A tough week for Craptos
What a week. If I had to sum up this week in a meme it would be this one:
Remember to share this newsletter:
and subscribe if you haven’t already.
This week I’m going to talk about Crypto’s (Crapto’s) absolute lamping by the market and touch on Daddy J-Powell’s FOMC press conference.
“What?!! You can’t pay double-digit interest on my Craptos????”
Ok. So this isn’t exclusive to this week because if you’ve been following the broader market for cryptocurrency, it’s been on a downward trajectory for the last 6 months.
But what is exclusive this week are two market events, one micro and the other macro, which in my opinion have contributed a significant amount to the denting of crapto #HODL-er’s sentiment.
Starting with the micro event, on Monday Celsius blocked its customers from making withdrawals. This raised my eyebrows a lot when the FT notification on my phone flashed up this article. I’ve never warmed to the idea of lending and craptos mixing together; stupidly high volatility coupled with stupidly high leverage on a security which is stupidly speculative is just stupid: it simply builds a house of cards to topple into a liquidity death spiral.
I think the liquidity death spiral is what Celsius is attempting to prevent when it made a U-turn, rebuking the accusations that it would prevent withdrawals last week. Why?
Well, it’s to do with what Celsius does and promises. The Celsius Network:
“The Celsius Network is a financial technology (fintech) platform that offers interest-bearing savings accounts, borrowing, and payments with digital and fiat assets.” - Alex Mashinsky, Founder and CEO
Interest-bearing savings accounts and borrowing are what freaks me out. Customers can stake (staking in the crapto-sense is where users of the network allow their craptos to be locked up on a network to aid the consensus mining mechanism, not wagering) which, according to Celsius, earns an interest. They promise that interest payments can be as much as 18%, as the interest rate is reflective of the demand for that specific crapto. If Doge is in higher demand than $CumRocket, then Doge will earn a higher interest payment.
As I attempt to understand it… I don’t. So A lends their craptos to B for interest through the Celsius Network, and B uses that crapto to earn cash flow from proof of stake (this is how I understand it). Does what B earns through proof of stake pay the interest for A? If it does, why doesn’t A just do it directly? Meh, let’s just brush over that and look at the other more concerning thing.
Celsius provides crypto-collateralised loans, allowing people to borrow cash, using their craptos as collateral. In fairness to Celsius, they know to under-collateralise their loans. The max customers can borrow in fiat from their craptos is 50% of their crapto value. Given that the price of crapto’s has dropped nearly two-thirds, Celsius’s collateral suddenly isn’t worth that much anymore and their balance sheet starts to become worryingly insolvent. To combat this, they could start liquidating aggressively. I have no idea if they’re doing this but they might and this could cause the prices of their crapto collateral to tank further, inducing them to sell more to raise cash, further depressing prices and voila; a liquidity crapto death spiral.
Further, Celsius has had a myriad of failed strategies and significant losses on projects, losing 38,000ETH using Stakehound’s wallets and also losing $22 million in the Badger DAO hack - it’s the law of the jungle out there. Whatever the reason for freezing withdrawals may be, it’s very indicative of insolvency in my opinion. People have attributed the unravelling of LUNA as the Bear Stearns moment of the crapto markets, due to Celsius’s bank-like model, could the fall of Celsius be the Lehman Brother’s moment? In my opinion: YES.
The reason being is that Celsius borrows Tether (USDT), the crapto supposedly pegged against the dollar, to operate its model and under their facility, they must post BTC as collateral. Now, due to the unregulated nature of the space, let me introduce an absolute buggery of an ownership/capital structure:
Celsius own Tether —> Celsius is a creditor of Tether —> Tether is an investor in Celsius —> Tether’s loans to Celsius are booked as an asset on Tether’s balance sheet —> Celsius includes its own Tokens as an asset on its balance sheet.
So both the value and credit worthiness of Tether and Celsius are tied together…
There’s no way it’d pass regulation if it were an actual bank.
After Celsius’s move to freeze withdrawals on Monday, Binance also halted withdrawals for a few hours. This further dented #HODL-ers plunging crapto prices further.
Now, let’s move on to the macro event.
Daddy J-Powell
I sat waiting with bated breath, my third can of coke zero in my hand to keep me awake thanks to TP Wednesday, waiting for what the Fed would say they’re going to do about Monday’s unexpectedly high inflation data. You can read what Powell said here.
I’ve been saying that if you want to see our future, look at BOO stock or ASOS stock to chart. Well, the future has arrived.
Powell has made it very clear that the Fed will induce a recession to bring inflation back to target at 2%. This journey would begin with a 75-basis point increase in rates with the potential for the next meeting to increase to 50-basis points. As such, stocks pretty much dive-bombed everywhere - no sector was safe, and bonds rallied. The market has priced in a recession.
This is significant to craptos because when interest rates rise, risky assets fall. People have speculated that BTC is an inflationary hedge, likening it to gold. This just never works.
The irony is that when inflation is high, the Fed intervenes by raising interest rates, which causes people to move away from risky assets like BTC and into bonds, causing BTC’s price to drop. Thus when inflation is high, craptos drop.
Even Craig Wright (supposedly Satoshi) said that bitcoin’s price negatively correlates Fed interest rate hikes.
As you can see, the macro event of the Federal reserve increasing the interest rate by 75-basis points, further fuelled the decline in crapto’s price due to the mechanical nature of the markets.
Since the Fed has indicated inducing a recession, one can speculate that there is a behavioural element to crapto’s price decline as a result of interest rate hikes. If consumers observe that there will be a recession and have some of their assets in crapto, they’ll think to liquidate it for a rainy day… or #HODL, #diamonhands through this recession.
That’s all for this week. See you.