Crypto Winter Unwind Still Has Legs To Run And Run

Are there any perma-bulls left in crypto? There don’t seem to be many left so I must admit to wanting to buy bitcoin now, but I am not going to because there are so many potential shoes to drop. (Beats me why shoes drop at all, but it’s now a cliché everyone understands.)

Take for example, Genesis. They are part of DCG (Digital Currency Group), which owns the Genesis “crypto earn” business where hodlers could get interest on their deposits. Genesis is owed huge sums by DCG (Reuters: $575 million). Genesis have frozen withdrawals, an action which has so far meant bankruptcy for others that have done likewise.

DCG owes Genesis so much, how are they going to escape implosion? DCG owns Greyscale. Greyscale has 600,000 bitcoins… we hope for holders… or maybe we hope not for bitcoinBTC
holders, if they were to be a domino in this chain reaction. Greyscale trades at a huge discount to their declared net asset value of 42% and the discount has been growing steadily for a year and has been over 30% since May, well before the bottom fell out of FTX.

Then what about Gemini that offered the “earn” product of Genesis? Will they escape the consequences? What if they don’t?

If any of these operations fail, what is the knock on… and then the knock on of that knock on?

The potential for contagion remains giant, not just from the above situation but in most areas you look in the centralized segment of crypto.

This dulls my bullish desires to buy into the current lows.

So under the hood of this is:

Crypto exchanges’ customer balances were/are not segregated like your stock brokerage account. They do not have to be, there is arguably no law to say they should be, even if the exchange is located somewhere. It might not even be possible to segregate accounts for many exchanges in the first place because of the way banks refuse to bank crypto companies. Not your keys, not your crypto.

So a crypto company is free, in practice, to do what every fiat banks does and that is use/play with depositors’ money. A crypto exchange is just an accounting system where you play a computer game with text and basic graphics. Those guys you see in conferences wearing t-shirts and shorts, they have your crypto in their wallets.

This access to depositors’ assets is exactly why banks go bust and have gone bust since the beginning of time. Borrowing short and lending long is enough to seal the fate of banks in bad times and/or if they do it too much or too optimistically. You don’t even have to inject all the criminal corruption that permeates banking (since the beginning of time) to put a bank on the edge of a financial precipice. That is why there is a Federal Reserve, because when times are hard, bank runs will pull the whole financial system into meltdown without the need for fancy derivatives or rogue traders.

Since 2008 banks have been fined half a trillion dollars for their skulduggery and they have had regulators crawling all over them (since the beginning of time.) So what hope does centralized crypto have that a group of wild, risk-taking entrepreneurs won’t get sucked into the same vortex of shame that has sucked bankers into its inescapable gravity? None.

So certain exchanges, we don’t know the full extent and probably never will, have taken depositors’ money and piled it into other players’ projects, products and Ponzis and once the wings of leverage melts off these crypto Icarii, down they plummet. When an exchange wants to buy a bankrupt company like Voyager, where is that money coming from? Profits? What about all that YouTube advertising? Those huge offices? Those 2,000 employees? Is that capital all coming from profits? Coinbase raised $500 million from VCs. What about those others titans? Buying into and starting projects and paying bills with depositors’ money and wash trading inhouse assets up to huge valuations is how FTX blew $8 billion. It will turn out not to be alone.

So right now is a Wily E Coyote moment with a range of big names air-cycling far from the cliff edge.

Unless a lot of time passes and none falls into the ravine or another failure pitches many into a sequence that triggers a final capitulation, I’m not going to start buying.

It should really kick off soon and if it does, the bottom is $6,000-$8,000. If it doesn’t then the angels must have sung.