It has been a while since I’ve done a post and a lot has happened since the last one I did on crypto back before Christmas “Crypto Lending and why you should stay the fuck away from it…” (I’ve opened it back up if anyone wants to take another look).
Taking a look at what I wrote it is amusing to see how accurate my prediction was especially in regards to Celsius (even if the timing was a little off in that it took a little longer than I thought). The biggest flaw was the needless and possibly confusing explanation of backwardation and Contango. I only included it as an example of a risky trading strategy that traders were engaging in as an example of how the system could break, and break it did.
As it turns out the trigger wasn’t too far removed from that example. The implosion of ‘Three Arrows Capital’ once a leading light in terms of a crypto based hedge fund controlling some $18bn in ‘assets’, 3AC was as close to the ‘Establishment’ as crypto firms come, being around since 2012.
Essentially 3AC was one of the ‘greedy traders’ I was referring to in my first article (along with SBF and FXT who are also intimately involved in what is going on). Firstly 3AC was a huge investor in Terra and Luna, the algorithmically balanced stable coin that collapsed last month. Secondly it had placed some massive ‘arbitrage’ trades between ETH and stETH or ‘staked ETH’ which was Ether that had been staked into the new ETH2.0 pos system that is supposedly only 6mths away.
Theoretically ETH and stETH should eventually equal each other, as they are merged into one new chain, however a key difference exists one which anyone who works in Finance is acutely aware of and of which most people in crypto are completely unaware of – liquidity risk. This difference in liquidity between the two markets and the residual uncertainty that maybe ETH2.0 may never go ahead, meant that there was a slight difference between the prices – essentially the price gap vs the future expected merged price creates a short dated forward in stETH (forward price vs spot becomes an issue of Contango/Backwardation that I made a ham fisted job of using as an example in my post before Christmas).
The trade was borrowing ETH at around 2% and then doing a form of yield farming ending up going long stETH generating about 4% or so real yield. Literally picking up pennies in front of a steam roller.
Consequently traders like 3AC and FTX went tits long on this trade, with crypto lending firms like Celsius and BlockFi loaning them the fuck loads of ETH to do this trade. FTX is probably gunna get out of it okay, as they have the ability to sodomise their trader’s stop losses and clear them out, while trading against them from their unregulated exchanges based in the Bahamas. Twitter is currently full of FTX traders who’ve used any form of leverage being arse raped by Sam. However the issue presents a huge problem for 3AC who doesn’t have such nefarious means of making back their collateral.
Last month before Terra/Luna collapsed, 3AC had spent around $560m buying locked Luna (essentially Luna that was staked and locked in contract). That is now worth around $670 dollars, not millions of dollars, $670 actual dollars. Apparently 3AC had also invested a large portion of funds placed placed with it by investors into Terra and Luna secretly, as it did not have an investor mandate to invest those funds in the Terra ecosystem. Be prepared for the follow on as many local crypto funds are forced to reveal that they had placed their funds with 3AC and are now also looking at losses to explain to their investors.
Re-using the diagram in my December piece, diagrammatically we are currently here, waiting for the 3rd stage bombs to go off:
When Terra and Luna collapsed it created seismic waves that rippled through crypto land – for a while it seemed as though things have quieted down, but the reality was it was like being in the eye of the cyclone. The quite respite, was actually the period of time when all the inter-dependencies were starting to break as the plumbing backed up throughout they system. This is the EXACT scenario that I described playing out in my article before Christmas.
Obviously 3AC is now in the poop. It is most likely insolvent, as are the crypto lending firms like Celsius and BlockFi who enabled these ridiculous trades. If this is the case then the likelihood is that there are a great many other firms who do business with them who are also likely insolvent.
Guys like Celsius operate a 10-20bn balance sheet with about 5% of equity buffer – they will have to eat 3AC’s losses, which will mean their equity effectively evaporates. Right now most people I’ve spoken to who’ve parked coins in Celsius or BlockFi are completely unable to access them – imho, like I alluded to in December, those coins are already gone.
So that brings us up to the moment and closes off the issues I raised back in December. Where too now?
Well there is a chance that the market might muddle through it. This is a liquidity crisis and it is possible that crypto’s liquidity providers, FTX and ultimately Tether, might be able to pull a save off. Possible, but really given where the market is headed, with increased regulation and higher costs, are they really that incentivized to actually bother saving it?
Sam got Solana back up and over $150 around after Christmas, giving him plenty of time to sell down more of his stake in a flawed network that constantly goes down. Tether has been busy selling down its reserves as insiders cash out with the available hard currency, redeeming billions in the past month. Soon there won’t be any real USD left for them to cash out and they will have to start selling their commercial paper – which will imho turn out to be IOUs from Binance, Coinbase, Kraken and 3AC… good luck with that!
In all likelihood I think they know the party is over and aren’t gunna bother doing anything that is likely to cost them hard currency in order to assist or any actions that are likely to be scruitinised for their legality in the days to come.
So that means another prediction of mine is likely to soon come into play “The BitCoin Doomsday Machine… or why BTC could go back below $3k” (another article that I have re-opened, although alas, it is missing most of the JPEGs following the great flame war of 2021). Basically if the liquidity Doom loop that has been triggered by the collapse of Terra/Luna continues, then as the fall out continues to build the likelihood is that the price of BTC will fall below $20k and suddenly Michael Saylor and MicroStrategy and its enormous holding of BTC and the leverage it has used to acquire those long positions will come into play.
Saylor recently came out and said that MicroStrategy had the ability to add BTC from its existing holdings to its collateral requirements all the way down to a price of around $4k, so maybe the Doomsday Machine at the heart of Crypto might not go off…. but one thing I do know is that the market does have a tendency to eventually sniff out excessive and risky use of leverage, and drive prices down to the point that traders have no choice but puke up their position.