On the hunt for a bubble?
Look for all of:
1) Highly uncertain fundamental value
2) Optimistic zealots
3) The ability to borrow against the underlying asset
1/x
Look for all of:
1) Highly uncertain fundamental value
2) Optimistic zealots
3) The ability to borrow against the underlying asset
1/x
Cryptoassets fail the bubble test:
✅Uncertain fundamental value
✅Optimistic zealots
❌The ability to borrow
Or so I thought.
2/
✅Uncertain fundamental value
✅Optimistic zealots
❌The ability to borrow
Or so I thought.
2/
Leverage is critical for inflating a bubble because it allows the zealots to borrow against their inflating collateral and so ownership can concentrate as prices 🚀.
Price rise --> increases borrowing ability --> spurs optimistic purchasing --> price-rise ♻️
3/
Price rise --> increases borrowing ability --> spurs optimistic purchasing --> price-rise ♻️
3/
Leverage also facilitates the collapse that is the inevitable other side of the bubble:
Marginal price weakness--or even prices flat with increased volatility--can prompt calls on collataral and forced liquidations.
4/
Marginal price weakness--or even prices flat with increased volatility--can prompt calls on collataral and forced liquidations.
4/
The only buyers left at the top of the market (the maximally levered zealots) become forced sellers as soon as their lenders get marginally more nervous.
Price volatility --> Credit tightening --> Zealot bankruptcy --> Volatility📈, Prices 📉 --> ♻️
5/
Price volatility --> Credit tightening --> Zealot bankruptcy --> Volatility📈, Prices 📉 --> ♻️
5/
But no lender would be foolish enough to accept crypto as collateral
And leverage is a required precondition for a bubble
So no need to worry
Right?
Hello?
😱
[drops phone receiver]
The leverage is coming from inside the house!
6/ to be continued
And leverage is a required precondition for a bubble
So no need to worry
Right?
Hello?
😱
[drops phone receiver]
The leverage is coming from inside the house!
6/ to be continued
Continued here:
