Over the past 2 months we have seen a massive decline in the price of Bitcoin and other crypto assets: Bitcoin declined about 18% in May, which was followed with a 38% decline in June. It is down more than 70% from its all-time high of November 2021.

Likewise, the total valuation of all cryptocurrencies saw a decline from almost $3 trillion to the current valuation of around $870 billion. Hence, over $2 trillion in valuation have been eclipsed and about $1 trillion over the past two months alone.

This begs the question: What the hell happened there?

A lot of critics have taken the opportunity, to dance victory laps and declare once again, that Bitcoin doesn’t work, will never succeed in the long-run and is finally dead.

Well… people following Bitcoin for some time are familiar with this narrative…

So far, there have been 8 times, in which Bitcoin pulled back more than 50%. It always came back and went to substantially higher valuations.

As stated in previous issues, I think that Bitcoin is the hardest and best form of money ever conceived. As its programmed attributes play out over time, this gets recognized by more and more people, who will sooner or later adapt it as their store of value. Moreover, due to its decentralized nature, it is basically impossible for any entity to prevent this process from happening. Therefore, in the long run, it is almost destined to become the main global settlement layer in the future.

As long as the fundamentals are intact, there is nothing that makes me divert from this belief. What are the key fundamentals?

• Flawless operation of the ‘proof of work’ mechanism and its difficulty adjustment to produce stable and secure blocks every 10 minutes on average.
• Decentralization (especially nodes, but also development and mining).
• Network growth (a healthy growth of the user base).

Since all of these fundamental factors are well intact, there are other reasons which must have caused this massive decline in valuation.

From my perspective, there are 3 main factors, which — in combination — are the reason for this decline:

1. Bitcoin is generally in a bear market phase.
2. The bearish ‘risk-off’ macroeconomic environment.
3. Structural risks inherent to current ‘DeFi’ endeavors of crypto companies.

Historically, Bitcoin has moved in cycles, which to some extent can be tied to its halving events every 4 years. It is not totally clear whether this 4-year cycle is a perfect indicator to gauge price developments, or, whether these cycles will continue to follow previous patterns over the next years, but we are by all measures in an environment that is driven by bear market sentiment.

With high inflation, the stock market experiencing its worst first half year since more than half a century and the Fed putting pressure on the global debt markets by tightening the credit markets, people first and foremost sell the assets which they consider more risky. While I think that Bitcoin offers the best risk-off asset out there, most investors have’t grasped the asset’s features yet and still see it as a speculative risk-on asset. This can also be seen by the high correlation of Bitcoin to the NASDAQ over the recent months.

The third point is probably the most crucial one that is playing out at the moment and the one I want to focus on here.

A Brief Description of the Current Stablecoin Environment

One angle of cryptocurrencies which has gained a lot of attention over the last year, are stablecoins. The event that pulled the trigger for all the recent deleveraging and liquidation events was, when the Terra USD stablecoin (UST) lost its peg to the USD and the subsequent collapse of both, the LUNA token and the UST itself.

I briefly introduced the inception and basics of stablecoins in the January issue, but I’ll elaborate on the relevant aspects of them here.

Stablecoins are crypto tokens which are pegged to fiat currencies or commodities. They allow easy movement of value between trading entities without going through the traditional banking sector. This brings several advantages:

• Instant settlement of transactions.
• Avoiding all the troubles and inconveniences related to the regulatory framework that underlies the banking sector.
• Circumventing capital controls.
• Avoiding high transaction fees for international payments.
• A way to have exposure to more stable currencies (e.g. someone in Turkey who is experiencing >70% inflation of the Turkish Lira and cannot open a USD denominated bank account).

The majority of the current market capitalization of stablecoins are pegged to the USD. Most transfers and trading on and between exchanges, lending platforms and DeFi entities, are facilitated with stablecoins.

What is important to understand, is the way in which the peg is archived and secured. There are 3 ways in which this is done:

1. Collateralized
   • This is the most straight forward approach: A central entity holds the same amount of highly liquid assets (such as cash of the actual fiat currency to which it is pegged or Treasuries) as the stablecoins that it issues into circulation.
   • Examples are:
     • Theter (USDT)
     • USD Coin (USDC)
     • Pax Dollar (USDP)
     • Binance USD (BUSD)
   • This is probably the most secure form of a stablecoin. But there are still some risks:
     • Market swings might lead to temporary de-pegging.
     • General counterparty risk (technical security, trustworthiness and collateralization strategy of the issuing entity).
     • Future government decisions might lead to freezing up the assets.
   • The major downside of this form is that it relies on centralized institutions. Thus, it is prone to arbitrary government decisions. Stablecoins are still quite new and just recently came on the radar of lawmakers. Hence, it is very uncertain how governments will react when the global use of stablecoins continues to expand and thereby lowers the level of control that the government can exert upon the market.
2. Crypto-over-collateralized
   • Another form to peg stablecoins, is through an over-collateralization with other cryptocurrencies. These cryptocurrencies are held in a vault and it relies on rules (ensured through smart contracts) that govern the level of over-collateralization required to mint new coins, or the penalties incurred when the value of the collateral drops under a certain level.
   • Example: (DAI)
   • The advantage of this form is, that it does not necessarily rely on a central institution which can easily be controlled by authorities.
   • The risk is, that the assets which are used for ensuring the peg, might tumble and lead to an under-collateralization. in such a scenario the pegging might break. If the backers are not quickly adding additional collateral to the vault, this could be detrimental.
3. Algorithmic
   • This is the most opaque and difficult to understand form of creating a peg. There is no determined collateral backing. Instead, algorithmic mechanisms enforced by smart contracts are employed to ensure the pegging. This mechanism is supposed to make sure that the supply is expanded when the peg is too high, and it contracts if the peg is too low.
   • Examples: TerraUSD (UST) & (FRAX)
   • Advantage: Potentially decentralized.
   • There is a good argument to be made that it is impossible to ensure the security of such a stablecoin, because, apart of its complexity, without real backing, it consequently always has to rely on an automatic pegging-mechanism, which can be exploited by market participants.

Here is a chart that shows how these constituents account for the stablecoin supply:

As can be seen, the total market capitalization of the stablecoin supply experienced a substantial expansion over the last year. It reached almost $200 billion before the Terra-event unfolded in May, causing a 16% reduction in the overall stablecoin supply.

For everyone interested in a great conversation about history, current state and potential future visions of the stablecoin adoption process, I highly recommend a recent podcast, in which Saifedeen Amous (author of “The Bitcoin Standard”) hosts Paolo Ardoino (CTO of Bitfinex and the above mentioned Tether stablecoin, USDT).

Luna Meets Terra

I actually didn’t pay any attention to the whole Luna & Terra story until Do Kwon and the Luna Foundation Guard started to buy massive quantities of bitcoin in the months preceding the collapse. I mentioned the massive purchasing in the April and May issues of the ATARAXIA Financial Newsletter. Here is an excerpt from April:

Another groundbreaking announcement has come from the Luna Foundation Guard (LFG). The foundation is implementing the algorithmic stablecoin TerraUSD (known as UST), which currently sits at more than $15 billion in market cap. Terra is described as “a public blockchain protocol deploying a suite of algorithmic decentralized stablecoins which underpin a thriving ecosystem that brings DeFi to the masses”. [now clicking on the link gives: “Terra 2.0 is Here” 🙈] There are now a whole bunch of stablecoins out there. The ones which currently have the widest range of use are regulated stablecoins, who are pegged to the dollar and mostly also backed by the dollar and/or commodities, such as Tether, USDC, and BinanceUSD. The problem with these stablecoins is, that the underlying assets are held by banks and therefore bear the risk of potentially being confiscated. Terra is currently the 4th largest stablecoin and its founder Do Kwon has announced the plan to back it in the future by a basket of other crypto-assets, primarily bitcoin. Consequently, over the last days the Luna foundation has started buying huge amounts of bitcoin on a daily basis, already holding more than $1.5 billion worth of bitcoin.

I was excited by the idea of having a decentralized stablecoin backed by the “most pristine” collateral asset, as Do Kwon framed it at the time. So I wrote:

Except for Microstrategy and Tesla, LFG has already acquired a higher bitcoin stack than any other publicly-listed company. Further, according to Do Kwon, Bitcoin is the “most pristine” collateral asset and with the declared goal of keeping acquiring another $1.5 billion with current reserves, this would amount to a total of about $3 billion in total (at the current BTC price). Additionally, it is planned to obtain another $7 billion in bitcoin through users wanting to get access to UST. This would promise the possibility of a stablecoin that is truly decentralized. While offering the benefit of low volatility and commercial usability, just as any other USD stablecoin, it would not rely on the granted permission by central authorities. In other words, this might be an enormous step in the direction of a more free financial system. The world is taking step after step, to slowly but surely realize the value that bitcoin offers. It is the most pristine monetary asset the world has ever seen.

However, to my own regret, I did not take the time to closely look into it and the way that the pegging is supposed to function, so I did not foresee the collapse. In retrospect, it seems quite obvious that it was destined to fail sooner or later.

The pegging mechanism was designed as follows:

• Terraform Labs was the institution that founded the project. It was founded in January 2018 by Daniel Shin and Do Kwon.
• LUNA was the governance token. It acted as the ‘collateral’ for the TerraUSD (UST).
• The mechanism was designed so that one UST could always be exchanged for $1 worth of the LUNA token. And vice versa. The underlying structure was that UST would either be minted or burned, depending on supply and demand:
  • If there was high demand for UST, the price would rise slightly above the peg and market participants would be incentivized to immediately burn LUNA to mint new UST and hence bring the price back down to the peg.
  • On the other hand, if the price would fall below the peg, arbitrageurs would exchange their UST, to get $1 worth of LUNA and profit from the spread. Thus, the supply of UST would subtract and the price would rise back to the peg.

• Further, Terraform Labs tried to bootstrap an entire Terra ecosystem around the LUNA token, as to incentivize people to invest in the project and hold the Luna token. These incentivization schemes included:
  • Luna holders would receive a percentage of the UST payment fees.
  • Listing LUNA on all popular exchanges to encourage trading frequency and liquidity.
  • They partnered up with the Korean fintech company CHAI, one of the largest eCommerce platforms in the country with 10 million users and $3.5 billion in GMV. (Note: The Founder and CEO of CHAI is Daniel Shin, the co-founder of Terraform Labs)
  • Another popular part of the ecosystem was the Mirror Protocol (MIR), a protocol that allows the mirroring of real assets, such as stocks.
  • Probably the most crucial part in building the ecosystem, was the Anchor protocol. This money market platform primarily facilitated the borrowing and depositing of Terra stablecoins. The gist of it was, that depositors of the UST were offered with a yield of 20%!!!
• The main goal was to generate mass adoption in order to create a large ecosystem with the decentralized Terra payment system at its core. Additionally, they wanted to win the competition of being the most used stablecoin.

As a result of the incentives — primarily through the 20% yield from depositing UST on the Anchor protocol — the LUNA Token and the UST experienced a phase of rampant growth and expansion. The Anchor protocol was launched in March 2021 (by Daniel Shin and Do Kwon (the same founders of the Terraform Labs). Unsurprisingly, this marks exactly the point, when the ecosystem started to gain massive traction: LUNA went from a market cap of around $3 billion to a peak of $41 billion in April 2022.

In late 2021, Terra also overtook DAI in market cap, which was the main competitor as a decentralized stablecoin. The competition between these two protocols became quite a big discussion on social media and was colorfully commented by Do Kwon’s tweets:

Do Kwon 🌕 @stablekwonBy my hand $DAI will die.March 23rd 2022656 Retweets5,554 Likes

Important to note here is that the 20% yield of the Anchor platform was of course not sustainable. It was not generated by the lending activities on the platform, but rather subsidized by Terraform Labs.

Worries about the sustainability of the yield were always played down by Do Kwon:

Do Kwon 🌕 @stablekwon13/ But in the meanwhile, I am resolved to find ways of subsidizing the yield reserve. Anchor is still in the growth phase, and maintaining the most attractive yield in DeFi stable will strengthen that growth & build up moats. Stay tuned.Do Kwon 🌕 @stablekwonDon’t wanna get another DM about the @anchor_protocol yield reserve. What do you want?January 28th 202226 Retweets606 Likes

In other words, Do Kwon was very aware that the offered yield was not sustainable, but it was provided with the goal of enticing investors to hold UST, by providing the highest yield in the DeFi landscape and thereby achieving massive growth with the accompanying network effects, to building up moats.

The crucial (negative) feature of the design is, that the market cap of Luna needs to keep up with the market cap of UST. Otherwise, in the case that the demand for UST outpaces the demand for LUNA, then the UST-peg becomes more vulnerable, since its backing reserve deteriorates in relation.

In a scenario where Luna declines in value and the peg breaks below $1, arbitrageurs would step in and burn the UST in order to mint more LUNA. However, this would increase the LUNA supply and lead to a further decrease in the price of LUNA. This in turn can create a negative feedback loop and finally lead to a hyper inflation of Luna.

Therefore, it was crucial for Terraform Labs to incentivize investors to hold their UST and not exchange them for real USD. Hence, the 20% yield offered on Anchor was really an essential part of keeping the whole charade going — unsustainable in the long run.

Due to its popularity, the yield reserves began to dwindle quickly in January and February, so that Terraform Labs needed to add additional funding to the Anchor yield reserve, which was financed by selling some of the LUNA token treasury:

Before the collapse started, the total value stored in the Anchor protocol was just over $14 billion and it was growing quickly. At a 20% yield, this would require a payout of $2.8 billion a year, not even considering the compounding effect.

To put it in perspective, the total market cap of LUNA at the time was around $30 billion (most of it not in control of Terraform Labs), so it was clear that they would run out of funding capacities soon. However, if they wouldn’t continuously provide this yield, it would be likely that people would withdraw their UST from Anchor and exchange them. This might set in motion the above described de-pegging spiral.

As a strategy against this looming disaster, the Luna Foundation Guard (LFG) was established. The goal was that the LFG would acquire and hold bitcoin as a reserve to secure the peg. In the event of a de-pegging, these funds could be used to buy UST and thereby defend the peg (similar to how developing countries use USD reserves to defend their currencies in crisis situations).

Do Kwon was also the leading figure of the LFG and the stated goal of the foundation was, to accumulate a total of $10 billion in bitcoin. (This was when I first got interested. It would make it the largest Bitcoin holding entity except for Satoshi Nakamoto).

Through ‘donations’ from Terraform Labs and also raising $1.5 billion from a deal with Genesis and Three Arrows Capital (3AC) (a hedge fund that will further be covered as a protagonist later in this story! 🙈), the LFG started buying massive amounts of bitcoin in late March and throughout April. By May 8th, they held a total of 80,394 BTC, worth $3.275 billion at the time, which made it the second largest institutional holder behind MicroStrategy (129,218 BTC) and in front of Tesla (43,200 BTC).

Besides BTC, the LFG also held some other assets before the events started to unfold. According to LFG, their reserves consisted of the following assets:

LFG | Luna Foundation Guard @LFG_org1/ As of Saturday, May 7, 2022, the Luna Foundation Guard held a reserve consisting of the following assets: · 80,394 $BTC · 39,914 $BNB · 26,281,671 $USDT · 23,555,590 $USDC · 1,973,554 $AVAX · 697,344 $UST · 1,691,261 $LUNAMay 16th 20223,923 Retweets12,159 Likes

To get a better grasp of the event, it is crucial to understand the environment around it, to put it in the right frame:

• The Fed had started raising the funds rate, by 25 bps in March and by 50 bps early in May, leading to havoc in the bond market and a significant decline in the stock market → general risk-off sentiment.
• Bitcoin had declined by 21% over the previous 30 days → the BTC reserves of the LFG therefore were worth much less.
• The LUNA token did even worse: Its price had declined by about 37.5% over the previous 30 days → This is the token which is supposed to ensure the peg.
• Consequently, the rapidly increasing supply of UST (due to the 20% Anchor yield), was faced with a substantial decline in the market cap of LUNA.

→ This provided the perfect environment for speculative attackers to take advantage of the flaws in the pegging design.

It appears that some trader(s) started to attack the peg by systematically selling USD. A first de-pegging occurred on May 7th, but the pegging-mechanism still worked and the price got back to $1, however, the volatility around the peg had increased.

May” target=”_blank” rel=”noreferrer noopener”>Do Kwon 🌕 @stablekwonMay” target=”_blank” rel=”noreferrer noopener”>May 8th 2022763 Retweets7,296 Likes

On May 8th, LUNA and UST were both in the top 10 (rank 9 and 10 respectively) cryptocurrencies in terms of market capitalization. Combined their market cap amounted to about $40 billion, which would put them at rank 6, right behind Bitcoin, Ethereum and the other major (centralized) stablecoins:

As the rumors and concerns about whether the peg could be maintained increased, the spreading panic led to a bank run-like situation starting on May 9th.

Over the following days, people rapidly started to withdraw their UST from the Anchor protocol and exchanged them for $1 worth of newly ‘minted’ LUNA.

Through this process, the LUNA supply massively increased. The LUNA token holders were therefore faced with the following two options:

1. Trust into the long-term viability of the Terra ecosystem and hold on to the LUNA tokens (whose supply was rapidly increasing while the price was rapidly falling).
2. Quickly sell it!

Obviously, most decided to sell and LUNA experienced a hyperinflation:

It actually took only 36 hours for the price of LUNA to decline from $60 to $0.1:

As can be seen in the above chart, the UST price (green line) still experienced some rally attempts to get back up to the $1 dollar peg. This is due to the attempts by the LFG to defend the peg by selling their BTC reserves. These reserves were all sold in three tranches within 24 hours — one of the largest Bitcoin sales that ever happened — but it was not enough to defend the peg.

“When you are right, you cultivate the delusion that you know something. When you are wrong the air goes out… the windbag flattens… and you see yourself for the idiot you really are.”

— Bill Bonner

Zooming out, the story can be summarized by looking at the market cap of LUNA and the price of Terra:

This is where the story of Luna and Terra ends. Actually, upon the collapse, many observers were quite optimistic, given how robust the bitcoin price reacted to the rapid sale of 80,394 bitcoin.

It dropped from around $34,000 to slightly below $30,000, before seemingly stabilizing around that price level over the following days. However, it triggered the start of a massive contagion effect throughout the whole cryptoverse.

The Contagious Effects Rippling Through the Crypto Industry

“Only when the tide goes out do you discover who’s been swimming naked.”

— Warren Buffet

This famous investment quote perfectly describes what happened in succession of the Terra & Luna collapse.

In the ensuing days, markets calmed down a little, but it was clear that there would be some effects of this meltdown. If $40 billion of value just evaporates like that, there must be some contagion somewhere. Will Clemente tweeted out the relevant question:

Will Clemente @WClementeIIIMy question now is where will contagion show up from the UST meltdown? How many crypto funds & projects were holding UST? How many custodians lending clients funds in anchor? etc. This is crypto’s Bear Sterns/Lehman Brother’s moment, but here there are no gvt bailouts.May 11th 2022331 Retweets3,142 Likes

It turned out that a lot of well renowned DeFi related companies, exchanges and lending platforms were involved in various yield-seeking schemes that were in one way or another exposed to the Terra ecosystem, but without applying the adequate risk-management procedures, to protect against scenarios such as a blow-up of Terra & Luna.

As it turned out, a lot of them were swimming naked.

There were several prominent people, such as Brad Mills, Nic Carter, Cory Klippsten and Lyn Alden, who looked into it and warned against the flaws of the Luna-Terra design and the likelihood of such an outcome. So it definitely cannot be framed as a black swan event.

A structural problem that has been building up throughout the crypto industry over the last few years, is the expanding construction of complicated products to generate yield.

The gist of it is, that some of the involved institutions took massive amounts of risks in order to grow their user base and generate higher yields, which was done through:

• Unsecured lending: Lending out assets without requiring the lender to post a sufficient amount of collateral.
• Rehypothecation of collateral: Using the collateral (posted on the platform to secure loans) to invest in other projects. Or, to use it on another platform as collateral to borrow other assets. And they might proceed doing the same. This leads to a situation in which a certain asset serves as collateral for many investment schemes.
• A lot of leverage: Lending assets exceeding the value of the own assets to invest.

Moreover, the market structure in the world of Decentralized Finance (DeFi) is quite distinguished from what is going on in the traditional financial sector:

• One aspect that separates the DeFi world from the TradFi world is, that it relies on transparent blockchains. The movements of assets can be followed and transactions settle immediately.
  Some (the more prudent) entities engage in something called ‘Proof of Reserves’, in which it can be verified that the entity actually holds the assets that it claims to have.
• Another aspect is, that there is no government-guaranteed deposit insurance and no state-sponsored lender of last resort.

The problems with unsecured lending, insufficient collateral and rehypothecation became obvious when billions of value disappeared from the Terra & Luna collapse and the value of other (collateral) assets also lost substantially in value. This led to margin calls and forced selling of assets, which in turn triggered further margin calls, liquidations and value depreciation of assets.

In short, it unleashed a downward selling spiral and the contagion effects ensued and quickly rippled through the cryptocurrency ecosystem.

Lets look at some entities and in which way their exposure caused contagion:

• 3AC: As mentioned above, Three Arrows Capital, a hedge fund focused on DeFi investments and reportedly managing $18 billion at its peak, is the protagonist culprit:
  • Due to its reputation, it was able to borrow money unsecured from several counterparties. Including:
    • 15,250 BTC from Voyager.
    • $350 million of USDC.
  • Due to its reputation as a large hede fund, it was also able to trade on Deribit (a trading platform for options and futures of cryptocurrencies) without posting collateral.
  • “Collateralized (fully or under-collateralized is not entirely known) lending with multiple firms such as Genesis and BlockFi.”
  • Buying and staking Ethereum (stETH) in a complicated form, involving a complicated rehypothecation process.
  • Invested heavily ($500 million) in LUNA to fund the LFG.
  • Allegedly had a 9-figure position in the Anchor protocol.
  • They had invested $1.3 billion and were the largest holder and therefore heavily exposed to the arbitrage trade in the GBTC fund, whose discount continuously widened up to 34%.
  • Several protocols were backed by 3AC.
  → Fails to meet margin calls, facing insolvency.→ Court orders liquidation.

• Celcius: One of the largest lending platforms.
  • Suffered losses through hacks in DeFi projects in which they had exposure:
    • 38,000 ETH in a blunder related to Stakehound.
    • $22 million loss in the Badger DAO hack.
  • Like 3AC, they also had heavy exposure to the staked Ethereum (stETH) scheme.
  • At least $0.5 billion exposure to Anchor
  • Has laid off over 20% of its staff.
  • Completely halted all withdrawals.
  → Potentially insolvent and on the verge of filing bankruptcy.
• Blockfi: Maybe the largest retail lending platform.
  • Lent $1 billion to 3AC.
  • Also heavily invested in the GBTC trust.
  • Announced to shed 20% of its workforce.
  → Gets a ‘bailout’ loan of $400 million from FTX including the option to be bought for up to $240 million.
• Voyager: Cryptocurrency exchange platform.
  • $660 million in exposure to 3AC.
  • paused withdrawals .
  → Files for Chapter 11 bankruptcy.
• Finblox: A trading and lending platform.
  • Involved with 3AC to generate yields.
  • Limited its withdrawals to $500 a day and $1,500 a month.
  • Paused reward distribution.
• Babel: Lending platform based in Hong Kong.
  • Reports liquidity issues and suspends withdrawals.
• Genesis: Cryptocurrency lender and broker.
  • Exposure to 3AC.
  • Parent company Digital Currency Group, has “assumed some of Genesis’ liabilities related to 3AC”.
• CoinFlex: Exchange platform.
  • Unsecured lending: Claim to have had special agreements with a large investor, preventing them from making a margin call.
  • Halts withdrawals.

Ark-Invest summarized some of the important events in a timeline:

Many risks taken by the above listed institutions, were unquantifiable and lacked transparency. A combination of DeFi hacks, leverage, rehypothecation of collateral, counterparty risks, duration risks such as GBTC and stETH and illiquidity, lead to these collapses.

It remains to be seen if the cryptocurrency ecosystem can take these events as a lesson to learn from and improve upon.

One way to get there, would be the proliferation of the “Proof of Reserves” standard among crypto institutions that provide custody based products.

To summarize it all, basically, the 17% decline in May and the 38% decline in June can be capsulized by the following 2 big developments playing out throughout the crypto market:

• May → Terra & Luna collapse
• June → Contagion effects

Have We Reached the Bottom? Or, Are Further Shock-waves to Be Expected? Might Bitcoin Be the Canary in the Coal Mine?

The question is whether we have seen the worst and are bottoming out, or whether there is more distress coming in the next few weeks. Some on-chain metrics appear to indicate that based on several historical floor models, we should be in the final capitulation phase, but given the macroeconomic environment, the viability of these models could be tested. In addition, there are still concerns about the financial condition of some companies in the space (e.g. some of the leveraged miners seem to be in a precarious situation). Therefore, it wouldn’t surprise me, if we haven’t seen the bottom yet.

Key Takeaways from these events:

• Some due diligence and appropriate risk management considerations before investing in any yield seeking schemes are highly recommended.
• Always keep in your mind: Not your keys, not your coins!

I will limit my price prediction to the hunch that once Powell pivots, rates get cut back to zero and the next rounds of QE and stimulus get injected (which I still believe is inevitable), the Bitcoin spaceship will skyrocket. 🚀

The final question is, whether what happened in the crypto hemisphere, is just a canary in the coal mine, for what is going to play out in traditional financial markets!?

When it comes to undercollateralization and overleveraged institutions, the crypto market is a small fish in comparison to what is going on in TradFi. During the Terra meltdown, the largest stablecoin issuer, Thether (USDT), also experienced a situation similar to a bank run: It redeemed $7 billion within 48 hours, which represents about 10% of their reserves. I am pretty sure that most financial institutions would not be able to do that within such a short time frame.

The difference is, that in the DeFi world, there is no central bank that can print the money to bail them out. Additionally, the naked swimmers are not as easily identifiable through the jungle of balance sheets and quarterly reports, as they are on transparent blockchains with immediate settlement.