The Next Crypto Crash Will Be Everyone’s Problem
Shah Gilani|August 6, 2022
There’s undoubtedly another crash coming to the cryptocurrency space.
There are a lot of bad actors manipulating countless unsuspecting, neophyte speculators in tokens and coins, as well as thousands of “projects” that are inadequately developed, overly hyped, and destined to fail .
And while those outside the crypto space couldn’t care less about a crypto crash or excruciatingly cold crypto- winter, they don’t know that such an event could weigh on U.S. stocks and push equity benchmarks down to new lows, and then some.
Basically, they don’t know why they should care.
So, today, I’ll examine the unnoticed and misunderstood details about the cryptocurrency game, how another significant crypto drop could lead to contagion.
Lipstick on This Pig Doesn’t Change its Nature
There are four principal reasons cryptos fail…
- Fraud: Some coins are issued by fraudsters whose sole intent is to manipulate their tokens higher (by any number of nefarious ways) to enrich themselves by fleecing unsuspecting speculators. One popular fraud is the “rug pull” which is what happens when a founder/issuer “abandons” a project and keeps the investment capital raised by issuing coins.
- Security Breaches: Project hacking, from creating fake nodes to outright theft, can kill a crypto.
- Weak Ecosystems: Some projects are more focused on creating coins and selling them without building a community that understands and cares about their crypto’s blockchain “mission.”
- Inadequate Development: A lot of well-intentioned cryptocurrency projects fail because founders launch their projects on inadequate or faulty architecture.
Fraud will always be a problem. It’s nothing new in the traditional world of finance and trading and it will always exist in the decentralized world of finance. The problem with DeFi is it’s so new and offers so much potential reward, especially when it comes to speculating in cryptos, that the public and even institutional players don’t know who is real and who is setting them up.
So-called “white papers,” not unlike bond indentures or prospectuses, are rarely read and even if they are they’re so complicated it’s virtually impossible for a lay person to understand what these projects ultimately offer.
Security breaches, especially hacks and outright theft, from ecosystems and wallets, is getting worse.
In 2021, crypto theft grew by 516% over 2020 to $2.36 billion.
A frightening 72% of that total was stolen from DeFi projects.
Ethereum and Solana both experienced thefts, again, this week. Losses in 2022, from theft, are expected to be up another 500%-plus. That doesn’t include losses from stablecoin Terra’s collapse, amounting to tens of billions of dollars, or the zeroed-out valuation of Celsius Network that was once worth $25 billion.
As for inadequate development, or outright asinine architecture, the award goes to…
Terraform Labs.
It issued the Terra stablecoin I mentioned a second ago, which was tied to another made-up Terraform Labs coin called Luna.
Luna, a free floating crypto whose only real value was the magical arbitrage mechanism it shared with Terra, was supposed to keep Terra worth a dollar. When I came upon TerraUSD and Nova and asked some of the smartest people I know in DeFi how it worked, no-one could explain it to me.
Being a derivatives guy in the traditional world… one who has worked on structured product development and designed arbitrage software to trade global markets… I can’t say I felt stupid when they collectively said, ” it’s complicated and just not something you’re familiar with.”
If someone can’t explain something…
No! I f many so-called experts, creators of these projects, and issuers of cryptos tied to their projects can’t explain what they do or how they do it…
Run !
Not only are giant imagined DeFi ecosystems that are supposed to be the shape of the financial future poorly conceived, almost every piece of every cog in , the foundational stuff, doesn’t make sense. Not unless speculation and hoped-for appreciation is the real goal.
Some of the basic properties I question are:
Does it make sense that with publicly viewable transactions outsiders can see how much leverage someone has and even where they might have a “stop-loss” order?
Does it make sense to design incentives, that come about from some intersection between algorithms and game theory, to reward user behavior to elevate the value of the coins that underlie the project?
Does Proof of Work really make sense ? O h sure… you’re entitled to have something you work for, but what if what you’re working for is just an answer to a puzzle?
Does Proof of Stake, PoS, justify credibility or manipulation?
The answer to every one of those questions is: No!
It’s a game.
DeFi is more about game theory than it is about finance.
And that’s the problem.
The unsuspecting public, the FOMO institutional crowd who want to get richer, the traditional bankers who don’t want to get left out of some new financial cyberworld, the pied pipers like the Winklevoss brothers, MicroStrategy’s Michael Saylor, Elon Musk, Sam Bankman-Fried, are all in on this merry-go-round. And it’s connected to the real world, as in the stock market.
Lots of speculators in cryptos are stock investors too.
What’s getting worrisome is how many institutional players have been drawn into the crypto space and are leveraging traditional assets to speculate in cryptos.
The market’s bouncing and so are cryptos, but we haven’t seen the bottom in cryptos yet. Mark my words. We’re in for a nother hard selloff in the crypto space, based on another giant collapse or fraud , and when it comes it’s going to hammer stock and capital markets.
If you don’t see it coming it’s because you’re not looking.
The biggest bust in crypto will be when that tether severs .
When there’s a liquidation event, on a global scale, and leveraged crypto holders want to sell their cryptos.
Only, that tether is a fraud.
You’ve been warned.
What’s sad is how bad crypto actors are killing the good blockchain is capable of.
Only proper regulation will fix that. And as of today, that’s nowhere in sight.
But, when we get news of it, you’ll get all the detail here on Total Wealth Research.
Until then…
Cheers,
Shah
