Searing Fraud, Attacks on Bitcoin, and the Absence of Sanity. Inflation Slows.
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Searing Fraud, Attacks on Bitcoin, and the Absence of Sanity. Inflation Slows.
If you haven't received a Doctoral degree in surviving bitcoin cycles this week, it's time to shake you into cognizance. The Fed is getting what it wants as inflation slows.
Dear readers,
Greetings from India—what a week to be on the road. To start, I must bring back fellow USC alum Will Ferrell for this moment. Nothing else seems to fit:
Here is the quick clip from Anchorman:
And let’s be honest, we all might need a little comic reprieve. So, just in case you need to take a breather before we get started, here is the full six-minute scene. Hopefully, some laughs before we dive into the most dramatic day in bitcoin in…a few months?
Ok, ready? The Bitcoin Layer has your back. WTF just happened?
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Bitcoin will survive, but many things will not
Joe Consorti covered the early week’s drama in a fantastic post on Tuesday.
Catch up here, in case you missed it:
FTX, the now-allegedly-defunct exchange, looked like it would be swallowed up by Binance for literal pennies (not on the dollar, just pennies) a couple of days ago. That lasted only a few hours:
Binance tried, but eventually was met with the fact that FTX had engaged in egregious risk management practices at best, and outright decades-type prison sentence fraud at worst. Will the con artist Sam Bankman-Fried eventually serve jail time? That is another conversation, but I’ll leave this thought here for you to chew on, brought to you by Cash App star Miles Suter:
Whether or not nefarious forces are at play from the US government and/or intelligence agencies is beyond the scope of The Bitcoin Layer, for now. But I will leave bitcoin podcaster Marty Bent’s tweet from three months ago:
What isn’t beyond the scope is the outright, blistering mismanagement of FTX and associated vehicles and the $8 billion hole that was uncovered:
What has transpired due to this collapse of epic proportions? To start, bitcoin’s price fell over 20% in a matter of hours. To continue, the prices of shitcoins across the board have collapsed, and without a doubt, a variety of “crypto” instruments will cease to have any value. And finally, the behemoth exchange FTX, complete with its Tom Brady and Larry David advertisements, regulatory capture, and endorsement from the draconian-minded World Economic Forum has completely collapsed. Its VC investors are marking the value of the company at $0. Imagine the level of ignorance, fraud, and malpractice that has surrounded SBF this year after seeing the below:
And the end scene:
The potential contagion now that FTX is heading into court proceedings is palpable and has likely been the primary contributor to the price decline. The rumors are stirring up:
The interconnectedness of counterparty risk is reminding me of the way the banking industry almost collapsed in late 2008 after Lehman Brothers—no entity seems safe. But bitcoin will survive, as it always does. If this is your first cycle, the nightmares and sleepless nights might be with you. If this is your second or the rare third cycle, you likely have most or all of your bitcoin in self-custody and are ready to weather the storm.
Proof of reserves is ostensibly uncomplicated
How could this all have happened? Where were the adults? Where were the industry leaders warning that fractional reserves and centralized exchanges could lead to catastrophic situations such as the one faced by the market this week? The truth is, they were EVERYWHERE. If you’re willing, listen to the brilliant arguments of Caitlin Long from last year’s bitcoin conference in Miami—it was crystal clear to anybody with proper banking and risk management experience that the way the “crypto” industry was structuring itself was a recipe for disaster:
What is the solution? The concept of “proof of reserves,” in which a centralized entity can sign a message that proves, using bitcoin’s blockchain, the assets it holds. But proof of reserves is incomplete as a risk mitigation technique without additional practices, such as not issuing a shitcoin exchange token (such as FTT, which brought this whole thing down—hop back into our post from Tuesday to understand the way in which FTT and the associated shenanigans led to the collapse of FTX). Ultimately, this token was printed out of vapor, dumped onto retail, then collateralized against real liabilities. Once the market caught wind of this reality, it sold all it could in end-of-days fashion, stop-hunting FTX & Alameda into oblivion.
The bottom line here is that with its clout and its VC backers, FTX propagated its own money and used it for speculative activity (separate entity Alameda notwithstanding). When things went south, the most obvious explanation is that SBF funneled money, in some form or the other, away from his exchange to his prop trading operation. Outright, jail-worthy fraud.
Not your keys, not your coins, and never ever ever shitcoin
Bitcoiners are wildly cynical, and for good reason. Staying cynical is the only way to protect oneself from all the theft, fraud, and greed that has come with the “crypto” industry. Bitcoiners have always preached self-custody, because the overarching theme of a transition to a bitcoin world (advocated by the staunchest advocates) is the separation of money and state. And if the separation is reliant on centralized entities, such as these exchanges and “DeFi” platforms, then the separation is only a mirage. It’s also why the relentless advocacy for a bitcoin-only approach to digital assets never fades—is it really worth it to pick up a couple extra percent return or chase the next high flyer only to be stuck with zilch? We at The Bitcoin Layer have always argued, no. Were we a little blindsided by just how much fraud and leverage were in the system? Certainly. Are we fazed by this dip? Not in the least. Bitcoin is already up 12% off its lows, and we expect the macro headwinds to turn into tailwinds as the Fed stops hiking rates. Speaking of which…
The hiking cycle is over
Inflation just came in weak, and the Treasury market is reacting accordingly. Yields are plummeting this morning and the expectation of a Fed Funds rate eclipsing 5% now has disappeared. December’s rate hike expectations are now firmly at 50 basis points, and going forward, the market is all but convinced that whether or not it happens in 2022 or early 2023, this hiking cycle is over. The dollar is weakening significantly, stocks are rallying, and the macro narratives of the past six months are now reversing. Where are those 5% Fed Funds expectations? Gone:
This is exactly what we have been projecting here at The Bitcoin Layer—a slowdown in inflation that dismisses the 1970s-style inflation fears, a Fed that will succumb to the economic cycle, and risk markets that are itching to get going again after a year of pain.
Stay safe out there. The bitcoin market obviously decoupled from macro this week as all hell broke loose, and it’s a stern reminder that this relatively immature asset class can get rinsed at any time due to a variety of underdeveloped financial infrastructure, speculative juices, and yes, fraud. But bitcoin is also in deep value territory, and the liquidity cycle could be on the brink of shifting back to easing. Stick with us as we cover all the drama.
Until next time,
Nik
The Bitcoin Layer does not provide investment advice.
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Searing Fraud, Attacks on Bitcoin, and the Absence of Sanity. Inflation Slows.
Well done, Nik! You have been warning anyone who would listen to not venture into shitcoins and this is why! Too much fraud out there in the crypto world. Plus, you have been harping on the Fed not continuing to raise rates and inflation easing. Again, you nailed it! Keep it up!