The Wolf Den #528 - Not All Bailouts Are The Same
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In This Issue:
Not All Bailouts Are The Same
Bitcoin’s Store of Value Thesis - IntoTheBlock
Bitcoin Thoughts And Analysis
Altcoin Charts
Legacy Markets
What Is A Short Squeeze?
Voyager Fights Contagion
Goodbye Coinbase Pro
The Wolf Of All Streets Podcast Ft. Charles Hoskinson
My Recommended Platforms And Tools
Not All Bailouts Are The Same
When Luna collapsed, many (including myself) were impressed at the lack of contagion. There was an expectation that the ill effects would spread like a virus, but early indications were that the worst was over.
Financial viruses move slowly.
It is clear that the issues have accelerated with time.
As the threat of contagion spreads, companies that we thought were well insulated have been effected, including Voyager and BlockFi. BlockFi has had its issues in the past, with overexposure to GBTC when the premium turned to a discount. That said, it seemed clear that they had cleaned up their act.
Voyager has always expressed that their yield is earned by responsible lending to well vetted counterparties and not by farming in DeFi or otherwise exposing client funds to other parts of crypto.
*For full transparency, I have been a passionate user of Voyager since the first days. It has always been my preferred platform. I have significant funds there myself, which I currently cannot access after having withdraw limits reduced. I am right in the thick of this with everyone else.
Luna was the first domino that likely caused 3AC to tip in the wrong direction, and Voyager had a sizable loan out to 3AC who is unlikely to pay it back. 3AC also reportedly had a massive leveraged Bitcoin long that they failed to disclose to their lenders. Rumors are that 3AC lied to all of their lenders about the status of all of their loans, so litigation is extremely likely. But that will take time.
SBF swooped in to "rescue" these companies with revolving lines of credit adding up to about $750m for each platform.
You might be asking why Sam would do such a thing? Is it self-interest? Is it altruism? I shared more detailed thoughts on this topic in the news below.
What I want to talk about up here is CZ’s blunt response to Sam’s bailouts.
Just a couple of days after the “rescue” loans, CZ wrote a blog to remind us that, “not all bailouts are the same.”
In his blog, CZ very concisely made the point that some companies DO NOT deserve bailouts and should fail.
Don’t perpetuate bad companies. Let them fail. Let other better projects take their place, and they will. - CZ
But if you keep reading, CZ clearly states that some bailouts are good. He notes that there are companies that can be fixed or just need a cash infusion to weather the storm. I would be willing to bet that CZ and SBF are probably on the same page. Let's not forget that SBF is a significant share holder in Voyager as well.
The last portion of the article was about leverage, the likely culprit for this whole mess. Leverage will probably go down in history as this cycle’s fatal flaw. In 2017, it was ridiculous ICOs and in 2012 it was government attacks and hacks.
Below is CZ’s wrap up on leverage and the state of the market.
Slow leverage is when funds lend to other funds or DeFi protocols to invest. When one of these gets liquidated, the affected lenders typically take a few days or weeks to realize or admit the pain. These can also have a cascading effect, but the propagation speed is much slower. I believe we have not seen the end of these yet. Luckily, the more these cascading events happen, the number becomes smaller and more spread out.
So far, I believe the blockchain industry has shown tremendous resilience. If two years ago, on March 12, 2020, you told me bitcoin’s price would be $20,000 in June 2022, I would be pretty happy. So, why not zoom out for a more balanced perspective? With this in mind, let’s take the situation as a chance to reiterate proper risk management and educate the masses.
Perhaps there are more unreported effects of the contagion. All we can do is wait and see, and make wiser decisions in the future. There is going to be a clear shift back to the "not your keys, not your coins" ethos and self-custody when all of the dust settles.
Bitcoin’s Store of Value Thesis - IntoTheBlock
In this report, we bring to you the latest in on-chain cryptocurrency analysis. We look at the blockchain directly and analyze balances, transactions, and the overall activity of market participants. This gives us a unique insight into the future of the market.
This section is written in conjunction with IntoTheBlock (ITB). ITB is an intelligence company that leverages machine learning and advanced statistics to extract intelligent signals tailored to crypto-assets. IntoTheBlock tackles one of the hardest problems in crypto: to provide investors with a view of a crypto asset that goes beyond price and volume data.
The Wolf Den research team uses IntoTheBlock to dig deeper and get the most important insights about the crypto market.
Bitcoin’s Store of Value Thesis
Bitcoin’s passive utility is brought forth by a reinforcing loop: the belief that people will be able to retain their value in a decentralized manner through Bitcoin attracts more people to do so. Put another way, Bitcoin’s decentralization is the base for it to act as a store of value. People’s ability to hold their wealth in Bitcoin with minimal risk of it being seized or censored leads many to believe that this technology is valuable and thus can retain value over time.
Leveraging the blockchain’s public nature we can assess whether price fluctuations affect holding behavior. In particular, the validity of Bitcoin’s store of value thesis is best represented by its long-term holders; the higher the amount of Bitcoin that is held by long-term investors, the greater the perceived value of this passive utility.
Via IntoTheBlock’s Bitcoin ownership indicators
Over time, despite decreasing their balances during bull markets, long-term investors continue to increase their holdings throughout bear markets. This shows that not only have long-term believers held despite volatility, they have taken advantage of it to double down.
Short-term volatility is inherent in a new asset which is still difficult to value. Naturally, as Bitcoin benefitted from people taking risk amid abundant capital, it is also suffering due to the subsequent backdrop. This has led to very strong correlations between Bitcoin and traditional stock indices such as the Nasdaq 100.
However, the characteristics of Bitcoin are very different to those of a technology stock. While a segment of the market has been treating these as equal, another continues to show interest that it can be much more, driven by its provably neutral financial system. In the juxtaposition of the current macroeconomic uncertainty and increased weaponization of finance, a decentralized network such as Bitcoin’s stands to gain value as the need for a sovereign alternative becomes more apparent.
Bitcoin Thoughts And Analysis
WEEKLY CHART
The weekly chart offers a hint of hope for those watching larger time frames. As you can see, this candle is a potential doji, although we have a couple of days left and it is too early to tell. More importantly, price has bounced perfectly off of the 2017 ATH as support, which bulls want to see hold.
On the downside, price is still below the red 200 MA, which has never been the case for 2 consecutive weeks in Bitcoin's history.
The blue checks show the bear market structure since 69K. As you can see, we have a series of lower highs and lower lows. This structure would be broken if price gets above $32,375, making a higher high. A break of the bear trend requires a 50% move up in price, so it's hard to get too overwhelmed with cheer.
Still, all reversals start somewhere, so all we can do is watch and wait.
DAILY CHART
This NOT a prediction. This is what bulls want to see - a V shaped reversal from the lows. The volume profile and candle structure at the bottom were the early signs that this was possible. That said, volume has decreased on the way up, which makes it look more like consolidation than reversal... for now. Let's see how the next few days and weeks play out.
Altcoin Charts
I do NOT share signals in this section. I share setups and charts that I am watching, in an effort to help show you how I view a chart and what criteria would be necessary for me to consider taking a trade. NEVER blindly buy something because it is listed in a newsletter or posted on twitter. You need to have a plan when you enter a trade. These are just ideas, and are almost always “if, then” scenarios. If a certain set of things happen, then I would consider a trade.
BITCOIN DOMINANCE
Bitcoin Dominance gives us a gauge as to how altcoins are generally performing vs. Bitcoin. As I said was likely for weeks, Dominance has dumped dramatically. The problem is that the market has been so bad that there was no real "alt season" alongside the drop. Alts merely managed to tread water and "die slightly less" for a period.
At the moment, Dominance is breaking support (although charting support and resistance when there are no orders is a bit fishy) indicating that this trend may continue.
Legacy Markets
What to watch this week:
US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 rose 1.1% as of 10:08 a.m. London time
Futures on the S&P 500 rose 0.7%
Futures on the Nasdaq 100 rose 0.9%
Futures on the Dow Jones Industrial Average rose 0.6%
The MSCI Asia Pacific Index rose 1.1%
The MSCI Emerging Markets Index rose 1.3%
Currencies
The Bloomberg Dollar Spot Index fell 0.1%
The euro rose 0.2% to $1.0544
The Japanese yen was little changed at 134.91 per dollar
The offshore yuan rose 0.1% to 6.6916 per dollar
The British pound rose 0.1% to $1.2277
Bonds
The yield on 10-year Treasuries was little changed at 3.09%
Germany’s 10-year yield advanced one basis point to 1.44%
Britain’s 10-year yield was little changed at 2.31%
Commodities
Brent crude rose 0.8% to $110.90 a barrel
Spot gold rose 0.2% to $1,826.43 an ounce
What Is A Short Squeeze?
By Sahil Bloom:
If you follow financial markets, or if you watch Billions, you’ve heard the term “short squeeze” quite frequently. But what is a “short squeeze” and how does it work? Here’s Short Squeeze 101!
First, the basics. The “short” in “short squeeze” refers to the concept of short selling. Short selling is a way of betting against a stock - i.e. betting that its price will decline. “Short interest” is a measure of how heavily an asset is shorted by the market. It is the total number of shares that have been sold short (borrowed and sold), but have not yet been covered (bought and returned). It is usually measured as a % of the # of shares outstanding.
A “short squeeze” occurs when a heavily-shorted asset experiences a rapid upward price movement. When this happens, short-sellers may be forced to close their short positions (i.e. buy the stock and return it to the broker), further accelerating the upward price movement.
Let’s look at a simple example to show this in action. We will use Tesla, one of the most heavily shorted stocks in the world. Imagine the stock price is $1,000 per share. This seems crazy. Ricky Rational decides to short the stock at this level.
Ricky borrows 1 share from his broker, agreeing to return the borrowed share in the future. He sells it short at $1,000. If the price declines, great. He is now able to buy a share at $800. Ricky returns that share to his broker and closes his short with a $200 profit!
If the price rises, not so great. His broker gets nervous about his ability to pay and forces him to replace the borrowed share. He buys a share at $1,200 and closes the short in a loss. In both cases, the “closing” of the short requires a purchase of shares of the stock.
Therein lies the makings of the short squeeze! If Tesla stock rapidly rises (which it does too often), Ricky and many others may all be forced to close their shorts at once. This creates a surge of buying (to return the borrowed shares) and drives the price up further.
Short sellers are literally squeezed out of the market. You can track short interest in specific stocks to determine when one may be occurring. So next time you see a chart that shows a sharp rise, followed by another, even sharper rise, you may be seeing a short squeeze.
That was Short Squeeze 101! I hope it was helpful.
Voyager Fights Contagion
The virus is spreading. In a recent market update, Voyager publicly revealed that the company is issuing a letter of default to 3AC for failure to repay a loan of 15,250 BTC and $350 million USDC. Thankfully, not all hope is lost because Alameda has stepped in with a loan that almost perfectly covers Voyager’s loss. Alameda loaned Voyager "$200 million cash and USDC revolver and a 15,000 BTC."
Is this altruism? Is it because Alameda owns approximately 11.56% of Voyager's outstanding shares? Is it because Sam found cheap debt? Is Sam taking over every platform in crypto? It’s impossible to know, but Sam has gone on the record to say, “I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion. Even if we weren't the ones who caused it, or weren't involved in it. I think that's what's healthy for the ecosystem, and I want to do what can help it grow and thrive.”
Voyager has reduced the withdraw limits for all users to $10,000 a day, limiting the size of any potential bank run. As mentioned above, this also effects me. While my risk is managed with limit exposure to any platform and the bulk of my coins in cold storage, this is still an awful feeling that I share with many of you.
Goodbye Coinbase Pro
The crypto exchange will “sunset” the standalone app once known as GDAX later this year.
One of the worst kept secrets in crypto was that all Coinbase users could switch over to Coinbase Pro for much cheaper trading fees. But as that migration began, Coinbase the app began to add its own new features and the user base found itself divided. This problem should be solved later this year, as Coinbase Pro is phased out and Coinbase consolidates its users onto its Advanced Mode. Keep an eye out for official emails and updates that help you move over your funds. This should be a benefit to all users.
The Wolf Of All Streets Podcast Ft. Charles Hoskinson
Crypto is a very fragmented industry and tribalism is a very big issue. If we can solve the problem of tribalism and bring people together, encourage them to build new products and support each other, crypto will thrive. I sat down with Charles Hoskinson, the founder of Cardano at Consensus in Austin, Texas, and we talked about why the bear market is a good time to unite the industry and how we can actually achieve it.
In this episode with Charles, we discussed:
Tribalism in crypto
There is hate but there is a lot of love too
Multichain world
Harmful behavior
On decentralization
We need more philosophical conversations
The advantages of a bear market
The US risks losing crypto leadership
The Swiss approach
Regulation can be algorithmic
The industry needs to come together
The solution to tribalism
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The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.
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