RATLINKS: JULY JULY JULY
IT MAYBE SUMMER HERE BUT IT'S WINTER IN THE CRYPTO HEMISPHERE
Welcome to the July edition of Ratlinks touching on two topics:
Lost in Currency Translation
Summer State of Mind
Please enjoy this edition responsibly as you begin the July 4th blur and the ensuing summer sprint that begins once you realize “summer” is half over.
Relax. Summer doesn’t have to just be a season. That endless summer feeling is really a state of mind. Find that feeling and bottle it.
Speaking of bottling it.
This month’s edition of RatLinks is brought to you by Crab Trapper the only bourbon made with real crabs.
Crab Trapper, the #1 green crab bourbon that tastes like a briny and a better fireball
New Hampshire's Tamworth Distilling — working with a team from the University of New Hampshire — have created Crab Trapper, a green crab-flavored whiskey. And regardless of whether a seafood-accentuated spirit sounds up your alley, this unusual alcohol has an even greater purpose: to find a use for the state's unwanted green crab population which wreaks havoc on New England's coastal ecosystem.
ANTI-ANTI-FRAGILE
There are old investors, and there are bold investors, but there are no old bold investors.1
Investing is not just about making money, it’s also about not losing money.
Spotting an opportunity is not simple as it is vastly easier to follow consensus than to be a contrarian. It feels good to buy into a rapidly rising asset even if you are entering at the wrong time or price. You are likely more focused on missing out on the upside than thinking about the possibility that the asset price could crash.
Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.2
Rapidly increasing prices can often create a positive feedback loop where higher prices beget higher prices. When this occurs more often than not a bubble emerges.
This type of positive feedback loop happened to Tesla see Ratlinks: Flywheels and Mousetraps
Prices keep rising until there are no more new buyers. When demand is fully saturated, no new buyers emerge and previous buyers become sellers driving the price lower and it becomes painfully obvious that the bubble burst.
When the bubble pops it creates a phenomenon called the sleeping dragon, a negative feedback loop where any time the price rises it awakens more sellers leaving many with a significant loss that may never be recouped.
This is interesting, but I don’t care about the stock market. You see I put all my money into magic beans, jpegs, and stablecoins.
BANDS WILL MAKE THEM DANCE
Let’s step back before we look forward and go all the way back to 1992.
George H. W. Bush was president, Michael Jackson’s Black or White was atop the charts and an investor named George Soros realized that the United Kingdom’s exchange rate mechanism (ERM) was destined to fail.
At the time the British Pound was pegged within a certain trading range controlled by The Bank of England. The range was created to limit volatility bringing stability to exporting companies and in turn reducing inflation.
Soros realized that if he shorted enough British Pounds it would force The Bank of England to defend the peg by either:
Selling its foreign exchange reserves to buy pounds
Raising interest rates to attract foreign capital who would buy pounds.
The first solution is limited by the sizes of reserves and the second slows growth by limiting many companies’ willingness to borrow.
On September 16, 1992, Soros shorted 10 billion British Pounds and convinced other investors that if they also shorted the pound it would collapse. After only a few hours Soros broke The Bank of England as it announced its exit from the European Monetary System, abandoning the ERM. These actions devalued the pound by 15% earning Soros $1.1 billion dollars and this was 1992 when a billion dollars really meant something.
History never repeats itself, but it does often rhyme.
If you watch the downside, the upside will take care of itself
— John Paulson, billionaire investor who spotted the subprime crisis
A “stablecoin” is a cryptocurrency whose goal is to avoid volatility and provide stability by pegging its value to a safer asset like the U.S. dollar.
Sound familiar?
This stability allowed stablecoins to become a backbone of decentralized finance (DeFi) as stablecoins popularity increased further with the offer of a much higher yield than traditional savings accounts. Stablecoins began offering 15-20% annual returns for depositing or “staking” your stablecoins leading to multi-billion dollar market caps for things like US Dollar Coin (USDC), Terra (UST), and Tether (USDT).
15 to 20% interest on a savings account? Can I really trust this? Please tell me more about how these were created?
Even by crypto’s often-surreal standards, Tether has a peculiar history. The company was founded in 2014 by Brock Pierce, a cryptocurrency evangelist who, as a child actor, starred in the “Mighty Ducks” movies. He and his partner, Reeve Collins, later handed control of the firm to a former plastic surgeon named Giancarlo Devasini, who has stored some of Tether’s assets in a bank in the Bahamas run by one of the creators of the “Inspector Gadget” cartoon.
With origin stories like this, how could anything go wrong?
In 2018, Do Kwon, a Stanford University-trained engineer, started Terraform Labs, aiming to transform modern financial systems by creating the Luna cryptocurrency.
By 2020, the company started selling TerraUSD (UST), calling it a stablecoin with investors referring to themselves as Lunatics.
Terra operated as an algorithmic stablecoin, one that operated via computer codes to help maintain its price equilibrium with a process known as minting and burning to maintain equilibrium between LUNA and UST.
Here's the key to UST retaining its peg: 1 UST could always be exchanged for $1 worth of LUNA. So if UST slipped to 99 cents, an arbitrage opportunity arose where traders could profit by buying a huge amount of UST and exchanging it for LUNA, profiting 1 cent per token. The effect works in two ways: People buying UST drives the price up, and UST being burned during its exchange to luna deflates the supply.
In early May 2022, the stability and yield powering the Lunatics came crashing down as the value of both LUNA and TerraUSD (UST) lost the entirety of their value when an unnamed investor pursued a multi-billion dollar short position against UST.
Much like Soros breaking The Bank of England, the selling of a large amount of UST caused the stablecoin to depeg. As more UST was sold, mass panic began to spread with more Luna being minted. This increase in Luna's circulating supply had the knock-on effect of then crashing the price of Luna.
The massive short was too much for UST to handle, and the peg could not be regained by Terra alone. As UST remained off of its peg, fear started to set into its holders. Mass liquidations began and investors pulled out of Anchor, Terra’s lending and borrowing platform which provided investors with the 19% yields on their UST.
As Terra’s econsystem broke, Anchor’s total value locked (TVL) decreased from over $14B to nearly nothing.
In all the collapse of Luna destroyed countless billions in value and likely more than the amount of wealth destroyed by Lehman Brothers bankruptcy.
The collapse of Terra has led to further ripples amongst other crypto platforms like Celsius, Voyager, BlockFi, and Babel Finance all of whom began to face liquidation risk due to poor asset-liability mismatch on their balance sheets.
Two of the companies BlockFi and Voyager received bailouts from another Crypto broker FTX in order to survive. FTX provided the bailout under one stipulation, that FTX money sits below client assets. Meaning that customer money deposited on exchanges belonging to clients can not be used to settle firm liabilities.
The borrowing firms will have to use their equity to satisfy liabilities in most cases wiping out any prior equity value. That is bad for major crypto investors who wrote large checks to participate in BlockFi’s March 2021 Series D at a value of $3 billion. It is likely many of these investors were carrying the position at an even higher valuation after BlockFi raised a $500 million Series E four months later in July 2021 at a projected valuation of $4.8 billion, or about 66.7% higher than the March valuation.
As of June 2022, BlockFi’s equity is likely now worthless after FTX reportedly agreed to acquire BlockFi for $25 million, a 99% discount from the $4.8BN Series E valuation.
It is worth noting that Coinbase a publicly-traded crypto broker recently disclosed that in the case of its own bankruptcy proceeding “customers could be treated as our general unsecured creditors.”
This will get worse before it gets better
Ethereum is the second most popular cryptocurrency with a $144 billion dollar market cap, a big number, but down from $450 billion at the start of the year. Ethereum’s network is used to power all sorts of blockchain “innovations” like smart contracts and NFTs.
For more on NFTs see: RATLINKS: PRINTING MONKEY
Ethereum's goal is to be the dominant and most valuable cryptocurrency overtaking Bitcoin in what is called “THE FLIPPENING.” For this to occur, Ethereum must speed up its network and to do so must switch its blockchain protocol in what is called “THE MERGE” sometime in 2022.
Ethereum is moving from proof of work to the more energy-efficient and faster proof of stake
DeFi or decentralized finance is fueled by the concept of staking and individuals stake Ethereum or other cryptocurrencies for two reasons:
Staking provides double-digit yields
When ETH moves to proof of stake, holders can collect transaction fees as a reward for staking cryptocurrency
What if that never happens or Ethereum’s merge keeps getting delayed?
Eventually, investors may decide they no longer want to hold their Ethereum let alone stake the currency. If that were to occur you could see investors rapidly exiting the ecosystem. If the amount of staked Ethereum drops other “smart contracts” will not be worth the blockchains they are printed on.
People may wake up and realize the majority of collateral on these networks is worthless, not because the assets were toxic but because they were never assets in the first place.3
Then again it's probably nothing.
FEELING GROOVY
24-7 newsflow and a rapidly changing world can be unsettling. It is important to take time for yourself even if it’s five minutes to find your center and just breathe.
Remember:
Peace of mind is underrated.
Quality of life is always worth maximizing.
You will never look back on your life and wish you spent more time in the office.
THE GREATEST KILLER OF HAPPINESS IS COMPARISON
"There’s a reason why going to a high school reunion is so awkward, and in some cases so terrifying: we are re-engaging with people with whom we shared a baseline, with whom we were (and still are) close to in age, and with whom we shared a common social environment at one point in our lives. our lives. That is why it is all the more mortifying to see the disparities, and why the urge to compare is far stronger than it would be with someone who went to high school in a different state or who graduated in a different year. We’re less likely to think of ourselves as their rival."
— Luke Burgis author of "Wanting: The Power of Mimetic Desire in Everyday Life"
KNOW YOU HAVE ENOUGH
JOE HELLER
True story, Word of Honor:
Joseph Heller, an important and funny writer
now dead,
and I were at a party given by a billionaire
on Shelter Island.I said, “Joe, how does it make you feel
to know that our host only yesterday
may have made more money
than your novel ‘Catch-22’
has earned in its entire history?”
And Joe said, “I’ve got something he can never have.”
And I said, “What on earth could that be, Joe?”
And Joe said, “The knowledge that I’ve got enough.”
Not bad! Rest in peace!
ONE FOR ME
“Don’t make stuff because you want to make money — it will never make you enough money. And don’t make stuff because you want to get famous — because you will never feel famous enough”
YOU GOT TO MAKE THAT MOMENT LAST
According to Andy Warhol “In the future, everyone will be world-famous for 15 minutes.”
I got my 15 minutes gaving a toast at my sister’s wedding. Afterward, people came up to speak to me and treated me like some sort of celebrity, which I am not.
Then it hit me if everyone is famous, no one is famous.
Find your beach and have an endless summer!
he Most Important Thing: Howard Marks
Extraordinary Popular Delusions and the Madness of Crowds Charles Mackay
Crypto End Game Goes Through DeFi’s Black Box - Heisenberg Report