... a prolong crypto winter until the next season. ...lesson...

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    ... a prolong crypto winter until the next season.

    ...lesson from crypto is not to delude oneself for more gains after already having an outrageous one.

    Big (bigger than normal) gains anywhere always ends. No exception. Just a question of when.

    Yes, we will know it when we see it fall, but Denial and Procrastination and Eternal Hope (D&P&H) gets the best of us when it arrives. And if that does not, our long term investing cap will. We could avert a larger than 10% correction but D&P&H makes us wait to see a bigger one unfold..,then it could get into a deep freeze for longer or a more painful exit.
    Prepare for a deep freeze in crypto

    These are dangerous times in crypto. Beyond the epic drawdown lies a toxic mess of hubris, internecine conflict and highly complex cross-jurisdictional litigation, writes Grant Wilson.

    Grant WilsonContributor
    Jul 3, 2022 – 4.55pm


    Up until mid-May, there was still some debate as to whether the drawdown in crypto should be referred to as a “crypto winter”. That debate ended with the collapse of Terra, which had the dual impact of extending the drawdown into historical territory, and providing a meme-worthy reference point.

    For context, the crypto winter of 2014-15 was principally a function of first-generation hacking of crypto exchanges, with Tokyo-based Mt Gox the exemplar. Similarly, the crypto winter of 2018-19 came to be typically associated with the collapse of the Initial Coin Offering boom.

    The collapse of stablecoin Terra fuelled a sharp decline in crypto prices and ended debate over whether a crypto winter is coming.  Bloomberg
    The epicentre of the 2022 variant will always now be viewed as decentralised finance (DeFi).

    There was a clear warning a year before, that we reported at the time, when the TITAN token collapsed. Dan Berkowitz, the commissioner of the Commodity Futures Trading Commission, had then provided an extensive critique of DeFi, and memorably declared that “a system without intermediaries is a Hobbesian marketplace with each person looking out for themselves”.

    Yet the DeFi wagon rumbled on, underpinned by central bank largesse, and the relentless “nasty and brutish” tactics of many of the core developers involved. Total Value Locked (TVL), a common measure of digital assets staked with DeFi protocols peaked only late in 2021, around the time when the Fed began to pivot its monetary policy stance more forcibly.


    While the developers behind terra sought to reincarnate the project immediately (there is no smart contract for extradition and prison), the resulting contagion has pummelled the DeFi sector. The volatility and illiquidity have been amplified by the lack of a lender of last resort, a mainstay feature of traditional finance.

    Though the resulting crypto winter is unlikely to be existential, it shapes as deep and painful for all those involved.
    Realised capital losses

    A useful starting point to assess the damage is the concept of realised price. This is a measure of the mean price of circulating supply, and as such, is often viewed as a proxy of the average entry level for holders. For Bitcoin (BTC), the realised price is currently around $US22,500, or some 15 per cent higher than the prevailing spot rate.

    This implies that recent transactions, on average, involve the realisation of capital losses. Since mid-June, the daily run rate of loss crystallisation in BTC is about $US2 billion. It is at least that again in the alt-coin space, without including the catastrophic losses seen in many DeFi projects.

    In dollar terms these are historically unprecedented numbers. And the average measure masks the pain that will have been experienced by those coming late to crypto.

    For the true believers, the capitulation flows are indicative of an oversold market. The realised price is being spruiked as an entry signal, displacing other technical indicators that were hyped as support as the downtrade unfolded.

    Yet even within this cohort there is grudging recognition that crypto traded persistently below its realised price during prior crypto winters. Only during the COVID-19 induced flash-crash of March 2020 was it instructive from a market timing perspective.
    Regulators recoil

    Moreover, the dollar value of the realised losses this time around introduces new dynamics. The pain is deep, but it is also widely dispersed. This is putting at risk the positive network effects that crypto relies upon, sometimes measured as an adoption curve.
    We have previously described the push for the mainstream in terms “crypto signalling”, being the digital equivalent of virtue signalling. While a post-mortem of the dynamic is premature, the incentives that individuals and institutions have in being associated with crypto, both publicly and even privately, have already changed. So-called “noobs” will be harder to come by as a consequence, and echo chambers will be more difficult to sustain as well.

    A second implication of the turmoil is that it will make it more difficult for crypto lobbyists to capture the regulators and legislators that they had firmly in their sights.

    In the US, the much-vaunted Responsible Financial Innovation Act faces a long haul ahead, notwithstanding its bipartisan foundation. Meanwhile, the patchwork quilt of federal oversight and state-based regimes will remain deeply inadequate.

    For hot beds such as South Korea and Singapore, the fallout from terra is very real, particularly in terms of consumer protection and licensing regimes. The permissive orthodoxy of “you broke it, you fix it” may have reached it limits, with chilling effects.
    Failed narrative

    In many other jurisdictions, there will be some relief behind the scenes. The gnarly policy difficulties that crypto poses have been forestalled, and a broader examination of whether crypto warrants a social licence may now ensue.

    Australia is an example, where the ambitious crypto reforms that were recommended by the Select Committee on Australia as a Technology and Financial Centre last October are now likely to wither on the vine. There may even be blowback when the Australian Taxation Office comes to see the cottage industry that has already emerged in using crypto to manufacture dubious tax losses.

    For crypto itself, the most difficult challenge will be how to reconstruct the narrative.

    The collapse in the purchasing power of crypto, that has coincided with the most significant breakout in global inflation since the 1970s, has fatally wounded its pretensions as a hedge on the same.

    The loftier claims that are often made in terms of decentralisation are being challenged as well. There is a new breed of critics emerging in this area, with Molly White, author of the “web3 is going just great” catalogue, an archetype of savvy.


    The criticism we have made of crypto lacking a coherent valuation anchor is belatedly becoming more widely accepted as well. Ethereum’s founder, Vitalik Buterin, recently took aim at our pet peeve, being the Stock to Flow model, noting that “financial models that give people a false sense of certainty and predestination that number will go up are harmful and deserve all the mockery they get”.

    Meanwhile, DeFi will have to comes to terms with the opprobrium that is coming its way. This will not be easy. There are too many instances of malevolent developers taking even highly sophisticated clients into what Russian mixed-martial artist Khabib Nurmagomedov refers to as the “deep ocean”. There are structural questions as well, particularly in terms of whether a sustainable source of borrowing in crypto (ie that is not used to fund further crypto speculation) can be maintained.

    In the workout phase, that may now extend over multiple years, it would be good to see some contrition, even if that seems culturally anathema in DeFi. The prodigal son was not driving a Lamborghini when he sought to return to the familial fold.
    For the broader crypto narrative, we cannot see an easy fix. The macro environment is unlikely to conducive any time soon either. Still, even a prolonged winter is better than the worst-case outcome. That would be where crypto is revealed as a utopian social engineering project, which has merely entered its first phase of failure.

    Grant Wilson is a senior adviser at Exante Data, a macro advisory and data analytics firm that provides research to institutional investors, central banks, corporations and private banks.
 
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