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Was yesterday Doomsday for crypto?

The answer is no… but it was pretty damn bad.

Before I continue, I want to discuss why I write this newsletter every day. It boils down to one word - therapy.

Probably not the word you expected.

Much of what I write is spontaneous. It’s quite rare that I sit down with a conclusion in mind and neatly arrive at it without bumps in the road. Each new paragraph is genuinely a surprise to both of us. It’s what keeps me going and hopefully what keeps you reading. 

This gives me the opportunity to explore my thoughts, put them on paper, review them, and then challenge and assess my conclusions. This is a test of my conviction and a thought experiment to sort my own beliefs.

By writing, I untangle the knots and jumbled information stuck in my head. In doing so, I find a sense of relief and am hopefully able to clarify some points for you in the process. I have ADHD, so this exercise is incredible for my well-being.

I have been up for hours, thinking and rethinking about the past few days in this market. Today, you get my random musings about the state of crypto.

On that note and in the spirit of therapy, let’s resume our regularly scheduled programming and discuss some crypto. To better understand where we are at in terms of crypto doomsday, let’s make a list of the good, the bad, and the ugly.

The good:

The Bad:

The Ugly:

This is by no means a comprehensive list, but it’s a an honest off the cuff appraisal of where we currently sit.

The Luna saga kept me awake last night. I can’t stop thinking about it. My “normie” friends can’t stop discussing it. The hedge funds that I am invested in can’t stop updating us. It’s a big problem.

Why?

First, it confirms the worst fears of every regulator, critic and hater on the planet. Janet Yellen was forced to address it yesterday, and I found myself struggling to disagree with anything she said. In this case, self-regulation was an epic failure, and nobody was there to protect the “Lunatics” that have believed and bet on this project, often with their life savings. The biggest money in crypto was backing Luna. Hell, Mike Novogratz has a Luna tattoo.

A stablecoin proved to be a systemic risk to the system, something politicians and talking heads have been screaming from the Washington mountaintop for ages. They were right.

It pains me to write that sentence, but it is the truth. And we have to be honest even when we don’t like it.

Bitcoin is supposed to be a hedge against inflation, bad behavior from governments and financial nonsense. It’s supposed to be a way to avoid systemic risk of market collapse. And it can be.

But… we piled on systemic risk within the crypto market so that it can’t function accordingly. We have largely taken the problems that we are fighting against and built them into our own system.

The worst part of the Luna saga is that we shot ourselves in the foot. There’s nobody on the outside to blame. NOTHING is worse than a self-inflicted wound, acquired on the world stage while everyone is watching. It’s like the classic scene in every horror movie - the call is coming from INSIDE THE HOUSE, GET OUT OF THERE!

We just gave the regulators all of the fuel that they will ever need to attack.

Warren Buffet is probably high on his 12th consecutive Coca Cola, celebrating our imminent demise.

Rat poison squared. Not true for Bitcoin. Maybe true for Luna.

This is a serious Catch 22 for builders who want to create a new financial system, and a clear argument for Bitcoin maximalism.

This does NOT mean that there is no value beyond Bitcoin. You know that I love the innovative side of crypto and am an avid fan of many altcoin projects. But this is a glaring example of the risks of being wrong and of blindly assuming that everyone in this space actually knows what they are doing.

Luna is currently trading at $4. It was $85 a week ago, and trading in the top 10 by market cap. This is an Enron type moment for crypto. Their stablecoin, UST, traded down to 22 cents. It is currently around 40 cents. Here are the two charts.

Stable, my ass.

There were rumors that a 1.5B bailout was coming from their backers and that it has fallen apart. Luna can actually go to 0, a meme that we usually reserve for the most overemotional and irrational bears.

In the process, Luna has had to sell the billions in Bitcoin that they just purchased weeks ago, when Do Kwon was the savior of crypto. It’s incredible how fast one can go from hero to zero in this space.

Bitcoin has been surprisingly resilient in the face of this internal attack. But anything with a lower marketcap is getting slaughtered on the back of this loss of confidence. It is definitely “good news” that Bitcoin is still trading above 30K after all of this. Even after Luna dumped 1.5B in Bitcoin on the open market.

Someone is buying.

As I mentioned, I invest in some of the bigger name crypto hedge funds, many of which have sizable exposure to Luna. Yesterday, the CEO of one of them sent out a special letter explaining the situation and their approach.

Uh oh. The CEO never sends special letters.

In it, he doubled down on his conviction in Luna, stating that they bought more and even bought UST at a discount because it’s the main stablecoin that they use in their DeFi fund.

That’s not a discount, man. That’s a failure. It’s a discount in the same way that a hyper inflated currency that keeps getting “cheaper” is selling at a discount against the dollar.

They decided all of this after having a “risk management” meeting.

The tone was “we are right and we are going all in now because the coin is cheaper.”

You fucking kidding me?

You saw a stablecoin go to 60 cents and believed it was just growing pains, even with direct access to the team and the best information available? And you kept using the stablecoin in your other fund?

This is the same phenomenon that makes retail traders lose all of their money - blind conviction and cognitive dissonance, even when presented with new and superior information. He refused to admit they were wrong, making it sound like they were geniuses for doubling down.

It took all of 24 hours to prove them horribly wrong.

And that’s what is really bothering me. The brightest minds in the space, the largest investors and the community were all HORRIBLY wrong about Luna.

Everyone, of course, except for Sam Bankman-Fried.

This is funny, because people have expected USDT to blow up for years, and it was UST instead. But was this predictable? Yes, he predicted it.

There it is - “you know how this plays out.” I guess it was obvious to some, while others were blinded by profit and being a part of the herd.

But are we the good, the bad or the ugly at the moment?

I think we are in the “ugly,“ verging on bad. We all know that the market would panic the moment Michael Saylor or Nayib Bukele gave up, but I REALLY do not see that happening. There’s chatter, but it is unsubstantiated rumor and FUD.

Imagine what would happen if El Salvador decided to move back to a fiat standard. This wouldn’t seal our death, but it would be a really painful liver shot from Mike Tyson in his prime. Again, probably not happening, but always worth considering the "worst” case scenario.

Furthermore, as much as I fought the idea for a long time, we are now closely tied to equities and a lot of shit in the real world needs a cleansing.

At its core, this is ugly stuff.

For now, we will take what comes. I’ll write these letters and you will read them. Today’s was clearly therapy, a purging of my thoughts and even anger about what we have witnessed in the past few days. I am not immune to the emotional roller coaster of markets, and in the rare moments when I start to feel the pain, I have you to share my thoughts with.

Thank you for that.

There will come a time when neither “bad” or “ugly” will be in the picture. Just the “good.”

And we will be here.

In this report, we bring to you the latest in on-chain cryptocurrency analysis. We look at the blockchain directly and analyze balances, transactions, and the overall activity of market participants. This gives us a unique insight into the future of the market.

This section is written in conjunction with IntoTheBlock (ITB).  ITB is an intelligence company that leverages machine learning and advanced statistics to extract intelligent signals tailored to crypto-assets. IntoTheBlock tackles one of the hardest problems in crypto: to provide investors with a view of a crypto asset that goes beyond price and volume data. 

The Wolf Den research team uses IntoTheBlock to dig deeper and get the most important insights about the crypto market.

Last weekend Ethereum saw the largest spike in network fees in its history, greater than DeFi summer, than the dog-token mania and NFT frenzy earlier in 2022. Yuga Labs, the creators behind Bored Ape Yacht Club sold over $320 million worth of digital land for its upcoming metaverse. The impact this sale had on-chain is second to none.

Via IntoTheBlock’s free DeFi Insights

$1k+ Transaction Fees — Multiple transactions on the Ethereum blockchain went as high as four figures due to the excessive demand

Via IntoTheBlock price data and official Fed St. Louis data

All-time High Correlation with Money Supply Change — the fed’s aggressive expansion of monetary supply following Covid has resulted in the strongest correlation with crypto price changes

So far, the 1-year correlation ® between Bitcoin’s monthly price changes and M1 supply changes appears to have peaked at 0.69 in February

As the fed’s hawkish outlook began to be priced in correlations dropped, likely as the market looked to anticipate these actions

Bulls need to step it up. This is the moment when we need to see real conviction and buying in the face of endless fear, uncertainty and doubt.

They are doing a pretty good job so far - yesterday’s volume was the second largest this year, and was GREEN. The largest candle was slightly bigger and was… two days ago.

There’s a ton of demand here, so we need to see follow through.

There’s nothing to celebrate below 33K. We need to see that line flipped back to support to even start a new bullish narrative.

Remember, any drop now below 30K is EXTREMELY likely to give us massive bullish divergence. Keep an eye on that. Here is the idea.

I do NOT share signals in this section. I share setups and charts that I am watching, in an effort to help show you how I view a chart and what criteria would be necessary for me to consider taking a trade. NEVER blindly buy something because it is listed in a newsletter or posted on twitter. You need to have a plan when you enter a trade. These are just ideas, and are almost always “if, then” scenarios. If a certain set of things happen, then I would consider a trade.

Ethereum continues to outperform Bitcoin, breaking out of the bull flag. Truly impressive. .076822 is now a key resistance. A break of that and flip to support should keep this flying.

Remember, this is being rejected at resistance. Not the time to look at it for a trade.

Azuki is one of the most popular NFT projects. At the time of writing, its floor price sits just below 10 ETH. To the community’s surprise, the founder behind Azuki, Zagabond, wrote a blog detailing his past failures in the NFT space. What Zagabond considered a “learning experience,” the community called a “rug.”

Most NFT projects fail, we know that. But what we didn’t know was that Azuki was founded by a man who has already abandoned 3 majorly hyped NFT projects, making off with quite a bit of Ethereum in the process. When Zagabond shared this revelation, Azuki crashed, losing about half of its floor price and a lot of loyal followers.

This is what Zagabond had to say about his past failures:

I wouldn’t go as far as to say that Zagabond is a blatant rug puller, but his past actions are questionable. A lot of money has been lost on the abandoned projects listed above and holders are not happy about it. I suggest you read the blog HERE for Zagabond’s point of view.

*Late last night Zagabond wrote an apology to the community, it feels pretty genuine. What do you think?*

Coinbase is struggling, losing 36% of the stock value in 36 hours. To be fully transparent, I have actually bought more of the stock in the past few days, averaging down on a long term investment that I still believe will pan out favorably.

Regardless, Coinbase’s quarterly report added fuel to the fire.

“First quarter total trading volume was $309 billion, a 44% decrease from the fourth quarter of 2021. Of Coinbase’s first-quarter revenue, $1 billion came from the exchange’s cut of trading fees, a 56% decline from the fourth quarter. You can expect volatility in our financials, given the price cycles of the cryptocurrency industry. This doesn’t faze us, because we’ve always taken a long-term perspective on crypto adoption.”

In all honesty, the Coinbase report wasn’t terrible. Their downgraded performance was expected considering the market conditions. They will likely be the darling of the next bull run, once again.

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