Spot Markets Live Transcript: 13/01/23

The advantages of sponsoring us are brand association with a geeky rabble of markets nerds but also a bit of awkwardness if we have to actually talk about your company. [Yes this is how independent media works.]

As a huge fan of the King, it had to be said. Rock-n-roll royalty.

Today, in case you haven’t already noticed, I’m joined by chief Nocoiner, David Gerard.

I also have a news blog which is a Finance Newsletter cos people give me money davidgerard.co.uk/blockchain/

I also co-write a lot with Amy Castor, but it’s 3am in LA so she can’t be here.

tl;dr I read this stuff so you don’t have to

So without further ado, can you summarise the events of the last 3 months in one digestible paragraph?

So now they’ve all been kiting cheques. You write a cheque you can’t cash, then you write another bad cheque to cover that one, then you account the uncashed cheque as an asset. Then you pray nobody ever cashes one, cos it’d take out everyone.

Now some are trying to.

Hilarity ensues

What’s the latest with SBF? I see he has written a Substack? (Wonder if anyone is paying him for that.)

https://sambf.substack.com/p/ftx-pre-mortem-overview

Top line: He’s denying that he stole anyone’s money.

(that link actually works)

The bankruptcy proceeds. John Ray’s team (now in charge of FTX assets) are very expensive but they’re very good. Unfortunately, most of the crypto assets found so far are internal FTX exchange tokens.

This is very closely analogous to if Tesco said it was solvent but its assets were half Club Card points at face value.

ALL the exchanges do this, by the way. They’re solvent if you account their internal marketing points as money.

https://twitter.com/BillAckman/status/1613534695421009921?s=20&t=17-0ttJ7mgpPqWzvDPU-Mw

This contrasts with his last somewhat sycophantic reaction to the original SBF drama, hilariously made light of by Rob Smith’s imitation tweet yesterday:

Did we learn anything new from the Substack?

Sam is trying to blame everyone but himself. It’s the fault of Caroline Ellison from Alameda, CZ from Binance and probably FTX’s lawyers.

But it’s not Sam’s fault in any manner.

The key points that stood out for me were that:

1) He didn’t have access to Alameda accounts for about 2 years.  He has extrapolated from unknown sources to conclude that at the start of 2022 Alameda had an asset book equal to about $114bn, $12bn of which was dependent on liquidity from third-party desks like Genesis.

2) He thinks that taking an $8bn loan on the back of an $100bn asset book was logical.

In fact the direct quote is:

“In that context, the ~$8b illiquid position (with tens of billions of dollars of available credit/margin from third party lenders) seemed reasonable and not very risky.”

3) The loans were taken out to invest in venture ($4bn worth), buyout CZ’s FTX stake ($3bn worth.) and about $1bn to pay interest payments to lenders.

This was at the start of 2022. So where exactly he thought he would have got the billions of real fiat currency to help Elon Musk buy Twitter with, I don’t know. He clearly didn’t have it to hand. He would have had to have liquidated the asset book.

I would not assume anything about this is meaningfully true. It’s a farrago of bullshit, in the technical sense.

I discount the truth value of any statement he makes here. If he posted that the sky was blue, I’d think first what his angle was.

He blames the stock market crashes, bad investments etc. He didn’t steal anyone’s money.

But on what planet was it ever logical for him to assume that crypto mark-to-market valuations of trash assets should be treated the same way as those of conventional bonds and equities?

This was worse than a penny stock or subprime portfolio.

We have indeed been here before however. In the GFC, banks made exactly the same mistake – assuming their trash assets would be worth more than they were in a liquidity crisis or a market downturn, but it turns out they were wrong.

Well, in SBF’s case these weren’t just level 3 assets. They were level 42 or worse.

As an aside, the lyrics of Level 42’s Lessons in Love seem strangely appropriate:

I’m not proud, I was wrong and the truth is hard to take

I felt sure we had enough but our marks went overboard

Lifeboat lies lost at sea I’ve been trying to reach your shore

Waves of doubt keep drowning me

All the dreams that we were building

We never fulfilled them

Could be better, should be better

For lessons in crypto

There’s a word for that of course.

He also blames the Fed among a slew of other factors.

In fact, here’s his list of culprits/external factors:

–BTC crashed 30%

–BTC crashed another 30%

–BTC crashed another 30%

–rising interest rates curtailed global financial liquidity

–Luna went to $0

–3AC blew out

–Alameda’s co-CEO quit

–Voyager blew out

–BlockFi almost blew out

–Celsius blew out

–Genesis started shutting down

–Alameda’s borrow/lending liquidity went from ~$20b in late 2021 to ~$2b by late 2022

As for FTX US vs FTX, I would trust everything John Ray says and nothing that SBF says.

Ray says it was all one commingled mass and they didn’t even keep proper accounts of anything.

So when the Lunch with the FT with SBF first came out, they were all surprised they had no idea who that was. And then were too embarrassed to admit they didn’t know about FTX.

But it kind of tells you everything you need to know about the SBF phenomenon. If you rise that quickly, something weird is going on

Also, everythng is Tether lol.

Now WHAT DOES THIS MEAN FOR MARKETS?

There are other players angling for the role of the next big crypto futures exchange to come out of nowhere.

Wintermute was one name being bandied about, there was a bit of a publicity push in December tho I haven’t heard anything since.

Wintermute is a “crypto hedge fund” based in London. Their main experience is getting hacked (or “hacked”, who knows) and losing money in FTX. In fact, they’re on the Unsecured Creditors Committee (UCC) for the FTX bankruptcy.

@Robert: Well I predicted Tether was going down by Dec 2017, so I don’t predict their end any more lol.

I think let’s move on to the wealth of other stories in crypto…

Izabella Kaminska11:25

Quickly, what’s this Nexo story all about?

Nexo is a crypto lender, they play the Defi markets and offer this as an investment product.

A bit like Celsius (ch11) or Voyager (ch11), they’re rather questionable. Got kicked out of a pile of US states.

They DO NOT operate in their native Bulgaria.

This did’nt protect them. Yesterday morning they were raided by an *international* task force.

Money laundering, something sort of ponzi-like, similarities to OneCoin and also funding sanctions violations, particularly funding sanctioned Russian entities.

Nexo were just another crypto lender for a long time. But frankly anyone offering 36% interest rates, you can say the p-word.

What is going on with Genesis/Gemini/Grayscale/GBTC – every G word in crypto?’

Genesis lent cryptos to Three Arrows Capital, who were blown out by Terra-Luna and blew out everyone else in turn.

Very 2008-like. Since May, crypto has had really its own mini-2008.

risky, but with returns yay.

DCG are a big holding firm with a ton of crypto interests. They own CoinDesk for example.

The main guy is Barry Silbert, a bitcoin old-timer, who’s survived multiple crypto bubbles

DCG also owns the Grayscale Bitcoin Trust, a pseudo-ETF for bitcoin (one-way, can’t be cashed out) -t hat’s GBTC

And how does Gemini fit into this debacle?

They took out FTX, so

Their whole pitch is “we’re the serious regulated exchange for your serious money”.

But Gemini got greedy.

These guys? Greedy?

No way.

But they sing so well.

Gemini thought “well a ton of money is in shadow banking, let’s get in on that.” They did a deal with Genesis to create a product called Gemini Earn, basically giving retail access to Genesis.

[at this point your Howey Test alarm bells should be going off]

So Gemini Earn customers signed a TOS that they were sending their cryptos to Genesis.

Now this was all fine until … Terra-Luna crashed, took 3AC with it, and that blew a $2.9b hole in Genesis’ accounts.

That was in July

Instead, DCG assumed a pile of its subsidiary’s debt and wrote a $1.1b promissory note at 1% interest payable over 10 years.

Genesis then accounted this as an asset.

To recap: DCG wrote an IOU from its left pocket to its right pocket.

I guess he has very short arms

This was fine until November, when FTX went down. That was like $175m? (IIRC might have been more, but on that order) but evidently it was the last straw for Genesis, liquidity for customers and Genesis froze withdrawals. Including for Gemini Earn.

Enter a very angry Cameron Winklevoss, whose ordinary retail customers were very upset.

Crypto should really be some sort of mini-drama in the style of Dallas or Dynasty.

Now that was the situation as of yesterday 4pm when we posted our thing: https://amycastor.com/2023/01/12/crypto-collapse-dcgs-check-kiting-comes-home-to-roost-nexo-raided-voyager-sale-to-binance-progresses-unbanking-the-banked/

Beeeecause end of day NY time yesterday … the SEC brought charges against both Genesis and Gemini!

They held that Gemini Earn was the unregistered security it very obviously always was.

Anyway. the Howey Test is very broad, and basically all this stuff is securities in the US.

So the SEC is gonna win this one.

So it came out that the “Blockchain Eight”, eight congresspeople (four from each party) had written to the SEC telling it to back off crypto!

When this finally came out was after the FTX crash, so this explains a lot of frustrated annoyance from Gensler in 2022 and now they can let loose.

I mean, the one real technical innovation of blockchain is that you can start a new penny stock scam at the press of a button.

There are like 7000 equity stocks in the US, and somewhere over a million blockchain tokens.

Imagine you’re a regulator, you suddenly have 100x the entities to deal with at the same budget?

That’s the SEC’s problem. they don’t actually have a giant Monty Python foot to bring down on these guys. They have to do it one handcrafted artisanal order at a time.

Those numbers (7000/1m) are from Alexis Goldstein at the CFPB, but I trust her numbers.

where’s that graph …

That’s coinbase BTC/USD.

Note faked pump at 00:00 UTC and at 01:00 UTC on the dot, none more organic.

In fact here’s that organic material

100% organic

But that’s 30min in itself. Silvergate Bank is probably insolvent (Frances Coppola says you can see it just from their SEC filings).

and Metropolitan Commercial Bank has dumped its crypto customers entirely.

The Fed, FDIC and OCC told banks to stay the hell out of crypto, after Silvergate got a $4.3b liquidity injection from the Federal Home Loan Bank.

The American Banker article is great, and hammers home what a dodgy bit of funding this was https://www.americanbanker.com/news/silvergate-bank-loaded-up-on-4-3-billion-in-fhlb-advances

But EVERYONE IS KITING CHEQUES

And EVERYONE IS COUNTING CLUB-CARD POINTS AS MONEY

Because RETAIL HAS GONE HOME and nobody really believes these unsaleable sh-tcoins can be converted into dollars at any scale.

@John yes, clubcard points are worth an actual p

Brilliant. Well you heard it all here. David thank you very much for joining us.

If you want to hear more from me I’m at https://davidgerard.co.uk/blockchain/ and Amy is at https://amycastor.com/. 

https://k7n9m6fn1vo.typeform.com/to/OWXCWM0E

Take care everyone, bye!