Where are the emperor's clothes?

Thoughts on crypto's mini collapse and cyclicality

pic of me and my friends last week at the bar, we had a good chat

One take. Let’s run through everything that’s happened in the last week and a half with ease. Crypto is a battlefield, and boy have we been at war. Where do I even begin?

I’m going to try and analyze crypto’s recent volatility with previous cycles in mind, all while being a market participant who didn’t get involved until Q2/Q3 2021. Everything I say is only indicative of my observations - I wasn’t around for much of crypto’s shenanigans and can only speak on what I know. Oh, and none of this is financial advice, unless you want to take it as that.

Back to square one

Things that have happened in and outside of crypto recently, from what I can recall:

• Celsius pauses all withdrawals and is assumed to be some form of insolvent

• 3AC goes under and faces debt of around $2 billion

• stETH “peg” breaks further, hovering ~ 0.9

• BTC and ETH drop over 50% in a week

• Rate hike machine goes brrrrr to the tune of 75 bps

• DeFi TVL reaches levels not seen since March 2021

• USDD continues to break below peg

• Coinbase has fired a lot of employees / Binance has hired many

• Do Kwon is still tweeting, for some strange reason

• There was some fud around MIM which sort of blew over

• Sam Bankman-Fried and FTX potentially bailed some people out

• NFT volumes down horrendously this month

• Inflation still very much a thing, consensus seems to be we’re in a recession

• The substackooooor bear market remains, with ATLs of new content

• BlockFi may or may not be in some trouble

• Some mild Tether fud here and there, but nothing substantial afaik

I’m probably forgetting a lot of things, but this is a recap of the madness we’ve witnessed in our digital casino. What’s the cause of all this and why does it feel like crypto is over? Here are a couple tweets which are fairly indicative of Twitter sentiment recently (both are some form of hyperbole but I enjoyed them):

your TVL is not safe

After the collapse of Terra and the flight of TVL from DeFi, many began to question (for good reason) the health and utility of beloved DeFi protocols. We experienced one of the most bullish bull markets of all time, fueled by excessive money printing and an entire world locked in their homes with nothing to do but speculate on digital currencies. The absurdity that occurred from the UST and LUNA fallout essentially caused quite a stir, largely because it showed us that there’s a strong chance nothing is safe. If we couldn’t trust the venture funds that put money into Terra or the tens of billions of dollars deposited in the ecosystem, what might be the next house of cards to fall out from under us? It’s human nature to speculate, and boy is crypto Twitter good at it.

Protocols like Aave, Uniswap, Lido and Curve all serve a purpose in the current state of DeFi, but what would happen if everyone lost trust in these decentralized bastions of open finance? Many took to debate on the stETH / ETH “peg” and what really makes a ratio golden (1:1). Some looked at DEX volumes and began to feel a certain way, questioning the utility of these sometimes worthless governance tokens and how they might never accrue value to holders. Others began to wonder what might happen if the appetite for risk within DeFi and crypto as a whole disappeared - who would be lending money to Aave or Compound if the risks outweighed the paltry rewards? Do our emperors truly have no clothes and was this all a fever dream that created generational amounts of wealth from thin air? If the big shots don’t know the future or how to manage risk, then there’s a strong chance none of us knuckleheads have any idea.

After UST went to zero, Twitter was full of threads and thoughts on how other stablecoins might break - an obvious response to market events. Some of these were more rooted in reality than others, but the message was the same: market participants are rightfully scared. Unlike TradFi, there is really no-one to bail us out if things go bad, aside from maybe Binance or FTX. If we lose all our money in a leverage-fueled fiasco, the Federal Reserve and Blackrock won’t step in to help us recoup our losses and build our system back from the rubble - we are alone.

something something gambling

The news of Three Arrows Capital collapsing came as a shock to practically everyone. It wasn’t so long ago that Su Zhu was on UpOnly explaining his reasons that we were in some kind of crypto supercycle. There were a million reasons to believe him, these paling in comparison to the fact that Su was managing billions of dollars and was largely seen as one of the best, mainly because he was.

Hearing that 3AC lost most of their money and became forced sellers of everything is a very tough pill to swallow. If Su Zhu can’t make it, how can we? There’s no doubt that a lot of the recent selling can be attributed to funds and potential redemptions, partly because of the relative strength in alts across the board. Seeing majors go down over 50% in a week is insane and it feels weird that alts didn’t completely fall off a cliff. Most alts are already down close to 90% from ATHs and a case can be made for a decent amount of them that selling has reached oversold levels.

But has it?

Defying the inevitable

I’ve tweeted a small amount about how I believe maybe 95% of alts will never make it back to ATHs. Here’s a quick glance at crypto’s total market cap without the big dogs weighing us up:

not very good

Looking at this chart, it’s kind of hard to make a case for more selling, if you’re under the assumption that the majority of current alts and their respective protocols aren’t vaporware. Unfortunately for us and our bags, recent events have shown just how decadent our system really was. In a market like we’re seeing, yields dissipate and protocols lose active users. There becomes less of an incentive to go on-chain and engage with the future of finance, mainly because there isn’t much to do. For the protocols that do have tokens, these become illiquid and the only thing you can do is sell (likely for a loss) or HODL and pray they’re around next cycle.

We still have a long way to go in cleansing FDVs and bringing token circulating supplies on par with their stated max supply, but this has been happening at a decent rate. Just a few months ago, I wouldn’t have touched some of these tokens because of their insane valuations. Now, the story is a little different. You can scoop up a large amount of quality DeFi tokens at reasonable valuations, with many of these posing far less of a dilutive risk than Q1 2022. I’m not saying these will all turn out as 100x investments, but if you spray and pray a little bit, you’re bound to find something that sticks.

Unfortunately for those reading this, I wasn’t around in crypto’s previous cycles, so I can’t speak to how things went in a transition from a bull to a bear market. From what I’ve heard, many of the most prominent coins and protocols disappeared, leaving protocols with *literally* worthless governance tokens and zero users. I imagine we’ll see some of this, albeit not nearly as much. I think a key difference from last cycle and this time is the amount of revenue producing protocols and the increase in total crypto market cap. Here is a list from the past week of protocol revenues, across various sectors:

not too bad!

As you can see, even in shitty market conditions, there are still things making money. This is a huge positive. If you believe a protocol will stick around and continue building through the bear, there’s no reason to believe the token will go to zero. There are other factors to take into consideration, however, making this a much more difficult guessing game. For instance, why might someone from the future look at our current alts and decide to bid? Why buy something old when you could trade it in for a shiny new token with potentially stronger tokenomics? Why buy an old token without meaningful value accrual when you could shoot for the moon and potentially buy the new cycle’s version of a SOL or JEWEL?

Even if DeFi transitions into a state that’s more boring and respectable, are these the tokens people desire? Is something like UNI as exciting as a DOGE or some wild futuristic meme token we haven’t yet dreamed up? I know, this is all extremely bearish, but bear with me here.

I have faith in a handful of DeFi protocols becoming truly decentralized hyper structures that can exist in perpetuity. I have faith that there will be significant value accrual for those holding these protocols’ tokens. I have faith DeFi comes back stronger than ever, in whatever form this may take. What I don’t have faith in is excessive liquidity mining, useless forks, DeFi on dead chains, protocols without quality teams and tokens with FDVs that make me want to scream. Thankfully, we’ve seen some of these aforementioned characteristics come to light in the form of the great DeFi TVL exodus, visualized here from two sources (DeFiLlama and DeFiPulse):

Doesn’t look too good, does it? Going off of DeFi Llama’s $71.5 billion amount, the top 10 DeFi protocols make up over 50% of this, with Maker dominance sitting at 10.7% with Aave trailing not too far behind. What might this indicate?

It’s my belief that these protocols represent the most trusted in the space, as they’ve been around the block a few times and have held up well according to their mission statements and have shown utility. Going further down the list, things don’t look as good.

As I’ve said before, much of DeFi was predicated on rampant speculation and obfuscated ponzi games, bringing the vast amount of wealth to those lucky enough to notice it and get involved first. Liquidity mining is the biggest example of this, a mechanism that frequently rewards the earliest users. Of the current top 10 protocols, I believe all of them will remain and find some form of success in the next cycle (I use this term loosely).

But how about the protocols that aren’t seated directly at the top but deserve some sort of mention? There are promising candidates in DeFi and I’ve pooled together a list of some that I believe will do well in the years to come:

• Maple Finance

• Osmosis

• Liquity

• Ribbon Finance

• GMX

• Frax Finance

• dYdX

• Olympus DAO

• Bastion

• Angle Protocol

• Trader Joe

• Euler

• Synapse

I know, that’s a mouthful. I plan to write about many of these in future articles, and there are some I’ve spoken about briefly in the past. Looking at crypto as a whole, it’s very easy to feel that much of it can go to zero, mainly because it’s difficult to feel bullish when retail only wants to buy dog coins or walk to earn coins. But there’s more than meets the eye, and crypto is bigger than the demand for a couple of coins that made uneducated retail investors money.

Speaking of retail, I figured I’d share some thoughts on NFTs too. Instead of our fungible tokens getting bid to infinity this bull run, we saw retail and mass adoption come for the non-fungible tokens, for a few reasons.

Non fungible extravaganza

NFTs became popular because they shared the spirit of crypto without the unnecessary boring parts. NFTs are fun images that you can share online and set as profile pictures. NFTs are leveraged bets on ETH, many of which were very good investments if you got in at the right times. NFTs were very liquid for a while, even though that isn’t the case. Arguably the most important selling point of NFTs, the communities that grew around these silly jpegs were probably unexpected by most who had been involved in the space. If you’d have predicted two years ago that everyone from Steph Curry to Justin Bieber were buying digital images of apes, everyone would have lost their mind. If you were making claims that NFTs would form entire cults online and spur huge social movements across the world, you probably would have been chased out of crypto Twitter and shunned for your beliefs. But this is exactly what we saw happen.

Taking a look at NFT volumes now, the story is a little different. Just see for yourself:

ouch

I’m sure that NFT popularity has only slightly fallen off, with much of this decrease in volume attributable to general market downturns and risk-on appetite falling off a cliff. There’s practically nowhere to keep your money right now - if you stick it in equities, crypto or even cash, you’re screwed and bound to take a loss. Why speculate on NFTs when it’s more than likely many of them continue to drop in floor price and fall in dollar terms thanks to ETH’s decline?

I believe there are moments in each cycle that come as surprises to those that have been around the block before. Looking at DeFi Summer and NFTs specifically, these were two events that came out of the woodwork and left many surprised. Could there be another of these events in a few years time? Absolutely.

Whether this will come in the form of web3 gaming, metaverse advancements or something entirely foreign, I have no doubt that the sheer firepower that is crypto will come up with a new mind blowing 1000x innovation.

Lack of innovation, disgusting CeDeFi

On the topic of innovation, it’s important to acknowledge the disgusting recent events that have unfolded with Celsius. For the unfamiliar, Celsius was a custodial platform where users could deposit their funds to earn an easy yield. Sounds a bit familiar.

Last week, Celsius paused all withdrawals from their platform, essentially locking users’ funds and preventing many from having access to stop liquidations or simply take control of their hard earned cash. As you could imagine, this didn’t go over well. As of today, June 20th, it is still largely unconfirmed if Celsius is insolvent, or what form of insolvency they may be experiencing. Regardless, they fucked up.

It’s unclear what they were doing with user funds, but many speculated they got burnt pretty hard on Terra and faced severe losses from UST’s collapse. Could they have been depositing funds into Anchor to earn an easy yield? It’s highly likely. After Terra’s blow-up, a large number of scummy apps offering easy 15% and beyond yields went under, with retail taking a hit on the way down. Centralized DeFi is garbage, and it makes me sick to see so many get screwed for something they probably had no understanding of. As far as getting the money back goes, there’s no timeline on when withdrawals will open up (if they ever do) or if users will get reimbursed in full.

Until then, it’s the world versus Celsius, and I’d advise you to stand with the majority on this one.

In terms of centralization, it’s probably best to examine your long tail risk when it comes to things like exchanges and stablecoins. In hindsight, Terra’s implosion was all too obvious. But what’s the next domino to fall that we’re overlooking? I’m not saying things will go south for USDC or Coinbase, but it’s smart to hedge against these possibilities in the best way you can. And no, I’m not saying your number one goal should be to “sUrViVe ThE bEaR mArKeT” as I was never around for a bear market and don’t want to talk out of my ass like many do. A little over a year ago I was long IPOF, and I think that tells you everything you need to know about taking financial advice from my substack.

Money printer go … never mind

Regarding cyclicality, we’ve definitely broken historical patterns in some form:

a wild story

There’s good reason to believe we’ve had enough happen in the past week and enough selling to form some kind of bottom, but what if this time was truly different? Crypto has been very cyclical, with multiple cycles under its belt that have behaved roughly the same. It was odd to see BTC double top within a six month period, and it’s even odder to see it break below 2017 highs.

A case can be made from both a bull and a bear’s perspective, but the more likely assumption is that none of us have any idea which direction this monster of a market might go. We’re living in a world that has just barely escaped the chains of a two year pandemic, coming out on the other side with price increases in everything and rampant inflation that doesn’t appear to be slowing down. The fed has started raising rates, but nobody knows when this will end and to what degree the rates will be raised.

I have no doubt that crypto will continue to serve as the bastion of innovation, a digital casino existing in the metaverse ruled by anonymous cartoon characters - but are we screwed in the short-term?

If crypto has truly broken from its historical cyclicality and we are walking through uncharted territory, there’s a high possibility that we go lower than we’d like to imagine. Key differences this time around include higher ATHs, far more VC funds entering private markets and more eyes on us thanks to mass recognition of meme coins and NFTs. Assuming there was a gun to my head and I had to predict where BTC bottoms on a longer timeframe, I’d guess we range in the 15-20k range for 3-6 months as macro conditions stabilize. This won’t be as pretty as it sounds, as I predict many alts will fade away to zero and lose any attention they once had on them. VC money will also dry up, as private markets tend to lag behind public markets for a short amount of time. It won’t be as easy to raise money for your web3 DAO tooling fly by night startup, but is that really going to hurt any of us? Probably not.

It’s in anyone’s best interest to remain diligent and keep their eyes on crypto. There are simply no other opportunities as good as this, unless you’re a gigabrain and feel an inclination to get involved with AI or biotech. For the rest of us, we’ll just continue to piggyback off geniuses like Vitalik and ride off into the sunset. I’ve already begun to see a lack of substack / mirror / medium posts like we used to, giving a bit of a qualitative insight into crypto’s attention. I urge you to try your best and make the most of this bear market - you won’t want to come out on the other side talking about buying JEWEL at a cent to people who don’t have any idea what Harmony or DeFi Kingdoms is. Just as many of us from the class of 2021 have almost zero knowledge of alts from previous cycles, there will be new market participants who don’t know what the Curve Wars were or why we fought them.

Do with this information as you wish.

I’m not of the belief that the world is ending, as much as /biz/ tells you to stack silver and exit all markets. This is the time to DCA into strength and work on building yourself up. Let this recent tweet from GCR serve as some solid advice:

listen

If I hadn’t gotten into crypto Twitter, I’d probably be sweating my ass off mowing lawns all day for .01 ETH. Twitter is a valuable tool, and you should be using it to maximize your chances of success in an increasingly PvP crypto environment.

Hopefully this served as a decent summary of recent crypto events, and a look into my thought process as we navigate the great bear market of 2022. I plan to write more soon, so stay tuned for my long overdue cross-chain report. Peace out.