Basically, they're a large crypto fund that has borrowed from almost every major crypto lender, and if they can't cover their margin calls (which is expected if they're insolvent), the risk of the debt is then transferred to the lenders themselves.
3AC isn’t just large. 3AC is the largest trader by volume in the world for like 4 years. Them going bankrupt is like long term capital management going bankrupt.
Its nothing like LTCM, its much worse because when LTCM the fed and SEC cleaned up by reducing interest rates and helping GS take over the positions. Crypto is "free" from govt interference like this.
for commenters assuming the US Government would step in, absolutely not. the death of Crypto is inherently in the interest of US foreign policy as it strengthens regional soft power in denied spaces by gutting uncooperative states (iran, venezuela, cuba, etc...) of their ability to sidestep western capital embargos. it also guts Wikileaks ability to defend itself in court, as its sitting on a good deal of crypto since being denied access to regular donations.
it also helps dampen inflation by strengthening the dollar, at whatever level that may be.
I like crypto, though not really what it has become in recent years. I too hope the US government does not step in. That would be totally antithetical to the entire point of crypto.
The situation is not entirely clear because some lenders may not loudly announce that they have liquidity issues as early as possible. It seems like a large part of the forced selling by 3AC and counterparties is already over, and it seems like many counterparties don't actually have any collateral from 3AC to sell and must eat the loss.
The answer is probably yes for both questions. These crypto and loan contracts are typically very complex and involve many classes of crypto and physical assets involving many 3rd parties. Therefore it's going to take awhile to untangle things to the point where each party knows their precise risk exposure and ability to take loans out against this exposure/loss.
Matt Levine had an aside in one of his recent columns about how ironically, "safe" investments are frequently the most un-safe, because the tiniest crack in the faith people have in them leads to panic.
For instance, the stablecoins.
Bitcoin itself doesn't seem to be vulnerable, exactly because there's no particular objective value. If it goes down 90%, well, nobody promised it wouldn't.
Sounds as if that's somewhat related to J.K. Galbraith's variant of Gresham's Law, in which "bad assets drive out good", during a crash, as the need to cover obligations as bad assets tank leads to sale of quality assets / securities.
From The Great Crash: 1929. One of my favourite books.
Frankly, this sounds like a feature rather than a bug. Speculation of this type is high risk/reward. If this guts the lenders, that’s a good thing - they’re not treating this with the appropriate amount of respect for speculating and protecting their balance sheets.
Someone on twitter succinctly described the situation by saying, “ I think a lot of stadiums are gonna have to change their names over the next few years.”
It's likely worth quite a bit. I was intrigued recently by the seemingly hot collectors market for corporate swag from famous failures like theranos, enron, etc. on ebay.
A startup named Crypto.com bought naming rights to the Staples Center in Los Angeles and renamed it to Crypto.com Arena. If Crypto.com goes out of business maybe the building will get renamed again.
The Staples Center in L.A. Is being renamed the Crypto.com Arena or something like that, I'm not aware of any other crypto companies paying to have sports stadiums named after them though.
Is there any downside to this? Seems to me this is a positive outcome if it encourages speculators to leave the cryptocurrency space.
Crypto was never intended to be used (and abused) in such a way, and is a considerable deviation from Satoshi's original vision regarding Bitcoin. Perhaps it's time to get back to basics.
I appreciate the feeling, but the problem is that Bitcoin just isn't very useful for the original vision, "a purely peer-to-peer version of electronic cash". [1] It's fine for a little light crime, where people are willing to put up with slow transactions, high costs, inconvenience, and significant risks to e.g., buy some mail-order LSD. But when you compare it with things like debit cards, Venmo, and M-Pesa, it's just not competitive.
I think Bitcoin was a really interesting idea in the pre-iPhone era, but for a variety of reasons it just didn't pan out. Which is why the space was so readily colonized by scammers, grifters, criminals, fraudsters, speculators, and loons.
It was supposed to be cash without the burden of nation state oversight. Instead, it turned into a giant casino ecosystem of unregulated securities involving more and more layers of abstraction (exchanges, stable-coins, NFTs, bundled transactions, hedges, subchains, ...)
> I think Bitcoin was a really interesting idea in the pre-iPhone era, but for a variety of reasons it just didn't pan out.
It’s panning out just fine. Everyone who thinks Bitcoin is old news presupposes that you can do something like Bitcoin, but better. There’s no evidence of this in any non-Bitcoin cryptocurrency.
This also ignores that Bitcoin is improving every year. Tools like Liquid and Lightning are incredibly sophisticated, first principles based approaches to real problems in finance, banking, and fungibility. That fly by night securities called "cryptocurrencies" with shallow liquidity claim that they can do better, but always fail to deliver, hasn't undermined anything about Bitcoin.
I agree with the parent post. This is great for crypto. Maybe all the web developers who think they can do cryptography better than cryptographers can go do something else now.
I think its one saving grace will be that it is used for non-recreational drugs that will soon become illegal or functionally unobtainable, for example Plan B and HRT.
I think there's some % chance that this collapse will hit outside the crypto world. I'm not going to be shocked when we find out through some stupid chain pensions were invested and the like.
Could wind up with major governmental oversight moving forward, basically making damn sure it's barely ever adopted. Everyone always talks about "satoshi's vision" and what not, but crypto isn't going to be worth shit if you are forced to make trades in black market scenarios because it shit the bed so bad it took down serious stuff with it.
Granted this is probably worst case which i'd put at very low odds.
> Could wind up with major governmental oversight moving forward, basically making damn sure it's barely ever adopted.
I'm basically of two minds about this.
One is that as long as people understand they're buying nothing of real value, it's fine if they want to "gamble". It's like a lottery ticket in this regard.
The other is if or perhaps when taxpayers will need to bail out crypto companies. At this point, I'll be extremely angry, and want the strictest government regulation possible.
It doesn't seem like the linkage between traditional finance and crypto finance is that strong yet.
If it ever got to that point I think we'd more likely see prudential authorities restrict traditional finance actors from investing in crypto rather than governments banning crypto outright.
The original vision has some questionable assumptions. Being deflationary by design practically guarantees speculation and undermines any utility as a currency.
If broad adoption was an actual goal, cryptocurrencies wouldn't be fundamentally structured like ponzi schemes.
The problem is that the people at the bottom of the pyramid have no idea how crypto works or the risks involved. Seems to me that defining crypto as an Unregulated Security would be a good first step, allowing only "Accredited Investors" to participate in crypto trading directly.
Homomorphic encryption without financialization will be the final form of cryptocurrency, and only for things like escrow and transfers between banks (probably replacing commercial paper). It'll take a decade and people will probably never see anything but their native currency in their banks. Part of the slow adoption will probably be due to it making Olde-Timey forms of corruption no longer possible. (But I'm sure new kinds will arise.) It was never meant to be an investment, just like you said.
There are going to be some great discounts when correlated assets bid down during these liquidations, and some nice block space available
Just pick the right asset if you want to speculate, there is always some that move
pre-2017 crypto was not a beneficiary of quantitative easing, the hedge funds didnt exist (barring like 3 with low AUM) and the LPs had no vehicle to purchase crypto
its more closely a return to that environment, except with waaaay better infrastructure
There is still over $200bn in stablecoins ready to move into any crypto asset at any moment 24/7, the redemptions to fiat aren’t really happening
There's a non zero amount of people who put their life saving into crypto because it was going to go "to the moon." Everything was coming up Milhouse... until it wasn't.
So those people are probably going to rely upon taxpayers for help. And so when homeless hodlers appear on the streets looking for the government handout, that's gonna piss off liberals and conservatives alike.
It doesn't threaten the mainstream economy because everyone knows it's a scam and no one is creating important financial infrastructure that relies on it. If crypto actually had the widespread adoption the enthusiasts dream of, we would be seeing a 2008 level disaster (and corresponding required bailout) all over again.
Here's hoping. If the federal government bails out crypto, then I will not be happy. I don't think it's gonna happen, because influential government figures have been calling it a risky, speculative asset class from the very beginning.
Every time these stories pop up, I'm amazed at how much infrastructure has built up around crypto. Entire websites with reporters that do nothing but cover crypto stories. Layers upon layers of derivatives built on top of coins I've never heard of, which themselves are built upon structures on top of ETH or BTC. Hedge funds. Analysts. Exchanges. Fintech. So much money swirling around a Greater Fool scam.
Reminds me of the good old days when World of Warcraft got so big that there was a substantial grey market for the in-game gold. At first, it was simple enough, forums where you could pay someone $10 with PayPal or whatever, and then they would meet you in-game and give you 1,000 game gold coins.
Within just a few years there were large-scale "gold mining" operations set up in China, wholesalers, retailers, "forex" markets, etc... Nearly the entire modern economic ecosystem was set up around a game.
At some point, if WoW was treated as a country, its "currency" would have ranked above quite a few real countries in terms of forex trading. If I remember correctly, it was bigger than 70 real nations.
This is still happening, in WoW and other games, and has morphed into some pretty wild things - such as people in impoverished countries playing the games as a source of income.
That was true for runescape too, but it seemed like its ended entirely when you were able to sell membership bonds for in game gp on the grand exchange. Now its like, why go with a scammer website where they will scrape your info when you can give jagex $8 and have 60 mill in game in a few moments? Brilliant way to get around the issue imo and it practically acts like a stimulus package for the players so they don't have to run flax like I did for hours 15 years ago.
The Wall Street guys have piled in running schemes that they are unable to do in the normal banking world because it is regulated & insured.
Most of the regulations have come from centuries of banking history, which the crypto world seems to be speed-running through right now, learning the hard way.
There is plenty to criticize about the banking world, but crypto is indefensible at this point.
Crypto is speed running it because it is trying to get to the terminal state of finance, but regulated through software and cryptography instead of centralized governments that have a monopoly on violence. Time will tell if this is possible. Too many people seem certain it is, or isn’t. I think DeFi is insanely cool, if it manages to work.
the day they announced Crypto.com bought the naming rights to the Staples Center it really brought me back to the year 2000 dot-com bubble. It's even a dot-com! But this time... it's with crypto. It's the over-the-top silliness of it. Super Bowl Ads. Macy's Thanksgiving Day parade floats. Hundred million dollar naming rights deals. Writing Matt Damon a blank check (I hope he got one because, why else would you do this Matt?? Why Matt, why??)
You're right, but I think this also means that we should take another look at the similar encrustations around real economies. Part of the reason the cryptocurrency thing took off so thoroughly is that a lot of financialization was already in extremely tenuous contact with reality. It was easy enough to sever the link entirely and focus on pure dreams of digital gold.
We need look no further than the 2008 financial crash for evidence of that; The Economist was reporting for years that there was clearly a lot of risk being shuffled around such that nobody was quite sure where it was. We all found out, but not until after a lot of the shufflers made their money and got out.
Yes. Funny thing is, in the real world, the trading and analysis has some purpose (steering share prices towards their "true" value, thus solving the capital allocation problem; aggregating time preferences & determining rates, thus solving the investment decision problem; allowing people with certain exposures to hedge themselves; etc.)
But in crypto land, it's a pure cargo cult - a facade of finance and analysis, with nothing behind it.
3AC is a hedge fund that actively traded shitcoins on centralized and decentralized exchanges and bought locked tokens from newish projects (like a VC).
Hundreds of developers, modelers, artists, and the like spent months working on NFT games, “digital land” and other projects that are sure to either get canceled or be commercial failures.
Ironic how similar the crypto and traditional world is.
I'd love to see some analysis (probably impossible at this point) of VCs on Twitter who added "crypto/web3" into their bios over the course of late 2021 through early 2022, and how many of them have deleted any reference to it since then.
No, this is great. Great, great fun. Life is too short to keep playing boring traditional finance, better play with crypto where things are always interesting.
I get the sentiment. Except... when you play a game of e.g. Monopoly it doesn't contribute to global economic collapse that affects real people that weren't even playing.
I think every cycle has dramatic stories. To me this is just another downturn where I buy with confidence and wait till the tides shift. I maybe wrong and that's fine. But history often rhymes.
Sure, but there's no intrinsic reason for crypto to have a given value.
Assets that generate value (cash flow) will fluctuate in value per the moods of Mr. Market, but over their long run will hew to the present value of their future earnings power.
There's no similar number for crypto. Might as well be tulips. In that case, perhaps it is true that history will rhyme.
Gold doesn't provide cash flow and is a 3 trillion dollar market.
Next you're going to say that gold has some magical property called "intrinsic value" which Bitcoin doesn't have.
Well, Bitcoin has absolute scarcity and a global permissionless and trustless payments network. Despite the protestations of many, it's a form of money and useful to many people.
The most important thing to remember in these cases is that ETH and BTC are likely the only top 10s to survive.
Maybe Doge because it's the original meme coin, but everything else will die. Just like the billions of random tokens I hold from 100s of ICOS from 2017. They're all worthless.
Does anyone have a view on how "contained" crypto is? I.e. do these failures lead to anything other than pretend value going back to zero? Is there anything real that somehow depends on crypto (like what happened with mortgages)?
Seems like the entire capitalization of crypto is around $1 trillion. The total value of housing in the USA is a bit over $40 trillion. So that should give you some sense of scale of the crypto market versus other markets that pose systematic risks.
In the grand scheme of things crypto is still relatively small, another dot-com bubble or not even that. It's going to be a sideshow for the bloodbath that happens in the public equity and corporate debt markets (and eventually, the housing market), which is just getting started.
Crypto in general contains a lot less uncollateralized debt, surprising chains of counterparty risk, and so on than traditional finance. This is because those defi protocols and exchanges that want to survive have process margin calls and liquidations quickly or be wiped out. 3AC may leave some counterparties in bad situations, but those counterparties are totally insignificant compared to the entities one hears about in traditional finance.
> Crypto in general contains a lot less uncollateralized debt, surprising chains of counterparty risk, and so on than traditional finance.
I don't think that's obvious at all when you have entities like Tether with unclear off-chain financials. Only the on-chain stuff is transparent and works as you explained.
People will contradict me on this because it's counterintuitive, but crypto flows are big enough these days that they can move the US stock market. This is quite noticable on days with big crypto-only news.
Meaning that crypto is very corellated with the stock market index, and if big selling happens on crypto, the statistical arbitrage algos will sell the stock market to exploit the correlation.
E.g. there's a big correlation between tech stocks and cryptocurrencies, but it could just be that investors consider them both in a single category (risky assets) and thus buy / sell at the same time.
I just want to block quote the second paragraph, but instead, just the first sentence.
“The deeper problem, always, is when you add leverage. Someone who gambled $40,000 on Bitcoin now has $20,000, fine. But someone who bought a Bitcoin with $20,000 of their own money and $20,000 borrowed from someone else now has roughly nothing, which is worse.”
Always the same story: New generations of degen traders get wiped out on leverage. The smart ones figure out that Bitcoin is the only signal amongst the crypto noise, and the network gets stronger.
Readit News
https://twitter.com/hodlKRYPTONITE/status/153690211554074214...
Basically, they're a large crypto fund that has borrowed from almost every major crypto lender, and if they can't cover their margin calls (which is expected if they're insolvent), the risk of the debt is then transferred to the lenders themselves.
We’ve been here before, we’ll be here again, a bunch of people will lose money and the cycle will repeat. It’ll all work out.
Which ironically would be bullish for bitcoin . stocks rebounded huge after the 1998 crisis.
Dead Comment
https://nitter.net/hodlKRYPTONITE/status/1536902115540742144
it also helps dampen inflation by strengthening the dollar, at whatever level that may be.
Are the loans denominated in crypto or dollars? Does this mean the lenders will have to sell crypto when they realize the loss?
For instance, the stablecoins.
Bitcoin itself doesn't seem to be vulnerable, exactly because there's no particular objective value. If it goes down 90%, well, nobody promised it wouldn't.
Sounds as if that's somewhat related to J.K. Galbraith's variant of Gresham's Law, in which "bad assets drive out good", during a crash, as the need to cover obligations as bad assets tank leads to sale of quality assets / securities.
From The Great Crash: 1929. One of my favourite books.
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TL;DR - like Usher said, “let it buuuuurrn”
That would have been funny.
[1] https://www.bloomberg.com/news/newsletters/2022-05-19/terra-...
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Crypto was never intended to be used (and abused) in such a way, and is a considerable deviation from Satoshi's original vision regarding Bitcoin. Perhaps it's time to get back to basics.
I think Bitcoin was a really interesting idea in the pre-iPhone era, but for a variety of reasons it just didn't pan out. Which is why the space was so readily colonized by scammers, grifters, criminals, fraudsters, speculators, and loons.
[1] https://bitcoin.org/bitcoin.pdf
It’s panning out just fine. Everyone who thinks Bitcoin is old news presupposes that you can do something like Bitcoin, but better. There’s no evidence of this in any non-Bitcoin cryptocurrency.
This also ignores that Bitcoin is improving every year. Tools like Liquid and Lightning are incredibly sophisticated, first principles based approaches to real problems in finance, banking, and fungibility. That fly by night securities called "cryptocurrencies" with shallow liquidity claim that they can do better, but always fail to deliver, hasn't undermined anything about Bitcoin.
I agree with the parent post. This is great for crypto. Maybe all the web developers who think they can do cryptography better than cryptographers can go do something else now.
Could wind up with major governmental oversight moving forward, basically making damn sure it's barely ever adopted. Everyone always talks about "satoshi's vision" and what not, but crypto isn't going to be worth shit if you are forced to make trades in black market scenarios because it shit the bed so bad it took down serious stuff with it.
Granted this is probably worst case which i'd put at very low odds.
I'm basically of two minds about this.
One is that as long as people understand they're buying nothing of real value, it's fine if they want to "gamble". It's like a lottery ticket in this regard.
The other is if or perhaps when taxpayers will need to bail out crypto companies. At this point, I'll be extremely angry, and want the strictest government regulation possible.
If it ever got to that point I think we'd more likely see prudential authorities restrict traditional finance actors from investing in crypto rather than governments banning crypto outright.
If broad adoption was an actual goal, cryptocurrencies wouldn't be fundamentally structured like ponzi schemes.
It's impossible to have a currency without speculation and financial markets on top of it.
There are going to be some great discounts when correlated assets bid down during these liquidations, and some nice block space available
Just pick the right asset if you want to speculate, there is always some that move
pre-2017 crypto was not a beneficiary of quantitative easing, the hedge funds didnt exist (barring like 3 with low AUM) and the LPs had no vehicle to purchase crypto
its more closely a return to that environment, except with waaaay better infrastructure
There is still over $200bn in stablecoins ready to move into any crypto asset at any moment 24/7, the redemptions to fiat aren’t really happening
So those people are probably going to rely upon taxpayers for help. And so when homeless hodlers appear on the streets looking for the government handout, that's gonna piss off liberals and conservatives alike.
This is way better than how it works in conventional finance.
How on earth do you think this is possible?
Wall Street is bad enough. This is insanity.
Within just a few years there were large-scale "gold mining" operations set up in China, wholesalers, retailers, "forex" markets, etc... Nearly the entire modern economic ecosystem was set up around a game.
At some point, if WoW was treated as a country, its "currency" would have ranked above quite a few real countries in terms of forex trading. If I remember correctly, it was bigger than 70 real nations.
Crypto is the same, except times a thousand.
https://www.polygon.com/features/2020/5/27/21265613/runescap...
Most of the regulations have come from centuries of banking history, which the crypto world seems to be speed-running through right now, learning the hard way.
There is plenty to criticize about the banking world, but crypto is indefensible at this point.
The next generation will have fond memories at that stadium and won’t think about the name either
We need look no further than the 2008 financial crash for evidence of that; The Economist was reporting for years that there was clearly a lot of risk being shuffled around such that nobody was quite sure where it was. We all found out, but not until after a lot of the shufflers made their money and got out.
But in crypto land, it's a pure cargo cult - a facade of finance and analysis, with nothing behind it.
Can anyone recommend a paper or post that explains how it is linked?
Ironic how similar the crypto and traditional world is.
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Assets that generate value (cash flow) will fluctuate in value per the moods of Mr. Market, but over their long run will hew to the present value of their future earnings power.
There's no similar number for crypto. Might as well be tulips. In that case, perhaps it is true that history will rhyme.
Next you're going to say that gold has some magical property called "intrinsic value" which Bitcoin doesn't have.
Well, Bitcoin has absolute scarcity and a global permissionless and trustless payments network. Despite the protestations of many, it's a form of money and useful to many people.
https://commons.wikimedia.org/wiki/File:Semper_Augustus_Tuli...
Maybe Doge because it's the original meme coin, but everything else will die. Just like the billions of random tokens I hold from 100s of ICOS from 2017. They're all worthless.
The casino will be back in another 3 years.
https://money.cnn.com/2000/11/09/technology/overview/
In the grand scheme of things crypto is still relatively small, another dot-com bubble or not even that. It's going to be a sideshow for the bloodbath that happens in the public equity and corporate debt markets (and eventually, the housing market), which is just getting started.
I don't think that's obvious at all when you have entities like Tether with unclear off-chain financials. Only the on-chain stuff is transparent and works as you explained.
Meaning that crypto is very corellated with the stock market index, and if big selling happens on crypto, the statistical arbitrage algos will sell the stock market to exploit the correlation.
E.g. there's a big correlation between tech stocks and cryptocurrencies, but it could just be that investors consider them both in a single category (risky assets) and thus buy / sell at the same time.
https://www.bloomberg.com/opinion/articles/2022-06-15/crypto...
I just want to block quote the second paragraph, but instead, just the first sentence.
“The deeper problem, always, is when you add leverage. Someone who gambled $40,000 on Bitcoin now has $20,000, fine. But someone who bought a Bitcoin with $20,000 of their own money and $20,000 borrowed from someone else now has roughly nothing, which is worse.”
Just the five US big tech companies (AAPL, MSFT, META, AMZN, GOOGL) are down a combined ~$3.4 trillion so far from the highs.
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