Crypto has slowly bled trillions since November, wiping out one big player at a time.
But how exactly did the giant crypto institutions fall, in what order, and why?
Today, we'll map out contagion in crypto and try to take lessons from the collapse:
THE GRAYSCALE PREMIUM:
Much can all be traced back to Grayscale BTC, crypto's first publicly-traded BTC fund.
The way GBTC works:
• Deposit bitcoin in the fund
• Get $GBTC shares after a 6 months
At first there was huge demand for the fund, so it traded at a premium to BTC
If the fund had 99 BTC under management, you could deposit 1 BTC (worth, say $10,000), wait 6 months, and get 1% of the fund's shares.
Since the fund was trading at a premium to assets under management, it was a good trade.
Every $1 of $BTC deposited yielded $1.30 in shares.
Who took part?
• Bitcoin miners
• Three Arrows Capital (held ~6% of the trust)
• BlockFi
The problem?
After a while, $GBTC no longer traded at a premium, but a discount. Players ended up underwater on their BTC.
A trade that at one time earned 30% suddenly LOST money.
The fund basically created a $6b black hole based on this $GBTC discount, with big institutions having to hold shares underwater in the hopes that they could eventually redeem at face value.
It was the first time we saw liquidity getting sucked out of the crypto space at scale.
THE LUNA DEATH SPIRAL:
While a tightening macro environment didn't help, the next chink in the armor was the Luna collapse.
If you're not familiar, my friend Jon Wu explains below:
The most recent liquidity crisis was around Lido Staked Eth, called stETH:
• stETH represents $ETH tokens earning interest and locked on the beacon chain
• These tokens typically trade at a slight discount to $ETH
Most people count on them to more-or-less hold parity with ETH
Many people use stETH to earn interest, and quite a few of them also borrowed against these stETH positions.
When Celsius and 3AC effectively got liquidated, they sold their stETH, further reducing the discount, pushing more people into liquidation: another death spiral.
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Some names you've heard of that are now likely reeling post GBTC/Luna/Celsius/3AC are:
• Maple Finance
• Genesis Global Trading
• Babel Finance
• 8 Blocks capital
Centralized lenders/custodians have been the worst-hit, likely because of poor lending decisions and the lack of transparency from these services.
Ironically, this is something that DeFi largely protects users against.
For Voyager Digital, it doesn't look good.
Today, FTX just announced the purchase of BlockFi for $25m, a distressed asset that once was valued at $4.4 billion now hyper-discounted based on its obligations.
While it's possible that the worst is behind us, there are plenty of players that can still blow up:
• Exchanges begin to fail
• Michael Saylor's Micro-Strategy is liquidated
• Heavy gov't regulation of the space
• Centralized stablecoin issuers fail (HIGHLY unlikely)
I'll leave you with this.
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Do me a favor and drop a RT/Fav on the first tweet, linked below:
Crypto is reaching a breaking point, and it has nothing to do with the Fed, Celsius, jpegs, or DeFi.
It's us.
We, the users, are destroying crypto.
Let me explain:
Crypto is ultimately a tool for governance:
Blockchains are only static if we decide to make them static, so far we have decided to make them static via governance and consensus.
Ultimately the unchangeable/immutable aspects of crypto have been provably valuable recently.
Some examples:
• No one can take away your tokens
• No government or institution can censor your ability to transact
• No one can stop you from trading at any time
• No one can reverse transactions
All of these things are things we value, things that are different in TradFi
Huge sectors of crypto are imploding, and crypto unicorns might be coming down with it.
Luna was first, but now $10b giant Celsius is facing insolvency and even bankruptcy.
Let's dive in:
What is Celsius?
In the last few years, we've seen the rise of so-called Centralized DeFi-companies that custody/manage crypto on behalf of investors.
They take your money/crypto, promise you a fixed interest rate, and then put it on-chain and use it in DeFi to earn a yield.
While they advertise their services like that of a bank, the service is almost more like a hedge fund or asset manager--these strategies have some risk involved and require supervision.