Cryptos are hyper-speeding through traditional finance crises

*By George Kaloudis

The last time I wrote about a stablecoin, in May of this year, it failed dramatically. But then came the proposal to make MakerDAO invest in US Treasury bonds to guarantee its stablecoin DAI, which forces me to speak again about the failure of some projects.

Two weeks ago, I suggested that over-leveraged platforms were a danger to cryptocurrency investors. The problem was evident with the insolvency of crypto hedge fund Three Arrows Capital (3AC), but also with retail lending and yield platforms Celsius and Voyager, which mounted restructuring plans.

This is the kind of thing companies do when they’re screwed. Voyager has even declared bankruptcy — to be fair, “the good kind of bankruptcy” (if there is such a thing) — proving that the industry is determined to tackle issues surrounding traditional finance at hyperspeed.

In addition, exchange could lose $270 million on loans to Three Arrows. There are a lot more bad things happening right now in the digital asset market. But, I have confidence that everything will (somehow) be okay.

The economy doesn’t look good

The yield curve inverted this week. This shift is often treated as a warning indicator of a recession. So it’s not a good thing.

Okay, but what does that mean? In plain language, the US federal government sells bonds – or Treasury bonds – to investors like you to finance state projects. The Treasury, in turn, pays an interest rate or income over a period of time. At the end of that time, the original amount is returned to the investor. If this sounds like a loan, it is.

The longer the term of the loan, the greater the value investors can earn on these bonds. That makes sense. Money gets stuck longer, so in exchange for that risk, you get more income. So if you plotted loan duration on the X axis of a graph versus yield on the Y axis, you would get a logarithmic-looking growth curve.

Except when the yield curve reverses – which it did. Now, 10-year Treasury yields are lower than 2-year Treasury yields. Theoretically, this means that investors expect long-term rates to fall. Practically, this means that banks – which rely on borrowing at rates higher than the “risk-free rate” (typically the 10-year Treasury yield) to make money – will lend less. And that will lead to a slowdown in economic activity.

Such is life in a debt-based monetary system.

Also, a 75 basis points (bps) increase in interest rates in July is basically a foregone conclusion at this point. According to the minutes of the Federal Open Market Committee (FOMC) June meeting, nearly all members were in favor of a 75 bps hike. Jerome Powell, chairman of the Federal Reserve (Fed, the US central bank), said a readjustment of 75 bps was “large and unusual”.

The Miners’ Struggle

Now let’s talk about the mining companies that are selling their Bitcoin (BTC) stocks to fund operations as they struggle to survive in the bear market. One of the biggest miners, Core Scientific (CORZ), announced that it sold over 7,000 BTC in June. The company didn’t perform well in 2022, so it’s not surprising that it has to draw on its reserves.

That said, while resistance from miners is seen as the start of a “death spiral” (as miners are supposed to be the last line of defence), in reality this is not happening. Death spiral is a term that refers to a scenario of panic and falling prices.

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Core Scientific CEO Mike Levitt assured investors that the company is focused on executing its plans and that the sale was just an exercise to maintain a healthy balance sheet. Again to be fair, CORZ would not need to disclose that it sold anything, as the publication of its financial results is not expected until August.

Therefore, transparency must be recognized.

The sad plight of lending platforms

Lastly, leverage continues to hurt the market. The collapse of Earth (LUNA) led to the insolvency of Three Arrows Capital and now we are facing a crisis of crypto lending platforms.

BlockFi received a ransom from the FTX exchange of $215 million; Celsius stopped operations and announced some restructuring plans; and Voyager declared bankruptcy. In addition, could lose $270 million on loans made to 3AC. The situation is difficult.

News on all these platforms is still unfolding. In general, none of this is good, but it seems that the worst is behind us. Exchange FTX and its CEO Sam Bankman-Fried are emerging as the “saviors of cryptocurrencies”. The company name has popped up in every discussion about crypto companies that are collapsing because of the Three Arrows insolvency.

an interesting point

That’s what you’ve seen: none of this is good, whether it’s the inverted yield curve, higher interest rates, miners selling Bitcoin or the various bankruptcies of crypto lending platforms.

What will be more interesting here is seeing what happens to BTC and altcoins during these difficult times. The situation is not only bad in the crypto market, but macro markers are signaling a recession.

Although born out of a recession, Bitcoin has never experienced one. At the very least, it will be interesting to analyze the scenario. Fortunately (or unfortunately) things are happening faster than I’m used to, after all, I used to work in the traditional financial market.

The interesting thing is to see what BTC will do in these difficult times for the macroeconomy – which is the root of it all. Last week, for example, the currency rose again. Does that mean I think it’s going to be okay? To tell you the truth, I don’t know.

*George Kaloudis is an analyst at CoinDesk Research.

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