Crypto Apocalypse Now?

Crypto Wile E. Coyote is air cycling like crazy. For a single example of this, if Genesis can’t pay its redemptions how is the company still in business, ergo Digital Currency Group (DCG) that owes them a huge fortune, ergo Greyscale, etc?

The answer is as long as they can credibly or perhaps incredibly establish their assets are good then it’s probably just a case of T&Cs to keep on going and not go Chapter 11.

Can these players afford to fail at this scale? If you do collapse, even if you did “nothing wrong” the American legal system will prosecute you in their “star chamber” where they never lose and even presidents are pilloried and your life is over. This is what Sam Bankman-Fried will learn. He probably thought he had breached civil law not criminal law with his chicanery but in the U.S. it wouldn’t matter anyway because if the U.S. wants you in jail, you are going to jail and the punishment is a life worse than death, forever.

So with that in mind, if you don’t hang tough you are going to hang: period.

When you see crypto companies advertising at the world cup final, you have to wonder what kind of monster profitability it takes to pay for that? I’m not a depositor so for me its academic, but you don’t have to be too paranoid to look at the current crypto hellscape to see FTX-like field marks everywhere.

By now most of us know that crypto exchanges are like banks. We also know that banks are a hive of crooks and crookedness. Not today of course, no no, but pretty much consistently for all of history before. What makes banks hives of crooks is that the controllers have access to depositors’ funds and have forever and everywhere lent on them to fund their own pet projects until the money is lost and the bank goes bust. Whether the temptation overcomes them or the resources simply act as a magnet of predators is not the point, the history of huge scams is littered with banks looting depositors’ funds.

Crypto exchanges are banks in structure. Your trading might feel real but it is merely bookkeeping, mainly not connected with the blockchain at all. The exchange/bank only has to keep cash in hand for withdrawals and keep track of the money and thence delete its cut righteously from the customers’ balances. A crypto exchange could hold all its money in dogecoin and let their userbase speculate in ether/bitcoinBTC
. If dogecoin went to the moon they would make a huge profit, if dogecoin went to zero they would go bust and its users would wonder where their funds went. (For dogecoin read FTX tokens etc.)

So even without blowing the customer cash on marketing and overheads, an exchange could go bust simply not keeping all the customer assets back 1 to 1 in the correct tokens or messing up by getting too short of one that went ballistic or being too long on one that fell. Heaven forfend if an exchange went short BTC at $20,000, hoping to profit when it fell back, only to see it fly to $60,000.

But wait…. The crypto/exchange model is the “bucket shop” model of old. Give your customers enough leverage rope and they will hang themselves. Give them enough leverage rope and the money they deposit is yours because they are doomed to lose it. It’s the oldest trick in the book.

This is how it works:

Give leverage, the more the better.

Facilitate stop losses. Without them it still works, but stop losses accelerate the pace of losses.

The asset volatility ensures customers are stopped out or liquidated. (No need to hedge positions.)

Customers lose all their money.

You don’t have to profit from fees you profit from being unhedged and liquidating the positions of your clients.

But wait. Those fellows won’t get rich enough fast enough; how can we speed that up?

Well as they control the system, they know where all the positions are, the stop losses, liquidation points. At the command of a few keystrokes they will spike the price of ripe assets and artificially liquidated those positions, likely in the middle of the night when no one is watching, and steal the customers’ funds in a totally plausible manner. Ever wondered about those crazy spikes, well now you know. This has been clearly happening in BTC and it has stopped recently. Was this a dirty game FTX was playing? Surely not.

(Gentle reader, DeFi not CeFi, not your keys not your crypto.)

So the key question now is if these other aromatic actors will fall. Or will they be able to cover their losses? Recall when Bitfinex got hacked it simply handed out “mickey mouse” tokens (sorry Mickey, your token would probably be worth quite a lot) and there have been several outfits to do this and one that comes to mind then simply dishonored the deal later and sailed on by as if nothing had happened. So in a way, crypto-geddon is not fate, but it will be a mighty triumph of smoke and mirrors if there is not another huge meltdown, because in the end Wile E. Coyote never pulls off flight.

The first two weeks of January will be “exciting.”