WEEKLY, Nov 19, 2022

Nov 19, 2022

Hi everyone! If you’re reading this, I’m assuming that you’ve managed to get through the past couple of weeks without losing your curiosity or hopefully conviction about the crypto industry and the impact it can have on the macro landscape. I’m very glad you’re here. Since many of you are new (welcome!), I’ll introduce myself again: I’m Noelle. I’ve been writing crypto-focused newsletters for over six years now, at first for CoinDesk and then for Genesis Trading. Now that I’m focusing on independent research, it feels natural to continue. If you find this useful, I hope you’ll consider sharing with friends and colleagues.

If you’d like to receive daily insight into market moves and the trend-shaping news that hints at the growing macro-crypto overlap, do consider upgrading to the premium subscription. You’ll get the aforementioned as well as good reads or listens I come across, daily wisdom from culture-shapers, and stick figures on charts. I made this week’s dailies open access, so feel free to check them out.

Some of the topics covered in this week’s daily email:

What is supporting the BTC price at these levels
BTC-ETH correlations
The impact of the FTX collapse on DEXes
A confused stock market
The significance of the ASX abandonment of its blockchain project
Cracks in the Treasury market, and potential solutions

Markets

In spite of the confusion and fear clouding crypto sentiment this week, BTC and ETH held up surprisingly well. In the daily emails I look into possible reasons why as well as some metrics suggesting that this could be a floor (yes, we’ve all heard that before, I know) – for more detail, check out those (they’re all free to access this week).

Looking at on-chain data, one of the many encouraging signs we’re seeing is the amount of crypto being taken off exchanges. I don’t usually pay attention to exchange balances because they can be misleading – not all exchange addresses are labelled as such, for instance. Yet this current drop is worth noting. Some BTC is probably going to decentralized platforms for trading, but it’s likely that the bulk is going to off-exchange custody, which implies an intention to hold.

(chart via glassnode)

The stock market seemed to convince itself that weak consumption data and a lower-than-expected US PPI were very good news in that surely this means fewer rate hikes, right? But a happy stock market is not what the Fed wants right now, so the hawks came out in force to talk expectations down again. Apparently, we might see a slowing of the pace, but the hikes are far from over. Consensus is still pointing to a 50bp hike in December, the same as a week ago.

(chart via CME FedWatch)

Check out the daily emails for more on the erroneous conflation between “pivot” and “slowdown”, confusing earnings,

Essay

Steps to Recovery: Where “We” Go From Here

What a horrible couple of weeks. Very few of us have not passed through some degree of surprise, disbelief, shock, anger, sadness, fear and betrayal. Many, tragically, have had life-changing amounts of money disappear, at a time of peak economic uncertainty. Even those more fortunate are reeling from a toxic combination of dismay, disgust and perhaps depression.

We’ve also had to deal with a handful of outsiders declaring “told you so!” and “crypto should die”. Critics are plenty right to point out the hubris, ego and lack of common sense that, yes, is prevalent in our industry. But the gleeful victory lap from skeptics compounds our embarrassment and shame.

Now we need to think about moving on. No, it’s not too soon.

The first step involves, well, figuring out the first step. In my opinion, it involves clearing up one significant misconception: That “we” are going to come up with “a solution”.

I have been asked often over the past week: “How can we make sure this doesn’t happen again?”. My response is, who is “we” here?

Crypto has never spoken with one voice, and it’s not going to start doing so now. Even the idea that consensus for such a diverse ecosystem is an ideal outcome is disconcerting. The origin of the industry is based on the free-market ideology that people should be able to choose their methods of transaction and representations of value, and that experimentation can directly test new incentives and forms of governance in a real market. It is up to us to evaluate risks – we may be bad at doing so, but we hopefully learn from mistakes and end up gravitating toward good actors.

And what do we mean by “make sure”? Insisting that we do whatever we need to in order to ensure this doesn’t happen again also implies a level of control that goes against the crypto ethos. How does one make sure that mistakes are not made? By dampening innovation and insisting on mass obedience to a strict set of often impractical rules. Parents know this dilemma: you can make sure your kids don’t get hurt by only letting them play under your supervision, and even then with lots of padding. But what kind of a life is that for them or you? Instead, you can teach them to do what they can to minimize risk, and when they fall, get back up again and recalibrate.

The crypto industry will make mistakes again, as it should because that is an integral part of experimentation. Participants can learn to be more careful, take less at face value, distrust the aura of celebrity, question established beliefs and research alternatives. But let’s be realistic – we’re human, most of us seek convenience over safety, and we instinctively trust our friends. So, we can’t “make sure” this doesn’t happen again, and nor should we insist on that. The best we can hope for is that we’re smarter and more demanding going forward, because no-one wants to repeat the past few months.

So, it’s time to reframe the question in more free-market terms. Instead of ineffectually grasping for a communal answer, how about: What can I do to improve the industry? What can I do to protect myself better? What can I do to help others?

Another question I get often is: “What should we do now?” This is natural. We want a solution, and we want someone to give it to us. Many think the solution is regulation, which means we’re walking into a situation the authorities have long expected. No restrictions, thank you, until things go wrong and then it’s your fault for not protecting us. The solution is not regulation – rules did not stop Enron, Madoff, MF Global, Archegos and similar catastrophic examples from happening. But our instinct is to run to the powers-that-be for safety.

Yet even from their point of view, there is no consensus. An editorial in the Financial Times this week suggested that “we should simply let crypto burn”. Who the “we” is in that phrase is unclear. Who has enough authority to just “let crypto burn”? No-one. Some regulators see a threat worth curtailing. Many (including the new House majority whip and the incoming head of the House Financial Services Committee) see innovation worth supporting. Others just don’t care. There is no “we”.

This recent emphasis on the plural pronoun is understandable in that we all instinctively seek comfort in the group in times of fear. But it is also dangerous, as emotional mobs can wreak much damage. Scrolling through Twitter over the past couple of days, I saw signs of an industry turning against itself, with some gleefully going after the next whiff of vulnerability in what is starting to look like a mass purge disguised as an attempt at community protection. History tells us this is never fair.

So, let’s stop stressing about what “we” want, because there is no “we” with the authority to decide what that even is. What we can do is use our individual priorities and abilities to help fix what we feel needs fixing. We don’t need consensus or permission for that.

Speaking for myself, which is all I have the right to do, I am going to work so hard to continue explaining our industry to anyone interested, to poke holes in easy conclusions and to question investment orthodoxies. It’s what I can do. And all of you reading this have talents you can apply, even outside the crypto sphere, to further whatever characteristics you would like to see more of here.

Enough already. It’s time to drag ourselves away from doomscrolling and the instinctive fascination with deranged tweets. It’s time to look beyond the gloom of the current newsfeed. It’s time for us all to dust ourselves off, take care of our wounds and get back to work. It’s time to focus on what’s next.

KEEP AN EYE ON

The debacle of the decade

The collapse of FTX and the resulting contagion is obviously still the main crypto story of the week, unfortunately. There’s too much to rigorously cover here, but the main hits are:

More detail is emerging about the scale of the disaster. I’ll go out on a limb here and say that I don’t think any bankruptcy statement has ever made such riveting reading as FTX’s. Written by the new CEO John J. Ray III, the tone is professional and yet somehow manages to ooze incredulity and astonishment. There are some great highlights here, and you can peruse the whole thing here.
It’s starting to look like territorial spats are going to add yet another wrinkle to an impossibly wrinkled situation. FTX Digital Markets, the Bahamas-based subsidiary of FTX, filed for Chapter 15 bankruptcy – a protection process open to foreign debtors – in the Southern District Court of New York, potentially complicating the Chapter 11 proceedings in Delaware. A Bahamian liquidator appointed by the islands’ Supreme Court said in a court filing that FTX was not authorized to file for bankruptcy in the US. And it appears the Bahamian government ordered the transfer of crypto assets out of FTX addresses after the US Chapter 11 had been filed. Big wrinkle.
The collateral damage so far is bad. Genesis Capital, the industry’s largest crypto lender, announced suspension of withdrawals. Gemini paused redemptions on its Earn program, and has had to deal with a spike in withdrawals as well as a temporary platform outage. Others that have had to cease or curtail operations this week: crypto lender Salt, Hong Kong-based crypto platform Genesis Block (no relation to Genesis Trading) and crypto exchange AAX. The Wall Street Journal reported that Blockfi is preparing for bankruptcy. More than a dozen firms have disclosed amounts trapped on FTX, some of them significant.

But there’s other stuff going on

While it may feel like the industry has frozen in the headlights of the oncoming train, it hasn’t. Even in this tumultuous week, plenty of constructive things happened:

Two $100 million “recovery funds” are in the works, from Binance and OKX.
B2C2 and other investors might be able to help Genesis with liquidity.
Bankrupt crypto lender Voyager might be saved.
Matter Labs announced the completion of a $200 million raise to focus on the launch of a zero-knowledge proof scaling solution for Ethereum. Cue new applications.
Some glimmers of expansion on the mining front: Arkon Energy closed a funding round, Bitfarms is paying down debt, Applied Digital secured a loan for expansion, and Crusoe Energy is acquiring a block of assets from bankrupt mining hosting provider Compute North.
The Sui Network, a new layer-1 blockchain developed by former Meta engineers, has launched a testnet to trial the functionality and develop its community.
Nike released details about its upcoming .Swoosh metaverse wearables platform (currently in beta) which will allow fans to trade, create and even co-create virtual items.

A YEAR AGO

(This section looks back at what was going on this time last year, so we can see how far we’ve come and how far we haven’t.)

A year ago, the BTC price had already peaked, although obviously we didn’t know this at the time. Froth was still thick in the funding scene, with massive raises from market infrastructure (Gemini was reportedly seeing funding at a $7 billion valuation, KKR was reported to be planning participation in a round for crypto custodian Anchorage at a $3 billion valuation) and tech development (ConsenSys closed a $200 million raise at a $3.2 billion valuation).

Miners were feeling optimistic (Marathon announced plans to raise $500 million in debt for rig expansion, Iris Energy upsized its IPO for a $1.5 billion valuation). NFTs were still hot with investors offering OpenSea financing that would put it at a $10 billion valuation, while KuCoin established a $100 million fund for metaverse projects. And new funds were popping up, including a whopping $2.5 billion crypto venture fund from Paradigm.

Meanwhile, in a longer-term and much less frothy corner of crypto, Bitcoin’s Taproot upgrade had just activated.

GOOD READS/LISTENS

Matt Levine has a knack for making the complicated seem relatively simple, which he masterfully applies to the FTX situation in a lucid takedown of why this fraud is just so crazy.

A powerful and beautifully written dive by Mario Gabriele into the essence of crypto culture and why it is worth fighting for, how the casino ethos came to be and why we need to change it, and what needs to change within ourselves to lower the odds of collapses like this happening again.

Allen Farrington applies his characteristic wit and no-holds-barred scorn to the sins of Silicon Valley and the corrupting power of yield-seeking fiat.

NLW talks about his experience working for FTX and his reaction to the whole debacle in an episode of The Breakdown that practically vibrates with eloquent anger and determination.

Have a good weekend!

After the week we’ve just had, I think we all deserve some great songs to wallow with. Songs that lift us up in a communal catharsis that make whatever we’re feeling – anger, grief, despair, sadness, determination – part of something bigger, part of being human. I have an entire playlist of these (of course I do), it’s “This is not good” on Spotify if you want to find it.

Meanwhile, here are some that I’ve had on loop at various stages because they have best reflected my moods this week: