the most prominent crypto hedge funds. They had $3 billion in assets under management and it looks like they’re going under.
Over the last few weeks, it’s become clear that 3AC had placed big bets on high risk assets throughout the cryptocurrency markets, including positions into the hundreds of millions with Terra.
Several platforms have come out saying that 3AC’s leveraged positions with them are in danger of being liquidated. Crypto exchange and lending platform, BlockFi, reportedly liquidated a $400 million position that 3AC held with them…
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Risky Business
Three Arrows Capital is just the most recent example of how NOT to do crypto. It’s really just a tale as old as time—people looking to make unreasonable amounts of money, doubling down in riskier fashion as time goes on.
The problem—3AC’s co-founders Su Zhu and Kyle Davies were thought to be the “smart guys” in the room. The traditional finance world has seen this too many times before. Blind faith in people who are doing nothing more than gambling with other people’s money. It’s flat out irresponsible and gives crypto a bad name.
As 3AC’s positions become further exposed, rumors are swirling about other hedge funds and institutional players in the crypto space. We’ve already seen the more mainstream exchanges and lenders freeze hiring and cut staff but we could see even more collateral damage in the coming weeks.
Repeat of 2017-2018
During the last crypto bull market, investors big and small poured money into new cryptocurrency projects. As ethereum paved the way for altcoins, projects began to raise money for their tokens and companies in what became known as ICOs—initial coin offerings. Similar to an initial public offering, ICOs would raise money and distribute coins to their investors that they could later use on the crypto protocol or sell when the project came to market.
As ICOs became all the rage, danger signs were everywhere. ICOs were completely unregulated and there was little due diligence done by investors. Most cryptocurrencies associated with ICOs plummeted as markets turned bearish in 2018 and there was no way to recover investors’ funds.
We could be witnessing this market cycle’s version of the ICO crisis and it’s even more insidious this time around.
After a crisis, there’s a sense that we won’t let this happen again. So, this time, trust in “more mainstream institutions” meant that these hedge funds and lending platforms had to be doing things by the book, right?
Wrong.
This year, we’re seeing bigger investors place bigger and riskier bets on protocols and assets with other people’s money and the only way out of this mess is to have even bigger investors swoop in to bail them out. In the meantime, markets will suffer and smaller investors have to sit tight and wait for things to shake out.
Tick Tock, Next Block
There are risky protocols, like Terra, and then there’s reliable ones like bitcoin. There’s a saying in bitcoin that goes: “tick tock, next block.”
Bitcoin’s protocol has been upgraded since it started running in January 2009 but the upgrades have been slow and have required methodical consensus.
Slow and steady wins the race.
The decentralized nature of the bitcoin network also means that no single person, hedge fund, exchange, or lender can do anything to alter how bitcoin functions.
Every ten minutes or so, the bitcoin network processes a block of transactions and records it on the public ledger. And, it just keeps doing that. It never stops.
While the market price of BTC has been hit hard like everything else, the point I’m getting at is that the bitcoin protocol or “project” isn’t going anywhere.
These other high risk projects that promise lavish returns do nothing but provide “hopium” to investors. Bitcoin was built to store and transfer value across a decentralized network and it does that. It always has and there’s no reason to think that will change. It wasn’t built to provide yield and even though people caught up in the most recent round of overleveraged bets on crypto owned bitcoin themselves, that bitcoin is just being resold back onto the market.
Bitcoin can’t disappear like these other coins once their project goes under. All things considered, the price has held up relatively well given the risky behaviors of bad actors putting selling pressure on the markets.
The Monthly Crypto Report drops next week! I send this to premium subscribers. I break down what’s happened so far this year, what happened in the last month, and what to watch in the month ahead. Upgrade or subscribe today to ensure you get it.
Conclusion
Bitcoin is the most reliable protocol in the cryptocurrency space. While its price might be volatile at times, the project will never fail due to the mismanagement or irresponsible actions of a few people.
What to watch:
June (monthly) close
June is coming to a close and bitcoin needs to hold current levels if it plans to rally in the coming months. I talked about bitcoin dominance recently. The metric has fluctuated wildly in the 40% range but a push back above 50% would signal a potential bullish catalyst in the near term.
Enjoy the week ahead!
$20,763.94—BTC Today
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