I wrote about Crypto Winter around this time last year. I don’t think we will see a thaw until 2024. For those that are regular readers here, I still maintain the SPY 0.00%↑ has to trade 320 before we can think about buying. I also read this and think we might be in the 9% category in 2023. I had drinks with the chairman of a very large logistics company and he isn’t bullish.
A lot of people are going to blog about the fact we need “good regulation” to end crypto winter. I don’t think that is necessarily the case. We need regulatory certainty and there is a massive chasm between “good regulation” and regulatory certainty. I’d point to the Commodity Futures Modernization Act of 2000 with regard to OTC derivatives as a case and point.
The word “good” implies that regulators will get it right. They often don’t. It also implies that regulators are our better angels, and there are countless examples where they are not. When someone blogs about “good regulation” what they really mean is regulation that suits them.
Would “good regulation” have stopped FTX? Mt. Gox? Any of the many frauds related to cryptocurrency? How about Binance?
Binance is a cryptocurrency exchange. It had some bad news. Its auditor, Mazars, has suspended all work. Mazars audited the reserves of Binance. Mazars also decided it would not be auditing other crypto companies. So far, they have released no public statement about this action.
$3B, BILLION, in outflows happened yesterday on the exchange. That’s a lot of cake. I think you should click this link to ZeroHedge and read the whole thing. ZeroHedge has some great points and I am reposting the speculative part here for context:
To add to our skepticism, the price of the Binance exchange token BNB is near all-time highs in bitcoin terms, appreciating an astounding 828% against bitcoin in the last 785 calendar days.
Is BNB, a more centralized cousin to Ethereum, really worth approximately 14% of all bitcoin that will ever exist? BNB is not equity in the Binance company. BNB is a crypto token spun up from nothing in 2017.
Why is the outperformance so notable? Why are we hammering this point so hard? Because financial markets aren’t magical machines tied to a fantasy-land reality. Financial markets — while appearing to be disconnected from reality at times — always come crashing down to reality, exposing those that were possibly perceived as giants once before.
For the most part, the crypto industry is an attempt at modern alchemy, and exchange tokens minted from nothing with centrally engineered “tokenomics” are no different.
It could be possible that BNB was pushed up with the internal help of Binance or its unofficial affiliates during the bull run. Just look at the volume profile of where coins changed hands on its native exchange. While it would be a leap of faith to say this took place directly using customer funds à la FTX, the revenue of the company has been used to buy back the token, similar to a stock buyback.
While it remains to be seen whether the firm is levered against its own token in any sort of way, it would certainly be no surprise to us if the company supported the ascent of the token/chain, similarly to many other exchanges with token that outperformed bitcoin during the bull run. BNB is a “blockchain” that can be arbitrarily halted by the Binance team. It is not even attempting to be a decentralized application set.
First blush: The folks that are in the “crypto is a fraud” camp are getting a much stronger case.
So far, here is what I think. Crypto is a great idea. It can be a very powerful idea. However, the people that are running a lot of the crypto companies aren’t in the game to provide solutions to problems.
They were attracted by the run-up in Bitcoin prices.
They were also attracted because VCs raised a ton of easy money to invest in crypto firms and doled it out easily without a lot of diligence or by performing incomplete diligence.
A lot of VCs that invested in crypto are smart and good people with good ethics and great intent. But, they really didn’t understand the rudimentary parts of finance and they will lose investors a ton of money in the next few years if they haven’t already.
These are people looking to make easy money and go away to the next thing, not build outstanding businesses that solve real problems for real people.
Helium ($HNT.X) is one that comes to mind for me. I am an owner of Helium and blogged about it in the past. Helium crashed along with crypto which is natural. But, it was accentuated by the fact that insiders sold at the top with no accountability and no transparency. No mea culpa and no transparency yet either. So, it looks like a fraud. I am waiting for reputable VCs who invested to disclose their holdings, whether they sold or not, and what their view on the company is with solid reasons why. Am I ticked that I didn’t sell? Not really. I am more ticked about feeling like I got taken.
That’s the difference so far between crypto and the world wide web crash in 2001. Web businesses of that time were trying to solve problems and the problems weren’t fake or made up. Often the businesses didn’t work but that’s not because they were frauds, it’s because they were bad ideas. They didn’t work because the entrepreneur executing those ideas wasn’t able to do it. Crypto has had some outright fraud with entrepreneurs entering that had nothing but making money for themselves on their agenda.
I remember back in 2008, VC Bob Geras told me to beware of entrepreneurs looking to raise money to run a business. Many of them would be doing it because they couldn’t get a job and as soon as the regular job market started up, they’d disband and go back to work. The same might happen again today with the recession that we are already in and will continue through 2023.
I will compare and contrast a couple of companies.
I do think that the SEC and CFTC aren’t the greatest regulators for a lot of reasons. But like Winston Churchill said when he examined all forms of government, the SEC and CFTC are the best regulators we have currently, and until someone comes up with a better one or the powers that be change some processes inside the SEC/CFTC, we have them.
The SEC regulates Coinbase ($COIN) and its stock is down massively this year. I own some. The stock is down due to some mismanagement for sure. However, in my opinion, the stock is down due to the fact that crypto collapsed and their business is crypto. If Coinbase were in traditional finance, the stock would still be down but not by as much. I have a very small account at Coinbase and I don’t worry about it. It’s down on the year, no surprise.
The CFTC regulates Bitnomial. I am a seed investor. They went through a four-year CFTC process to become a regulated exchange. They have transparent clearing and settlement and they haven’t created a token to juice return like FTX or Binance. They can do things no other exchange in the world can do and my gut is they will benefit when the dust settles in crypto. If you have money deposited there, you don’t need to worry.
In both cases above, the entrepreneurs and early employees at the firms came from the financial services industry. They knew the game before they got in the game.
Binance’s CEO came from finance, but FTX's CEO most certainly didn’t. I am always suspicious when an exchange issues its own token to use for things like margin. Only fiat currency ought to be used for margin at this point. Crypto is way to volatile, even Bitcoin.
However, if you wanted to issue your own token to have customers accumulate to save on trading fees, that’s different. That’s a marketing strategy designed to build loyalty. It’s not a heckuva lot different than traditional exchanges selling memberships.
What we witnessed in the early stages of crypto fintech was crypto companies taking existing ideas that were already embedded in traditional financial operations and plastering “crypto” all over them.
An example would be taking some sort of bond and tokenizing it. Essentially, that bond was already “tokenized” in that it was electronic and traded in the ether. I never saw the actual paper. The advantage to tokenization was that they could settle faster, and you could prove ownership. However, that differentiation wasn’t enough to make a business. It was too easy for the big people to copy.
There are markets that can use a lot more transparency. Municipal bonds are clearly one of them. My guess is a more efficient bond market would save governments trillions in debt issuance. Real estate is another one, especially commercial real estate, where transparency might lead to better pricing and more efficiency.
However, so far what the market is telling us is that the advantages that the crypto technology promise do not outweigh the costs of switching.
You might really hate the fact that existing exchanges seem to have a stranglehold over the market. You might hate the Big Banks, and the stranglehold they have over the markets they play in. I know I do because I value competition highly. Competition makes everyone better and customers get better prices and service.
However, you have to give the big exchanges credit when they deserve it. They are transparent about their processes. Markets, except in the case of the LME, work very well with orderly ups and downs and efficient prices. At the end of the day, you don’t worry about any money you have deposited there either. No need for “cold storage”.
I think that someday, technology will be good enough to enable a decentralized exchange model. When quantum computing finally arrives and is cost-effective to deploy at scale, lots of things in the world will change dramatically. Today, it’s not. Defi Exchanges are price takers, leeches of liquidity. They are not price makers. Exchanges perform a valuable service by centralizing trade and by executing all the other things they have to do in order to preserve price discovery and transparency.
It seems to me that Binance lost its way. When I was on the CME ($CME) Board and we demutualized, we turned our focus away from satisfying members to being intensely customer focused. We focused on the customer and market needs ahead of members. Our enterprise valuation took care of itself. If we did things correctly, the stock price would go up.
Binance focused on its own valuation rather than focusing on the needs of customers. It also forgot what the core mission of exchanges is supposed to do.
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Bank regulation does not prevent bank robberies. Hold that thought as we talk crypto.
It is difficult to take crypto seriously when one delves into the experience of the actors who have been exposed as naked swimmers thus far.
Did Scam Bankman-Fraud have any relevant experience in finance, exchanges, or securities? Would anybody with a brain give this dipshit several billion dollars? Have you seen this guy?
The only regulation that would have been effective would have been to keep this moron from ever getting into the business -- any business -- but before we embrace that elegant simplicity -- WTF were the VCs who funded this shamster thinking? They are the real morons here.
Crypto has been an exercise in excess from the beginning. There is no real business there. Blockchain is real, but crypto? You decide.
I sort of like Coinbase in the context of being the business that sells pick, shovels, and jeans to the gold miners. I like Coinbase the most amongst all other rivals.
But, then, they do some kind of reverse merger to go public that ends up with an effective price that peels off 90% of its value within less than a year -- $305.98 to $36.02 and still dropping.
Why is this not evidence of a wildly over valued scam?
If a boat sinks, it is a result of either a poorly designed or constructed boat or an incompetent or evil skipper.
Crypto is telling us who it is and we are arguing with them.
Believe them.
JLM
www.themusingsofthebigredcar.com
I buy nothing but Bitcoin from Swan on a regular basis in amounts that may well be "why waste your time". I use money that I can afford to lose (as should everyone but in this case especially). I don't tell anyone to do like I do; I might mention that I've been investing much larger amounts of money in CDs now that they give 4+% over 3 - 6 months while I hunker down and wait this all out ;-)