The tides of leverage are receding and that’s great in the long run

Many big players have been caught naked in the crypto market. Enron, Enron, and Worldcom illustrated all that was wrong with the dot-com hype. But the dotcom bubble wasn’t the end of the internet, it was the beginning. This eliminated a lot of waste in the space and created the need to build better apps while focusing on product-market fit. The market capitalization is at its lowest since Thursday or Thursday of the market capitulation.

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Ben Knaus

Chief Growth Officer @ Sch0lar.io Merger of Ed-Tech and Blockchain via Avalanche 🔺 Member of Forbes Technology Council

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Hello hackers! it has been forever.

In case you were wondering, I’m still alive but I’ve been busy building. With the recent capitulation, I thought I would give up my view on all the action.

If you’re in any asset class right now, you’ve undoubtedly felt the macroeconomic downturn. However, after a hype cycle at the end of 21′, a market downturn can expose a lot of waste.

As the old saying goes:

When the tides go out you can see who’s lean dipped.

And to my surprise, many great players have been caught naked.

Enron and Worldcom illustrated just what was wrong with the dot-com hype. No doubt the names below could have a similar narrative for crypto when all is said and done. But the dotcom bubble didn’t mark the end of the internet. It was the beginning. Although most surviving tech stocks saw declines of 50-80%. This eliminated a lot of waste in the space and created the need to build better apps while focusing on product-market fit.

If we created a Crypto Mount Rushmore capitulation of 2022: these would be the figureheads.

Luna/UST

This platform was exposed for systematic flaws reported by users on Twitter months earlier, only to be accosted by its founder Do Kwon responding with “I don’t debate poor people”.

A few months later, UST, an algorithmic “stable coin” turned out to be a not-so-stable DE-pegging against the dollar, as users had warned. Eventually causing a fallout of $40 billion. The full effect of this is still unknown, but UST was the darling of stablecoin yield options for VCs.

Celsius

The crypto borrowing and lending giant halted withdrawals on June 13 due to “scandalous economic situations.”

Prior to closing their Series B raise at the end of May, Celsius had a pre-money valuation of $3.5 billion. CEO Alex Mashinsky has guaranteed that Celsius has $28.6 billion in resources under administration. However, since closing its Series B in late May, Celsius’s resources have fallen to $12 billion.

Celsius has a large loan on MAKR, and with a recent payout of $28 million, they’ve lowered BTC’s liquidation price to just over 15,000. Putting every user’s funds on the line. If they resist the storm, expect a bank run for the ages when withdrawals are open.

3AC

One of the biggest and most successful VCs in space. Still, rumors swirl about possible insolvency due to over-indebtedness and Luna’s collapse. And a cryptic tweet from co-founder Su Zhu sent the online chatter to the max.

A related issue is 3AC’s previous exposure to the Terra ecosystem through the Luna Classic (LUC), which saw a multi-billion market crash in late May. The platform traded around $500 million worth of Bitcoin with the Luna Foundation Guard (LFG) for an equal amount of LUNA 3 weeks before the Luna implosion.

Even some protocols were caught in the 3AC fiasco with their treasures stored and managed by 3AC. It also doesn’t help the price of other crypto assets, as companies that are over-leveraged sell assets to hedge and add collateral. Create a double deflation of certain items.

We have seen the greatest leverage in history across any market since 2020. Reaching all-time highs at the end of 2021. (As seen below: Source ST. Louis FED)

Newcomers to take advantage of

It’s no secret that crypto has been a void for the world’s top talent. However, many of these management teams – most in their twenties – are not used to managing billions. In hype cycles like 2021, it’s easy to get caught up in the pace of growth and overlook the potential for downside risk. These management teams are brilliant but have no proven track record in risk mitigation, cash management, etc.

I look to most blockchain projects and VCs to emphasize having stronger leadership teams that have lived through surrender and can mitigate catastrophic events.

Future perspective

  • Sentiment is at its lowest since Black Thursday of 2020. Market capitalization then? Just under $150 billion. Market cap today after all that capitulation……$937 billion. More than a 6x since the last apocalyptic day.
  • Remember that digital assets are a leading indicator of the broader economy. Liquidity is 24-7,365.
  • Much like the Dot-com breakout, it can give us a broader perspective and lessons learned.
  • Know the downside risks of lending platforms and weigh the risks, cold storage is your responsibility while storing your keys is a great option.
  • Bear markets are the best time to build, and VCs are currently hungry for the next big projects focused on real-world use cases.

When the tide rises, let’s make sure the founders/builders/VC firms have learned from these lessons.

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