The is nothing more dangerous in life that misunderstanding. One of the worst ways to misunderstand something is to believe what it is called, when its name is not what it is.
Enough voodoo narrative let me give you an example right now that has cost many a total of billions.
Crypto Exchange.
A Crypto exchange is not an exchange.
A ‘Crypto exchange’ is a bank.
Once you understand that you should be very worried. An exchange, for example the Nasdaq, does not hold your stock. If it goes bust you do not lose a single share of Apple or any other investment. It just lts your interact between other financial providers. It is a venue, not a vault.
A ‘Crypto exchange’ is a vault that holds a ‘liquid asset.’ You deposit it and you withdraw it, what goes on between those actions, is secondary.
Just like a bank trading on a ‘Crypto exchange’ is just an accounting entry. You did not sell or buy on the blockchain, the ‘exchange’ merely kept an accounting record and will settle up ultimately only when you request payment because they are free to do what they like with your deposit once they have received it.
This is how a bank works. A bank will grant you interest, send your actual money off somewhere on a journey to earn it more than it is paying you and your balance is just an accounting record which is satisfied when you want to transact.
Banking has always been a confidence game and always will be and that is just fine but it has its weaknesses.
The key one is men of low ethical constitution can run off with your money and you may never know. Often you are not so lucky and at some point you find out when the bank goes bust. The whole banking system everywhere is unable to satisfy its depositors if they all showed up for a bank run. Hat has always been the case, but banks have governments standing behind them, so its rare for that trust game to implode.
Crypto has no such back stop as we saw with FTX, it also has no regulator making Crypto players jump through hoops or a Federal Reserve to bail them out before a meltdown takes on an unstoppable momentum. Rest assured without these checks, balances and bailout buckets, ‘fiat’ banks would look just like FTX et al and in fact they have on a number of occasions in the past. Banking is just like that, because deposits are just that, parked money that an institution can instead of guarding, put to work to make and create money. Apart from some slip ups unintentional or otherwise banks are quite good at that. Crypo players on the other hand have not covered themselves in glory.
Stock Exchanges on the other hand operate in a different world where the traded assets are looked after by custodians who job it is to protect assets not put them to work. You broker has been mandated to keep your assets separate from there operations so the temptation to play bank with your deposits is not a legal option.
If you confuse a crypto exchange with a stock exchange you are open to a nasty surprise. Would you hold a life changing amount of money in an offshore bank you’ve never heard of and who aren’t regulated and don’t even have a recognisable HQ or holding company.
I imagine you are saying ‘that’s a nope.’ Well that is what many ‘crypto exchanges’ are. That is not to say they are all as huge a farcical shambles like FTX or run by fellows with symptoms of cocaine abuse or evil intent. Nonetheless most will be banks whether or not they put your deposits to work elsewhere and subject to all the risks of banking and bankers.
Here are some red flags to watch out for:
Investments in other Crypto ventures. Was it from profits or from deposits?
Huge promotional spending. Was it from profits or from deposits?
Giant overheads. Was it from profits or from deposits?
Is the exchange trying to turn liquid tokens into illiquid tokens or inhouse tokens
Is there promotions paid in inhouse token rather the in ‘real yield’ crypto.
Is the place run by ‘shoot from the hip’-sters. I know this is the social media age but….
If we can get to easter without some other significant default, we might be able to say FTX was ‘it.’ However that is a long shot.
Remember this. ‘not your keys, not your Crypto.’
Squeeze every drop of risk out of your Crypto portfolio. Make sure you can tell your spouse, parent or confessor exactly why and where you have what you have. Then you’ve a good chance of passing though the intestinal tract of this crash in one piece. It’s the same for stocks right now, but Crypto is, as we know, an accelerated and amplified version.
There will be no defence in the future to say “but they said…… but I was told that…. Because there is no safety net under the Crypto highwire.”
ADD for Crypto Blog.
…what next?
This is my hunch:
Another some is likely to fall soon.
Here is the thing…. If another exchange goes bust its unlikely there will be a lot of BTC or ETH to sell as the exchange will have sold that or lent it out or ‘invested it’ already, hence it goes bust. It is not the forced selling that will cause the final leg down but the ensuing panic that will knock the price of Cryptos. Let us say $7000-13000 is the level I continue to expect but the thing that makes my ears prick up is or actually my eyes bug out is this:
This is the chart of the Greyscale Bitcoin Trust. BTC in Greyscale is at a massive discount to ‘real’ BTC, apparent 43%, and something happened near the initial high that made that embedded value diverge from the stock price. Why the massive discount? I won’t state the obvious.
So Greyscale is part of the Digital Currency Group, they control Genesis Global Capital who have frozen withdrawals because of frozen/lost funds in FTX. Coinbase is Greyscale’s custodian and all looks fine to the end of September but a lot has changed since then with the FTX debacle.
But…but….but….
So if Digital Currency Group gets into trouble, then that could be spicy… but even if that didn’t happen, imagine if the market got spooked and Greyscale holders started to bail even more, then BTC would pour out of the trust because of redemptions. This could create a vicious circle of stock being liquidated, forcing Bitcoin to be sold for ‘fiat’ forcing Bitcoins price to fall creating more stock selling pressure.
(Why would they have already started buying back…. Answers on a postcard too….)
I expect another collapse to happen soon. It might not be Greyscale, or another exchange but it could be something else entirely and it could roll into other situations creating further chaos because that is how crashes work. Crashes are an avalanche of contagion that can only be halted when they reach the valley or hit the sort of bulwark like the Federal Reserve is for banking. Sadly Crypto just doesn’t have such a defence, so this crash period is likely not done yet.