3AC contagion:

Didn't think this is something I'd be discussing again so soon, but since this weekend news broke that 3AC wasn't "cooperating with liquidators" it likely changes the timeline and severity of any forced selling.

If 3AC, is indeed entirely uncooperative this could mean:

-Some liquid tokens they hold in EOA wallets can't be seized.
-Any tokens in custody or exchanges will be seized and liquidated.
-GBTC allocations will be seized.
-Token allocs in vesting contracts could be seized.

-Their 'class share' funds including DeFiance will be in a fight for their life to try and not be liquidated.
-Depending on the existence of any agreements, projects that let them 'manage' their treasury may have no path to be recognized in the liquidation process.

A lot of this is bad, the liquidation of class share funds, the loss of treasuries and forced selling (likely OTC) of any vesting positions will really hurt the industry, especially during a bear market, it could lead to a lot of young projects folding.

But, the big question is GBTC, as we know they were a major owner of the product and that it can easily be seized.

As you know GBTC usually sit at a discount to the Bitcoin price due to fees, liquidity, conversion risk, etc.

The first few questions, that will be related to specific regulations around bankruptcy in their jurisdictions:

1. Will debtors be paid with in-kind transfers of the stock?

2. Or, will they have to liquidate first?

The hope is #1, which means that the loss will be absorbed by creditors on their books - which could make sense for them given the steep discount on GBTC, if there is a future conversion point to an ETF the price parity could mean great upside.

But, those owned debt, we know that at least a few of the largest positions were owned by:

1. People who were using client funds.

2. Entities going through their own bankruptcy proceedings.

So it seems unlikely these groups will want to hold in-kind.

When we look at the risk of the GBTC selling, we can't really measure the size of the hole, as we have no idea how many times over these assets could have been promised as collateral.

But, we can understand how they will liquidate.

Because we're in crypto, what will likely come into play is a unique product - the 'perpetual-future'

"Perps" unlike other options, don't have an expiry date. We simply pay a funding rate to maintain the contract.

Longs pay shorts if positive, shorts pay longs if negative, and the rate moves based on the directional time-weighted delta between the price of spot and the price of the perps.

But, here's the really important part: historically, being short paid.

Because crypto has had high growth, and has more market involvement and fomo in upswings (getting larger price disconnect) shorts have always been paid more than longs.

Now, normally this doesn't matter, because the change in nominal offsets the funding rate.

But, it does mean if you have a delta neutral position (sell short, buy spot) you got paid.

In having the GBTC product at -30% it represents an opportunity for market makers to:

1. Sell 1 BTC perp short.
2. Buy 1 BTC worth of GBTC at a discount.

Repeating this process until that gap is closed.

Now, things like this don't play out perfectly but lets imagine that drags down the perp price by -15% and brings up the GBTC price +15% to close the gap.

We might think "great, contagion over" but we've still got a large sophisticated MM with a large covered short.

It might be in their best interest to scoop up some spot here or roll off some of their short here, but, remember being short pays.

So if the MM is sophisticated enough, there is a huge incentive for them to heavily make the market at this level and collect funding.

We'll know the contagion risk is over from that particular risk when we see some closing in the GBTC price gap.

Similar to what we saw in the stETH/ETH event.

It's unlikely that a limited product maintains a 1:1 price, but you want it to close off.

Now, 3AC is not the entire GBTC position, and the GBTC position should have a discount based on a number of factors.

But, in the last filing we have circa 2021, 3AC owned 39M shares of GBTC (22%~) and at that time BlockFi also owned a large portion.

If that number has held, and they continued to buy through offering their 'arbitrage' product that we heard of in 2022, they could own a major portion of the outstanding GBTC.

Which sophisticated market makers will know skews the liquidation.

So rather than expecting spot down -15% and GBTC +15%, the large sell will likely mean that spot will drag down even further to meet with GBTC as very few buyers have the scale or risk appetite to step up.

That likely means your institutional holders and mutual fund holders are going to take a further hit on this (especially if BlockFi still owns their 3%~ position and tries to front run this selling due to their own financial challenges)

So ARK is likely to be the biggest public fund to take a hit here, along with some Morgan Stanley funds. While its relatively small percentages, I think it likely has the impact of making mainstream funds more cautious around anything crypto in the future.

I think in-terms of tradfi impact, the losses of pension funds on Celsius, BlockFi, etc is likely a higher impact.

But, it does mean there is a good chance that large market makers with cash on hand & risk appetite can likely squeeze retail on the spot price much further.

It's also just one more arrow in the quiver of regulators looking for reasons to not approve further crypto products.

So the hope is that enough people owed funds by 3AC will take on the in-kind transfers of GBTC for potential upside and that local liquidation allows it.

Still trying to dig in more to what positions they may have and local regs on liquidation preferences.

Feel free to DM me if anything is on your radar for this.

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More from @adamscochran

Jul 12

Canada's federal housing body has lowered its projections on house prices based on the current rate hikes already.

Expecting about a 5% relative dip year over year without further hikes.

But, there is some nuanced lost here.

One of the effects of the pandemic that Canada saw is smaller cities and towns that were outside of main working areas saw large price boosts.

And, in the rate hikes, hot markets like major cities have already had rapidly cooling prices.

Here's two key cities: ImageImage

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Two things to know about Canada:

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Jul 9

If you're thinking of taking a position, I think it's worth zooming out on the major indexes before doing so. There are arguments both directions but the hourly, daily and weekly charts for the S&P 500 all look like a pretty clear technical bounce here.

It's not to say that we can't see a sustained bear market rally - sometimes they do out perform the previous highs and can last for multiple quarters.

That said, there is nothing definitive pointing to this yet as there hasn't been any real positive data change.

With CPI data and a Fed meeting upcoming, I personally feel its more likely that we're moving off of an oversold bounce on technical and low volume - and that with 10yr bonds 3%+ and the curve clearly inverted, it'd be way to early to declare a soft landing victory.
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Jul 6

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Not something we've seen in recent history.

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But inline with crypto.

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While retail owns less of the stock market than ever before, it's something they have more direct participation in.

While your parents generation owned more, it was through a managed retirement fund.

Now it's a free app on your cellphone.
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It's over $100b in capital that will consistently buy short term bonds no matter what.

Based on Statista, there is just shy of $4T in 1 year and sub-1-year bonds outstanding.


My hunch is that of those, 3 months is a far more popular choice than longer notes but, lets say for a moment its 1/3rd of that allocation.

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Jul 5

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Seems unlikely that China would concede anything major prior to the party conference - especially since they have shown they are willing to take the gamble of spending through inflation to stimulate their economy until the conference.

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Jul 2

A good summary thread on 3AC structuring liquidation.

In my mind a few of the pieces jump out and might be telling us more than meets the eye:

First, self filing for the liquidation is a big deal. This wasn't appointed by a court, they decided to file themselves.

It does mean they know its over.

But, it's also an interesting play that usually results in more favorable treatment.

For example, if you wanted to illustrate to a court in the future that you were cooperative, acting with fiduciary duty and responsible - you could point to the fact you filed for your own liquidation as a responsible action.

Why does that matter?
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