More Pain Incoming? Depends on this…

Hey guys,

No doubt about it, last week was the craziest week that I have ever experienced in crypto. And, from comments made by some of crypto’s OGs, the collapse of FTX trumps every other episode of turmoil in crypto’s 14-year history.

Within a week, it went from one of the largest and most trusted exchanges in the world to liquidation. I’m still in shock.

Now that FTX has gone down the liquidation route, it means that users will have to wait in line behind those creditors. This includes yours truly.

It’s also important to appreciate that this has turned a massive spotlight on the crypto industry. Regulators are going to have a field day and rightly so. FTX gained our trust, or perhaps we gave it blindly away. The result is massive amounts of pain.

This is also not coming at the best time for the broader markets more generally. About two weeks ago we had the FOMC meeting and it was quite clear that Jerome and Co are not done “breaking the backs” of inflation. And this could break the backs of all markets.

In my video today, I take you through that press conference and explain exactly what was said and what it could mean for the crypto markets.

📊 My Personal Portfolio 📊

I have closed out of my SOL position (more on that later this week). I have also sold considerable portions of my Bitcoin & Ethereum stacks and will be holding all of the proceeds in stablecoin.

Given the current market conditions, I think that it is prudent to let things play out before moving back into the market. We are likely to see more fallout from the FTX collapse with potential contagion.

USDC 38.17% | ETH 26.50% | BTC 24.90% | ATOM 4.24% | DOT 1.76% | MATIC 1.33% | RUNE 1.10% | ADA 0.88% | INJ 0.77% | NEAR 0.57%

📈 Guy’s Forward Guidance 📈

In case my portfolio change didn’t make it clear enough, I am convinced that the worst is yet to come. There are still many indicators suggesting that the speculation hasn’t been flushed out of the crypto market yet. One example is Bitcoin dominance, which has stayed stubbornly low. Bitcoin dominance has historically increased when the crypto market crashed, but this hasn’t really happened yet. The only caveat there is that the surge in institutional interest in Ethereum post merge could mean that we should start including Ethereum dominance when factoring in levels of speculation in the crypto market.

Another thing I’ve been watching closely is the stock market. As most of you will know, crypto has been highly correlated with stocks in this market cycle. This is basically due to institutional exposure to the crypto market. What’s useful about this correlation is that you can see whether it’s a macro factor or a crypto-specific factor that’s been moving the crypto market. If it’s macro, then stocks will look the same as crypto. If it’s crypto, then there will be a divergence. Not surprisingly, FTX’s collapse has created a massive divergence between the price action of stocks, which are rising, and cryptocurrencies, which are falling.

This doesn’t mean the correlation between both asset classes has been completely broken, however. As such, the fact that stocks are rallying should scare you, because it means that the next leg lower in the stock market is still coming. It’s believed that the first stock market crash was caused by a change in future profit projections due to rising interest rates. The next crash will likely be caused by a huge hit to actual earnings. This is slowly but surely being reflected in all the layoffs, starting with big tech. With Europe effectively guaranteed to go into a recession, it’s hard to see how earnings will remain robust in the next quarters.

This begs an obvious question: what should you do? Obviously I can’t give you any financial advice, but I can repeat what was said by macro analyst Vincent Deluard in a recent episode of Blockworks Macro. If you believe that inflation will remain high, then consider energy-related assets (since this is where most of the inflation is coming from). If you believe that interest rates will continue to rise or remain high, then consider bank-related stocks (as they will profit massively once yield curves come back in line).

But, that’s just the macro side. On the crypto side, the future is looking… interesting, and not just because of the FTX-Alameda situation. Stablecoin issuers like Tether, Circle, and Paxos are literally making billions of dollars per year in passive income. That’s because most of their stablecoin tokens are backed by US government debt, whose yields are increasing as the Fed raises rates. This seems to be the only crypto niche that’s going to make large gains during the bear market. Where is all this capital going to flow? It’s anyone’s guess, but as stablecoins exist on smart contract cryptos, they’re the most likely recipients.

Case and point, stablecoin demand seems to be the primary reason why ETH has held up so well relative to BTC in this crypto crisis. It’s also why ETH’s supply schedule has been deflationary over the last week. Looking at the pecking order of smart contract cryptocurrencies, Solana seems to be the next best one for stablecoin transactions.

Although the Solana blockchain has been notoriously unreliable, it is still the fastest cryptocurrency on the market (besides Aptos, apparently). As crazy as it sounds, stablecoin issuers like Circle might be the ones that save Solana. More about that later this week.

🇺🇸 Moonboys Become Bitcoin Maxis 🇺🇸

I’ll start by saying that I am not a Bitcoin maxi in any sense of the word. That said, I’ve found myself thinking a lot about what Bitcoin creator Satoshi Nakamoto would want out of the industry, and what he (or she, or they) would do during times like these. As I mentioned in our video summarising this shitshow, a crypto industry where billionaires play poker with customer funds behind the scenes is the antithesis of cryptocurrency - that’s 100% TradFi.

And yet, it's the price appreciation of BTC over time that has ultimately created the industry we find ourselves in. In other words, it’s Bitcoin that gave rise to meme coins, billionaires, and all the bad stuff that happens when you put those two in the same room. Believe it or not, but many Bitcoin Maxis believe that these incentives were intentionally built into BTC. Put differently, Bitcoin was intentionally designed to make these FTX-type situations occur.

The reasoning here is easy to understand when you zoom out and watch the process in action. BTC appreciates in value. This incentivizes the creation of copycats, most of which will eventually go to zero. These copycats effectively market themselves as a way of getting rich quickly, something that appeals to the average person who is struggling to keep up with the inflationary financial system. Crypto newcomers create a massive crypto bubble, which ends in a very painful pop when all the scams collapse beneath the unprecedented leverage.

You’d think that this would result in all those retail investors running for the hills, but research by the Bank for International Settlements (and others) has shown that most crypto holders become HODLers. Put simply, most people who invest in crypto end up sticking around. The aforementioned rise in Bitcoin dominance during bear markets suggests that most of these retail investors take off their rose-tinted glasses and start stacking sats instead of shitcoins.

The result is that all the people who piled in to make a quick profit end up understanding the true value of cryptocurrency through their painful losses (and lots of sunk costs). And of course, the true value of cryptocurrency is the ability to own your own assets. It’s the ability to spend those assets when and how you want (unlike CBDCs) It’s the ability to see everything transparently on-chain. At the end of the day, it’s BTC that does this the best.

People eventually realise it, and they remember… until the next bull market, when the whole Bitcoin adoption cycle starts all over again!

🥊 Proof of SAFU 🥊

Mt.Gox, Quadriga, FTX.

What do they all have in common?

If you answered, “Opaque and reckless financial and operational practices.” Bingo.

It’s been a truly terrifying week folks, and to be completely honest, I never imagined FTX would join the list of defunct exchanges that went down due to shoddy internal practices. And just a month after CEO and founder Sam Bankman-Fried appeared on the cover of Forbes!

And, if you’ve seen my video on the situation posted a few days ago, you know that the irony of the entire situation only gets deeper. At this point, it’s safe to say that it’s best to not trust anybody - even if they happen to be the poster child of goodwill in crypto. In a subtle foreshadowing, the man himself admits that many crypto exchanges are secretly insolvent.

It just goes to show that the age-old adage of “not your keys, not your coins” still rings true. Crypto is a significantly unregulated and volatile space, and once there’s no money in the coffers, the gates of hell are bound to break open.

And here’s a nugget of fact to chew on - in the event such firms file for bankruptcy, you don’t even have the first claim over your own assets on the platform. The crypto exchange’s creditors do. That’s right, in most jurisdictions including the US, investors (i.e., customers of the exchange) are often last in line to receive funds from the bankruptcy proceedings.

So, as a rule of thumb, never hold more than 10% of your holdings on a centralised exchange. Always remember that the foundation of cryptocurrency is rooted in self-custody. If you’re a true crypto maxi, self-custody is the only way to go.

But having said that, I’ll be the first to admit that CeFi is probably not going away. At least for the foreseeable future. The reason? – quite frankly, it’s the easiest on-board for people new to the ecosystem. So how do we build back trust and ensure that crypto exchanges worldwide are following safer practices?

The answer is ‘increasing transparency.’ One such transparency solution that’s been in focus over the past few days is ‘Proof of Reserve.’ If you’re wondering what that is, put simply, it’s the practice of creating consistent public-facing attestations as to a custodial service’s reserves, alongside a record of its liabilities (i.e., user balances). The idea is to create a somewhat verifiable representation of its solvency.

Quite notably, Binance CEO CZ recently announced that his exchange will implement a Merkle tree proof of reserve. Other industry players have followed suit by pledging that they would also implement a proof of reserve for their exchanges.

But keep in mind, this isn’t the first time that the crypto industry has called for proof of reserves. Every time we’ve had an exchange fall, the industry has called for others to implement such a set-up. Sadly, while most exchanges do post such audits of their reserves to play this role’, they’ve usually been one-time affairs.

What we really need is consistent, real-time (or as close to real-time) verifiable proof of assets on-chain vs liabilities. Nic Carter, who happens to be a prominent advocate of proof of reserve, states that the best such practice to adopt would be an “ongoing, auditor-enhanced, user-verifiable proof of solvency using the Merkle approach.”

The closest example of an on-chain tool that offers such a proof of reserve model would be Chainlink Labs’ Proof of Reserve service. To be specific, Chainlink’s product uses Chainlink nodes connected to both the exchange’s API and its vault addresses to relay the data onto a proof of reserve smart contract. This contract can be queried by any other account on the network to determine whether the exchange’s crypto assets are equal to its liabilities.

While that sounds simple, there might be other tools that I’m not aware of that could be better. So, take that suggestion with a pinch of salt. If you’re looking for a list of exchanges that have currently published proof of reserve, I’d recommend you check out the list on Nic Carter’s page. The list is ever growing.

While the FTX saga is certainly harrowing, I hope we’ve finally learnt the importance of establishing a practice of uncompromisable transparency from exchanges.

And once again folks, remember that self-custody is the only real solution.

🔥 Deal of The Week 🔥

Speaking of self custody, if you are going to be taking control of your own keys then there is no better place to do it than through a hardware wallet.

I’ve already done a video about the safest hardware wallets on the market right now! So, I encourage you to watch it if you want the full low down.

If you were interested in which hardware wallets we personally use here at Coin Bureau HQ, I have a few:

1️⃣ Ngrave - The newest & coldest hardware wallet

Read our dedicated Ngrave review and find out if this new hardware wallet is the future of crypto storage.

👉 Grab A Ngrave & Get 10% OFF when you use the code COINBUREAU

2️⃣ Trezor - The choice for exotic altcoin dabblers

We’ve compared Trezor’s flagship devices side-by-side. Work out which one is for you in our exclusive Trezor article!

👉 Bag a Trezor now!

3️⃣ Ellipal - A Top-notch midrange hardware wallet

Ellipal has two core hardware wallet offerings - Ellipal Titan and the Ellipal Titan Mini. We’ve reviewed both, so you will want to read those reviews to make your choice.

👉 Get an Ellipal device & Get 10% OFF when you use the code COINBUREAU

🔮 Video Pipeline 🔮

• China’s Scramble For Africa
• Social media censorship: what you need to know!
• Saudi Arabia’s trillion-dollar city
• Solana post-FTX collapse: still worth it?
• Blackrock’s ESG investing is over: what it means…

🏆 What's New At CoinBureau.com This Week? 🏆

✅ ELLIPAL Titan Mini Review 2022: The Same Highly Secure Crypto Wallet We Love, But Mini!

✅ The Ultimate Guide to Stablecoins

That’s all for this week. Yes, it’s been the hardest week ever and I’m also not certain that next week will be any better.

However, there is one thing that you can always be certain of. And that’s that team Coin Bureau will always be here providing you with the educational content you can rely on.

Thank you to everyone who continues to support us in this mission.

Guy your crypto guy