The Tides of Leverage Are Subsiding And It's Great For The Long Run

Hey hackers! it's been forever.

In case you were wondering, I'm still alive but, I have been busy building. With the recent capitulation, I figured I'd drop my take on all the action.

If you're in any asset class at the moment you've no doubt felt the macro downturn. However, coming off a hype cycle in late 21', a market downturn can expose a lot of garbage.

As the old saying goes:

When the tides go out you can see who's been skinny dipping.

And to my surprise, many of the big players have been caught naked.

Enron, and Worldcom exemplified everything that was wrong with the dot-com hype. No doubt the names below could have a similar narrative for crypto when all is said and done. But the dot-com bubble wasn't the end of the internet. It was the beginning. Although most of the tech stocks that survived saw 50-80% drawdowns. This washed out much of the garbage in the space and created the need to build better applications while focusing on product-market fit.

If we created a Mount Rushmore of Crypto capitulation of 2022: these would be the figureheads.

Luna/UST

This platform was exposed for the systematic flaws users called out on Twitter months earlier, only to be accosted by its founder Do Kwon responding with "I don’t debate the poor.”

A few months later UST, an algorithmic "stable coin" proved to be not-so stable DE-pegging from the dollar just as users had warned. Eventually causing a 40 billion dollar fallout. The full effect of this still isn't known but UST was the darling of the Stable coin yield options for VCs.

Celsius

The crypto Borrowing and lending giant halted withdrawals on June 13th due to "outrageous economic situations".

Before closing their series B raise at the end of May, Celsius had a pre-money valuation of $3.5 billion. CEO Alex Mashinsky guaranteed that Celsius held $28.6 billion in resources under administration. However, from its series B closing at the end of May, Celsius's resources dropped to $12 billion.

Celsius has a large loan on MAKR, and with a recent payment of $28 Million, they have lowered the liquidation price for BTC to just over 15K. Putting the funds of every user at stake. If they do weather the storm, expect a bank run for the ages when withdrawals are opened.

3AC

One of the space's largest and most successful VCs. Yet, rumors swirl about possible insolvency due to overleverage and the Luna collapse. And a cryptic tweet by co-founder Su Zhu has sent online chatter to a maximum.

A related issue is 3AC’s previous exposure to the Terra eco-system via the Luna Classic (LUNC), which experienced a multi-billion market crash in late May. The platform exchanged roughly $500 Million worth of Bitcoin with the Luna Foundation Guard (LFG) for an equal amount of LUNA 3 weeks before Luna imploded.

Even some protocols have been caught up in the 3AC fiasco with their treasures stored and managed by 3AC. This also doesn't help the price of other crypto assets, as firms that are overleveraged are selling assets to cover and add collateral. Creating double deflation of some positions.

We've seen the largest leverage in history across all markets since 2020. Hitting all-time highs in late 2021. (As seen below: Source ST. Louis FED)

Newcomers To Leverage

It's no secret that crypto has been a vacuum for the best talent in the world. However, many of these management teams -most in their 20's -are not used to managing Billions. In hype cycles like 2021, it's easy to get caught up in the pace of growth and not look at the downside risk potential. These management teams are brilliant but not proven in risk mitigation, treasury management, etc.

I look to most blockchain projects, and VC's to put an emphasis on having stronger management teams that have lived through capitulation and can mitigate against catastrophic events.

Perspective Going Forward

• Sentiment is the lowest it has been since black Thursday of 2020. The market cap then? Just below $150 Billion. Market cap today after all this capitulation ...... $937 Billion. Over a 6x from the last doomsday.
  
• Remember digital assets are a leading indicator of the broader economy. Liquidity is 24-7 365.
  
• Much like the Dot-com burst, this can give us a broader perspective and lessons learned.
  
• Know the downside risks of lending platforms and weigh the risks, cold storage is your responsibility while storing your keys is a great option.
  
• Bear markets are the best time to build, and VCs are hungry at the moment for the next big projects focusing on real-world use cases.

When the tide comes in let's make sure founders/builders/VC firms have learned from these lessons.