The Latecomer’s Guide to Crypto Crashing — a quick map of where we are and what’s ahead

Since November 2021, when Bitcoin hit its all-time high of $69,000, the original cryptocurrency has lost 70 percent of its face value. And when Bitcoin falters, it takes everything else in crypto down with it. 

The entire crypto space has been a Jenga stack of interconnected time bombs for months now, getting ever more interdependent as the companies find new ways to prop each other up.

Which company blew out first was more a question of minor detail than the fact that a blow-out was obviously going to happen. The other blocks in the Jenga stack will have a hard time not following suit. 

Here’s a quick handy guide to the crypto crash — the systemic risks in play as of June 2022. When Bitcoin slips below $20,000, we’ll officially call that the end of the 2021 bubble.

Recent disasters

TerraUSD collapse — Since stablecoins — substitutes for dollars — are unregulated, we don’t know what’s backing them. In the case of TerraUSD (UST), which was supposed to represent $18 billion … nothing was backing it. UST crashed, and it brought down a cascade of other stuff. [David Gerard; Foreign Policy; Chainalysis Report]

Celsius crumbles — Celsius was the largest crypto lender in the space, promising ridiculously high yields from implausible sources. It was only a matter of time before this Ponzi collapsed. We wrote up the inevitable implosion of Celsius yesterday. [David Gerard]

Exchange layoffs — Coinbase, Gemini, Crypto.com, and BlockFi have all announced staff layoffs. Crypto exchanges make money from trades. In a bear market, fewer people are trading, so profits go downhill. Coinbase in particular had been living high on the hog, as if there would never be a tomorrow. Reality is a tough pill. [Bloomberg; Gemini; The Verge]

Stock prices down — Coinbase $COIN, now trading at $50 a share, has lost 80% of its value since the firm went public in June 2021. The company was overhyped and overvalued.

US crypto mining stocks are all down — Bitfarms ($BITF), Hut 8 Mining ($HUT), Bit Digital ($BTBT), Canaan ($CAN), and Riot Blockchain ($RIOT). Miners have been borrowing cash as fast as possible, and are finding the loans hard to pay back because Bitcoin has gone down.

UnTethering

Crypto trading needs a dollar substitute — hence the rise of UST, even as its claims of algorithmic backing literally didn’t make sense. What are the other options?

Tether — We’ve been watching Tether, the most popular and widely used stablecoin, closely since 2017. Problems at Tether could bring down the entire crypto market house of cards.

Tether went into 2020 with an issuance of 4 billion USDT, and now there are 72 billion USDT sloshing around in the crypto markets. As of May 11, Tether claimed its reserve held $83 billion, but this has dropped by several billion alleged “dollars” in the past month. There’s no evidence that $10.5 billion in actual dollars was sent anywhere, or even “$10.5 billion” of cryptos.

Tether is deeply entwined with the entire crypto casino. Tether invests in many other crypto ventures — the company was a Celsius investor, for example. Tether also helped Sam Bankman-Fried’s FTX exchange launch, and FTX is a major tether customer.

Tether’s big problem is the acerbic glare of regulators and possible legal action from the Department of Justice. We keep expecting Tether will face the same fate as Liberty Reserve did. But we were saying that in 2017. Nate Anderson of Hindenburg Research said he fully expects Tether execs to end the year in handcuffs. 

Other stablecoins — Jeremy Allaire and Circle’s USDC (54 billion) claims to be backed by some actual dollars and US treasuries, and just a bit of mystery meat. Paxos’ USDP (1 billion) claims cash and treasuries. Paxos and Binance’s BUSD (18 billion) claims cash, treasuries, and money market funds.

None of these reserves have ever been audited — the companies publish snapshot attestations, but nobody looks into the provenance of the reserve. The holding companies try very hard to imply that the reserves have been audited in depth. Circle claims that Circle being audited counts as an audit of the USDC reserve. Of course, it doesn’t.

All of these stablecoins have a history of redemptions, which helps boost market confidence and gives the impression that these things are as good as dollars. They are not. 

Runs on the reserves could still cause issues — and regulators are leaning toward full bank-like regulation.

Sentiment

There’s no fundamental reason for any crypto to trade at any particular price. Investor sentiment is everything. When the market’s spooked, new problems enter the picture, such as: 

Loss of market confidence — Sentiment was visibly shaken by the Terra crash, and there’s no reason for it to return. It would take something remarkable to give the market fresh confidence that everything is going to work out just fine.

Regulation — The US Treasury and the Federal Reserve were keenly aware of the spectacular collapse of UST. Rumour has it that they’ve been calling around US banks, telling them to inspect anything touching crypto extra-closely. What keeps regulators awake at night is the fear of another 2008 financial crisis, and they’re absolutely not going to tolerate the crypto bozos causing such an event.

GBTC — Not enough has been said about Grayscale’s Bitcoin Trust, and how it has contributed to the rise and now the fall in the price of bitcoin. GBTC holds roughly 3.4 percent of the world’s bitcoin.  

All through 2020 and into 2021, shares in GBTC traded at a premium to bitcoin on secondary markets. This facilitated an arbitrage that drew billions of dollars worth of bitcoin into the trust. GBTC is now trading below NAV, and that arbitrage is gone. What pushed bitcoin up in price is now working in reverse.

Grayscale wants to convert GBTC into a bitcoin ETF. GBTC holders and all of crypto, really, are holding out hope for the SEC to approve a bitcoin ETF, which would bring desperately needed fresh cash into the crypto space. But the chances of this happening are slim to none.

The bitcoins are stuck in GBTC unless the fund is dissolved. Grayscale wouldn’t like to do this — but they might end up being pressured into it. [Amy Castor]

Whales breaking ranks — Monday’s price collapse looks very like one crypto whale decided to get out while there was any chance of getting some of the ever-dwindling actual dollars out from the cryptosystem. Expect the knives to be out. Who’s jumping next?

Crypto hedge funds and DeFi

Celsius operated as if it was a crypto hedge fund that was heavily into DeFi. The company had insinuated itself into everything — so its collapse caused major waves in crypto. What other companies are time bombs?

Three Arrows Capital — There’s some weird stuff happening at 3AC from blockchain evidence, and the company’s principals have stopped communicating on social media. 3AC is quite a large crypto holder, but it’s not clear how systemically intertwined they are with the rest of crypto. Perhaps they’ll be back tomorrow and it’ll all be fine. [Update: things aren’t looking good. 3AC fails to meet lender margin calls.] [Defiant; Coindesk; FT]

BlockFi — Another crypto lender promising hilariously high returns. 

Nexo — And another. Nexo offered to buy out Celsius’ loan book. But Nexo offers Ponzi-like interest rates with FOMO marketing as well, and no transparency as to how their interest rates are supposed to work out.

Swissborg — This crypto “wealth management company” has assets under management in the hundreds of millions of dollars (or “dollars”), according to Dirty Bubble Media. [Twitter thread]

Large holdings ready for release

Crypto holders have no chill whatsoever. When they need to dump their holding, they dump.

MicroStrategy — Michael Saylor’s software company has bet the farm on Bitcoin — and that bet is coming due. “Bitcoin needs to cut in half for around $21,000 before we’d have a margin call,” Phong Le, MicroStrategy’s president, said in early May. MicroStrategy’s Bitcoin stash is now worth $2.9 billion, translating to an unrealized loss of more than $1 billion. [Bloomberg]

Silvergate Bank — MicroStrategy has a $205 million loan with Silvergate Bank, collateralized with Bitcoin. Silvergate is the banker to the US crypto industry — nobody else will touch crypto. Silvergate is heavily invested in propping up the game of musical chairs. If Silvergate ever has to pull the plug, almost all of US crypto is screwed. [David Gerard]

Bitcoin miners — Electricity costs more, and Bitcoin is worth less. As the price of Bitcoin drops, miners find it harder to pay business expenses. Miners have been holding on to their coins because the market is too thin to sell the coins, and borrowing from their fellow crypto bros to pay the bills since July 2021. But some miners started selling in February 2022, and more are following. [Wired]

Mt. Gox — at some point, likely in 2022, the 140,000 bitcoins that remained in the Mt. Gox crypto exchange when it failed in 2014 are going to be distributed to creditors. Those bitcoins are going to hit the market immediately, bringing down the price of bitcoin even further.

Feature image by James Meickle, with apologies to XKCD and Karl Marx.

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News: Jennifer Robertson speaks (QuadrigaCX), BTC tumbles, Crypto.com hacked, SEC shoots down another Bitcoin ETF

“Bitcoin Widow” went on sale this week. Jennifer Robertson was busy giving interviews to promote her book. It’s the first time we’ve gotten to see her live and hear her voice.   

Robertson was married to Gerald Cotten, who ran QuadrigaCX like a Ponzi. He mysteriously died in India just before things fell apart. Robertson was clever enough to go to college and start a business, but somehow remained completely clueless when it came to her partner’s shenanigans. The lavish vacations, the houses, and private plane trips were nice, though. 

Globe and Mail interviewed Robertson. Actually, they interviewed the journalists who interviewed her. You still get to hear a little of Jen’s voice. The interview is pretty dry. No tough questions. (Globe and Mail) 

The National, CBC’s flagship current affairs program, was a lot tougher. As politely as possible, they asked why she wouldn’t simply allow Cotten’s body to be exhumed and checked to make sure it’s really him. I make an appearance on the show. (YouTube)

Matt Galloway on The Current spoke with Robertson at length. (The Current)

Galloway: “Did you ever ask why hundred dollar bills were scattered around your house?” 

Robertson:  “It was kind of a Gerry thing.”

As a follow-up to Galloway’s interview, CBC On The Coast interviewed me about QuadrigaCX and asked me what I thought about the book. Worth a listen! (CBC, My review of the book

BTC keeps falling

Bitcoin is down to $35,000 from its November record of nearly $70,000. The sell-off has outpaced that of the U.S. stock market. David Gerard opines his thoughts on what is driving down the price. (blog post)

He notes the crypto miners are holding on to their bitcoin. If they sell, they know they will crash the markets, so they’ve got to sit tight on their piles of BTC.

There are still $78 billion tethers out there. Tether hasn’t minted any new tethers in 2022, for some reason. And the Tether transparency page has a new look and feel. 

The Grayscale Bitcoin Trust is now trading at 28% below NAV, its lowest ever. (YCharts)

MicroStrategy stock is dropping in tandem with the price of BTC. MSTR tumbled nearly 18% this week. (And the SEC doesn’t care much for the company’s crypto accounting methods, either.) (CNBC)

Another exchange hack

Fortune favors the brave, or does it? Maybe not.

Crypto.com, the fourth largest crypto exchange, was hacked on Jan. 17 in a 2FA compromise. All told, the thieves got away with $34 million in crypto — 4,836 ETH, 443 BTC, and about $66,000 in another crypto. All funds are SAFU.

The hack was confirmed by Crypto.com CEO Kris Marszalek, but otherwise, the company has been murky on the details, noting “suspicious activities,” and referring to the event as an “incident.” (Crypto.com announcement, Techcrunch)

Crypto derivatives trading platform BitMEX aspires to become a “regulated crypto powerhouse” in Europe. Its European arm BXM Operations AG wants to purchase Bankhaus von der Heydt, a bank in Munich. BaFin, Germany’s financial watchdog, has yet to approve the transaction. The purchase price is undisclosed. (Bitmex blog, Decrypt)

Last summer, BitMEX agreed to a $100 million settlement with FinCEN and the CFTC. Regulators accused the Seychelles-based exchange of failing to maintain a compliant AML program.  

In an effort to clean up its image, BitMEX has hired former Coinbase managing director ​​Marcus Hughes as its chief risk officer. (Bitmex blog, WSJ)

Everybody still despises Binance.

Armed with fake credentials, journalist Hary Clynch went undercover to interview for a top position at Binance. Naturally, he was offered the job. Part two of his three-part story is up. (Disruption Banking)

In her latest blog post, Carol Alexander, professor of finance at Sussex, provides visual proof that price manipulation bots on Binance caused massive liquidations on July 25-26, 2021. (blog post

In public, Binance CEO CZ welcomes regulatory oversight and boasts about his sparkly AML program. Behind the scenes, he withholds information about finances and corporate structure from regulators, according to a report in Reuters.

Everything is “FUD,” says CZ. (Twitter)

Regulations

The SEC shot down a spot market Bitcoin ETF from First Trust Advisors and SkyBridge. The ETF didn’t meet “the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest,’” the regulator said.

In other words, all the things that the SEC previously objected to—wash trading, whale manipulation, mining manipulation, manipulative activity involving Tether, fraud and manipulation on exchanges, and so on—were never addressed in the proposal. (SEC, p. 15; Decrypt)

Meanwhile, in Europe, regulators are clamping down on crypto advertising.

Spain’s market regulator issued a mandate that ads for crypto assets must carry a warning that investors risk losing all their money. (Bloomberg)

In Singapore, the city-state is getting rid of bitcoin ATMs as it moves to dramatically limit consumer marketing of crypto. (Bloomberg)

In Italy, Consob, the country’s financial services regulator, has warned of risks linked to an increasing number of financially illiterate Italians investing in crypto. (FT)

And in the UK, the Treasury wants to bring advertising for the crypto industry under the same standards as other types of financial products. (Official statement, FT)  

Bitcoin miners running out of places to go

The bitcoin network consumes vast amounts of energy, mainly fossil fuels. As countries in Eastern Europe struggle to rein in electricity use in the coldest months of winter, they want the miners out. 

The Bank of Russia is doing all it can to pull the plug on crypto and make bitcoin mining and crypto trading illegal. (Bloomberg)

In Kosovo, where the government has temporarily banned bitcoin mining, miners are now rushing to get out of the business, selling their mining equipment at bargain-basement prices. (Guardian

And in the Ukraine, authorities bust another crypto mining farm illegally stealing power from the grid. (SSU)

NFTs and more NFTs

Every celebrity and big business wants to get into the NFT market, it seems.

Gamers won’t have it. They don’t like NFTs because they’re already familiar with broadly similar exploitative paid weapons, skins, loot, etc. When their favorite online games announce plans to incorporate NFTs, gamers push back. (NYT)

If only consumers would push back on this nonsense with a similar passion as gamers.

Dan Davies, author of “Lying for Money,” says gamers are more aware than most of AML compliance issues. He pointed out that Tencent shut down its online version of Call of Duty, after discovering the platform was being widely abused by criminals. (Twitter)

Scammers set up a new server at the URL previously used by Ozzy Osbourne’s NFT project, stealing over a hundred thousand dollars in ETH. (The Verge)

Flyfish Club is an exclusive NFT restaurant in New York City. When it opens in 2023, you can only enter if you buy an NFT. You still have to pay for your food in dirt fiat, because they won’t accept crypto in the establishment. Parent company Crypto VC Group has raised $14 million selling Flyfish tokens, which are being flipped on OpenSea. (Fortune

What would you expect from an NFT restaurant? Stephen Colbert investigates. (YouTube)

I see a new trend developing, and the SEC is not going to like it. BrewDAO just announced it wants to start a brewery. (Twitter)

Coinbase is teaming with Mastercard, so you can purchase NFTs with your credit card on its soon-to-launch NFT marketplace. (Coinbase blog, CNBC)

Walmart is considering creating its own crypto and selling NFTs. Of course, it is. (Bloomberg)

Meta wants to profit on NFTs as well. Facebook and Instagram are prepping a feature that will allow users to display their NFTs on their profiles. Meta is also working on a prototype for minting NFTs. (FT)

After spending $3 million on a rare Dune book, SpiceDAO is still looking for a way to justify the expense. It failed to negotiate IP rights. Now it wants to develop an entirely independent animated series. (Twitter)

RatDAO, which wants to accumulate blue-chip art, says it’s bought an unsigned Banksy print. Most DAOs I’ve looked at tend to focus on NFTs. (Twitter)

Cryptoland’s plans to buy a $12 million Fijian island have fallen through. The real estate agent selling Nananu-i-cake said the contract to sell it to Cryptoland’s backers fell through and the island is back on the market. Here is the listing, in case you’re interested. (Guardian)

One Jan. 18, Cryptoland founders Max Olivier and Helena López did an AMA. Molly White uploaded it to YouTube. It’s hysterical if you can stand to listen. If not, Molly has threaded the highlights.

Wikipedia editors have voted not to classify NFTs as art, sparking outrage in the crypto community. Beeple and Pak will not be included on its list of the most expensive art sales by living artists. (Artnet)

A women-led NFT project, Famed Lady Squad, is actually being led by guys, the same guys who are behind a bunch of failed NFT projects. (Input magazine

Other interesting bits

President Nayib Bukele, thinking Moody’s had downgraded El Salvador’s credit rating, said he “DGAF.” It turns out, Moody’s had not downgraded his country’s credit rating. Moody’s has rated El Salvador Caa1, a very high credit risk, since a downgrade in July. (Bloomberg)

Crypto media outlet CoinDesk is offering employees an equivalent of stock in its parent company DCG, which has its hands in hundreds of crypto companies. David Gerard notes that DCG has a history of pressuring CoinDesk employees to pump company interests. (Blog post) 

VC firm A16z wants more money for crypto investments. It’s seeking another $4.5 billion—more than double than what it raised less than a year ago. VCs are fueling the boom in everything crypto. (FT

MetaMask founder Dan Finlay acknowledges they’ve failed to remedy an IP address leak vulnerability that’s been “widely known for a long time.” (Twitter)

A flood of crypto rich are moving to Puerto Rico for the tax breaks, driving up real estate prices and making the natives unhappy (CNBC)

Ethereum founder Vitalik Buterin and Elon Musk exchange tweets about synthetic wombs. (Twitter)

Dan Olsen posted a two-hour YouTube video explaining NFTs and the problems with blockchain in general. The video is going viral. (YouTube)

Martin Walker explains Web 3.0 in a 20-minute interview. (YouTube)

Crypto promoters often tell us it’s still “early days.” Molly White says the nauseating phrase sounds like it’s coming from people with too much money sunk into a pyramid scheme. (blog post)

Stephen Diehl has a great take on Web3, if you haven’t read it yet. (blog post)

Cryptocurrency is a giant Ponzi scheme. (Jacobin

Fais Khan illustrates that Coinbase Ventures-backed coins tend to underperform bitcoin after an initial pop on crypto exchange Coinbase—when the VCs cash out. (blog post)

Laura Shin’s book “Cryptopians” is coming out next month. It’s nearly 500 pages long. Public Affairs is the publisher. If you don’t have the time to read it, Patrick McGinty, who teaches in the English Department at Slippery Rock University, wrote up a great review. (Baffler)

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