I discuss the fear and liquidations driving the crypto market
Read the video transcription
Happy Friday, everyone. It’s Friday, June 17th, and it’s time for this week in crypto. I’m your host, Dave Weisberger, CEO of coin routes. Well, this week the theme is simple, it’s fear. It’s also a lot of lack of knowledge of what’s actually happening.
Effectively, what we’ve seen this week in all global markets are significant downdrafts triggered by the fed’s decision to drop 75 or to raise 75 basis points in rates, which actually, if anything, was welcomed by the market. But continuing fears that the system and most liquid assets have been propped up by leverage is something that is very, very real. So in the case of bitcoin, which we like to look at as a bellwether, there are worries that for selling, because bitcoin is the best collateral in the crypto universe, is still on the table. There are fears that there are leverage levels and price levels which will cause big firms to have to liquidate their holdings. We’ve already seen this play out in Asia with three arrows capital. Multiple exchanges have talked about that. And that sort of forced selling generally causes big downdrafts in the market. Yet if you take a step back and look over the last several trading days, we’ve seen bitcoin flirting with 20,000 not once, not twice, but three or four times, and it’s still sitting above that level right now. It’s rallied a couple of times to 22. Basically, that rally would peter out and drop back down as people are wondering about what’s going on.
When I look at this, it reminds me in many respects of past historical events, there are people who in the crypto community, we believed, or people believed, were incredibly smart and therefore deserve to be followed. Some of those people, in case in the case of do Kwan with luna, turned out to be completely inaccurate, despite his history on a defense of his methodology in the face of criticism before the collapse. In the case of places like three arrows capital, market leaders who at one point would talk about the need to measure risk, at the other point said this was an incredible buying opportunity and unfortunately found out that what they thought was enough risk control wasn’t enough. All of this together is reminiscent of long-term capital. Those of you who are too young to remember that it happened in the 90s, the group of nobel laureates got together and said, this is where the market should price certain bonds and certain assets, and they stuck to their guns.
And unfortunately, the market didn’t agree with them and they ended up going bankrupt. What’s less well known is that even after they flushed their positions to the investment banking community, those prices took a very long time and in fact, went even more against them after they were effectively liquidated. And so it’s entirely possible that we haven’t seen the end of the liquidation. On the other hand, if you look at the use case that people generally describe to bitcoin as an inflation hedge, or as a hedge against lack of trusted institutions. Considering there’s not a whole lot of faith in the monetary prowess of the central banks these days, one would think bitcoin would be rallying.
Obviously, in the short run, liquidity trumps long term and trumps fundamentals. But it’s an interesting battle that I think is going to play out over a much longer period of time that we’re going to see in weekly updates that I give you. So I may say this multiple times over the coming months, but there is a lot going on here. When one looks at bitcoin in particular, one sees an asset that the adoption metrics are continuing to improve, and the reason for its adoption is continuing to be even more visible to people. Yet liquidity is trumping it and prices dropping.
Well, one looks at the rest of crypto, you have to break it into two pieces, and I’ve talked about this a few times, but let’s be specific. DFI, I’ve said many times, holds the potential to disrupt the financing activities in the traditional banking system. Things like securities lending, interest rate swaps, etc. Could be much more efficient in a distributed way with more of the proceeds that deserve to go to lenders, going to lenders, and cheaper rates for borrowers as the intermediary share of the profits decrease. That is still true.
However, the fact that much of DFI existed because of extreme potential revenue opportunities in the case of 20% APY, which obviously have turned out to be somewhat illusory, has tarnished the entirety of the sector in many people’s minds. This is going to take time to overcome. That said, it’s a marathon and not a sprint, so we’ll see how it goes. The idea of lending facilitated via technology and not facilitated by a cartel is still a valid one. But it’s going to take time and frankly likely regulation. Likely some sort of knowledge and confidence inducing rules that investors know that when people make a claim that a is true. That a actually is true.
When we look at things like NFTS -and there’s a big NFT conference coming up in New York again this coming week- there’s still enormous potential in the market. But as I’ve said to multiple people who have asked me what’s going on, the fact is the underlying asset under the NFT is still relevant. If you believe that a picture of a board ape is going to be important to you and is going to hold up as a societal benchmark like a Birken bag is held up for 40 years, then by all means invest in that class of NFTs. If you think on the other hand, that the JPEG that you’re looking at is going to be more like a beanie baby, then don’t invest in those NFTs. But the notion of the NFT, the notion of an immutable blockchain proof of ownership of what is a creative asset is one that is not going away, and so that is something we will play out over a much longer period of time.
All that said, a lot of the fast money that came in was supporting many tokens and many things in the crypto community. And those are starting to unwind as well as fear takes hold among most of the people who are participating in the market. All of that said, I will make one final point. Warren Buffett was right about many things in his life. I don’t think about a lot of others. But when he said, buy when others are fearful and sell when others are greedy, I think that is a wise advice. Right now, fear is permeating the entire universe. I would not recommend leverage. In fact, I decidedly say that you shouldn’t use leverage. But if you’re sitting there and you have a belief in something in the ecosystem and digital assets that make sense to you, now is probably not the wrong time to start averaging into those sorts of investments.
Not investment advice, just my opinion. Do your own research. But at times like this, when people are panicking, or generally when the most wealth is made, just something to keep in mind. In any case, stay safe out there. It’s really, really interesting, and things may very well get worse before they get better. But that said, the market as a whole is handling it very, very well. Structurally, like at our firm for example, our systems have stayed up all week long regardless of the volatility in the market data, and it looks to me like most of the marketplace is doing the same. So take care, enjoy, and we’ll talk again next week.