Thread by @JoyceanNoia

Thread:

Here’s why I am more bearish than most people on crypto short term.

I’ve listened the the three podcasts in the tweet below and am struck by how little the presenters know about banking. The #3AC situation is not simply about debt of 1.5bn (or more).

https://twitter.com/degenspartan/status/1540343609673003009

It’s also about the kind of debt. Most large companies have a mixture of secured debt (mortgages and debentures) and unsecured debt. Secured debt is always paid off first and, in an insolvency scenario, the unsecured creditors (customer, companies, whatever) usually take a hit.

The hit or haircut is usually very large. 3AC’s secured lenders would likely take debentures (secured loan, over all assets of the company, possibly backed by personal guarantee from the founders also). Secured lenders will likely liquidate their security on insolvency.

Secured lenders are not gambling on their crypto security. Not only will they liquidate their security quickly (a lot of crypto) to crystallise their debt for their balance sheet, but they will also have trouble recovering illiquid assets like start up equity in start-ups.

In turn, this means 1) unsecured lenders *to* 3AC etc take a haircut as stated 2) these unsecured lenders will likely have secured and unsecured lenders of their own, and this will probably be enforced and liquidated 3) companies who *borrowed* from 3AC etc will be affected.

Borrowers *from* 3AC will be severely affected as their loans stop being paid, and no one will step in easily in this market as their security will not be solid or easily valuable.

Same goes for voyager, blockfi etc.

There will be a steady series of domino insolvency.

If this is anything like the Celtic tiger crash, where I advised on 1bn of insolvencies, most borrowers who are not in administration will try to avoid publicising their risk. So all the bad news won’t come at once.

It’s gonna be ugly, so I am shorting.

And I would add that the court proceedings and illiquid assets mean that the security that is there may be tied up for a year or more, making it worse. The liquid assets get dumped first. As the cases / disputes resolve, more assets will be dumped. So none of this is going away.

thebittimes.com/reveal-the-sec…

Here’s an example of an ugly situation. No bank or vc (likely have secured debt) is going to be tolerant in this shitty market. And this will have knock on effects.

The whole industry is opaque, with loads of risky behaviour.

Shorting the worst coins.

The reason I wrote this thread really, is cause I think a lot of crypto people think a corporate insolvency is something like a margin call in crypto. The process for corporates is much slower. The companies and their lenders engage for weeks or months first.

The competing lenders often go to court to determine priority (who gets paid first). The bank, their administrator and their advisors need to figure out a plan. The process takes ages to work out, it’s not over and the security isn’t all liquidated yet.

Crypto secured by loans will be sold off in several phases:

1) voluntary sales to service debt (while borrower is solvent) - this is happening right now.
2) when borrower is insolvent & after an administrator is appointed, the 1st thing sold is liquid assets. Takes time…

3) then there will be longer term sales, as the insolvency process plays out in respect of disputed assets (re court cases / disputes over priority of debt, and where illiquid security etc is worked out first).

All the way through 1-3, the secured lender will be fighting….

to stop any liquidation which doesn’t pay its debt first.

In a shady space like crypto, the borrower / debtor may have given unauthorised loans (always supposed to ask secured lender for permission first under mortgage terms) or unauthorised disposals to directors etc…

So there will be a series of stages and actions where forced sales of crypto will take place, which makes me think it will take time to be crystallised. That’s bearish, on top of macro issues like inflation and fed policy.

Any questions, let me know fam.

Not sure if you have the time @gaius1337 , but I’d be interested to know whether you agree with this thread re the slow & steady liquidation of crypto sales by lenders (and especially secured lenders). Also, miners now selling reserves and no longer profitable below €17,600.