Blood everywhere. Terra’s collapse last month was just the beginning. We’re now seeing the rest of the dominoes fall.
Today We’ll Be Covering:
- The Fed’s Decision: Interest rates increase by 75BPS with more on the way.
- The Celsius Collapse: The Largest CeFi institution has paused withdrawals.
- Three Arrows Capital in Trouble: One of the largest venture capital firms might collapse.
- Random thoughts: When to buy, what to buy, etc.
Let’s get into it!
The Fed Raises Rates
The Fed officially raised interest rates by 75bps, which is the highest since 1994.
People are expecting:
• +75bps end of July
• 3.4% by end of 2022
• 3.8% in 2023
They played themselves by believing inflation was transitory, and now they have to overcompensate by being more aggressive.
What’s causing inflation?
COVID / China lockdowns caused constraints on the supply side.
Increased consumer demand.
The Ukraine / Russia war.
Wages have gone up.
Increased oil prices.
So the only weapon the Fed has is to increase the interest rates, and hopefully, that’ll lower demand.
Did you know Russia's the #1 exporter of Fertilizer in the world? With the War in progress, fertilizer prices have skyrocketed. That means higher food prices.
Internal Locus of Control. We can’t control what the fed does. Focus on cutting spending if possible.
I use YNAB software to manage my personal spending and budget. Understand your numbers and look for waste.
I don't know what your life looks like, so I can't give you any advice there. For myself, I cut out $75+ monthly worth of streaming services. I'm cancelling a few trips that I had planned in the upcoming months. Develop the mindset of cutting down.
Every $100 you save is $100 towards my future. Build up that emergency fund if you haven't yet (everyone should have 6 to 12 months of emergency funds).
I know other "influencers" are busy flexing their condos and leased supercars. Those guys don't last long in the industry.
Stay humble and survive.
Celsius Faces a Crisis
Celsius is the biggest CeFi company out there. It had $28b assets under management at its peak.
Some of my friends used them.
Me: “Be careful, not your keys, not your coins”
Them: “I guess. But I don’t have the time to learn the DeFi stuff, and my BTC / ETH is sitting around doing nothing.”
Add in a great-looking mobile app plus marketing slogans like “banking is broken”, then it’s not surprising they gained traction.
So what happened? To keep it simple:
1. They used a ton of leverage. They were taking users' crypto, and doing risky plays.
2. StETH-ETH. Celsius bought a ton of stETH. stETH stands for Staked ETH. Not only is it a liquid version of ETH (that earns over 4% APY a year), but it can earn additional yield in DeFi via Curve Finance + others.
stETH can be redeemed for ETH but only after the merge is done. The Merge just got delayed again and we might not see it happen until 2023.
So what happens if everyone wants to take their Crypto out, but a lot of it is locked up because of the Merge?
They’re currently working with restructuring lawyers to figure things out.
My Take: I don’t like to take supplements with “proprietary” ingredients. The companies behind them hide what’s inside their supplements and claim that it’s a trade secret.
In reality, it’s a way for them to under-dose their supplements to have a fatter profit margin.
I don’t think all CeFi is bad.
The problem is when there’s a lack of transparency.
- If you don’t hold the keys, you’re taking on additional risk. That extra yield you’re getting may not be worth the risk.
- Make sure you understand how the CeFi platforms are generating the yields.
- Diversify. One of my friends put his ETH in Celsius because he didn’t trust himself to hold the keys. I get it. But he should’ve diversified a bit more because ALL his ETH is in Celsius now. He could’ve spread it out among Celsius and Coinbase.
Three Arrows Capital Overshot This Cycle
Three Arrows Capital is one of the largest Crypto Venture Capital firms. They were one of the biggest backers behind AVAX, Terra Luna, Near, and countless others.
The co-founder Zhu Su can move markets when he tweets…even currencies the size of Ethereum.
A few days ago it was rumored that they may be in trouble. Zhu started posting cryptic tweets and even deleted his Instagram.
People didn’t know what to believe as Zhu tends to play these mind games (also known as psyops)
Well, it does look like they are in trouble.
There was a rumor that 3AC was about to get liquidated on AAVE for $245m worth of Ethereum. It’s based on Nansen tagging a whale wallet as 3AC. They have since removed the tag, so I’m not posting it.
My Take: This is bad. 3AC leverages with everyone. If they're forced to be liquidated even further, then you can expect it to move the markets.
The lesson here?
1. It's easy to have a Halo effect because someone's an influencer, whale, or a Venture Capitalist. They're human and make mistakes too. I know some people felt Terra Luna couldn't fail because they had guys like Jump / 3AC backing them up.
2. Risk management is crucial.
Don’t rush to buy the dip. I've seen the word Contagion being thrown around on Crypto Twitter. Think of it like a domino. Terra Luna was the first piece to fall, and it might take weeks or months for everything else to fall too.
I know Ethereum seems cheap, but there’s a strong chance it could become lower. So don’t “anchor” it to its all time high of $4k and think you’re getting a discount. The dip can keep dipping.
I always preach dollar-cost average. Buy each month or buy weekly. You can set up recurring buys with fiat at your favorite central exchange.
The only thing I feel comfortable buying now is BTC / ETH. I do have a few altcoins that I’m looking to purchase, but I believe it's a better risk vs reward to wait a bit for alt coins.
Never Use Leverage. I’m seeing so many liquidation cascades happening right now. “Pigs get fat, hogs get slaughtered.” It’s much more sustainable to figure out ways to increase your income / cashflows.
This is a generational opportunity. My conviction in Crypto’s long term hasn’t changed.
The biggest problem this cycle is we wanted Crypto to happen before it was ready. Crypto's not used enough in the real world yet, and Anchor Protocol was a red herring.
The good news? There's so much funding, interest, and world class builders in the space now. Web 3 is inevitable.
The Whales of the next cycle are being created during this bear cycle.
There are various styles of investing and trading Crypto.
Which style do you prefer?