5MF SPECIAL EDITION: WHAT WE LEARNED IN 2022; TRENDS INTO 2023

Five Minute Finance

Published in

BLOCK6

15 min readJan 4, 2023

The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.

As a special, longer 5MF edition, let’s see what we can learn from the extra-volatile 2022 — and what the future could hold for 2023.

2022’s Ponzinomics Examined
Why 2023 Will Be a Big Year for DeFi
Goldman Sachs: Buying Crypto When There’s Blood in the Streets
Tesla Stock Inches Toward Pre-2020 Price Level: What’s Next?
A Good Sign for Bitcoin Mining Woes

2022: The Year of Crypto Deponzification

LUNA Drops ~50% in a Day as UST Peg Fails (link)
FTX Files for Bankruptcy, SBF to Step Down as CEO (link)

Ponzinomics Autopsy in Rearview

Looking in the rearview mirror, if a single word could describe 2022, it would likely be Ponzi. For 2023 to be any different, it is essential to understand how Ponzi schemes can destroy wealth.

People interpret this fraudulent activity in two general ways:

Paying returns on investments based on the influx of new investors, instead of actual profits.
Propping up insolvency based on the false perception of solvency.

These two activities are intrinsically linked, as the perception of insolvency can halt the influx of new investors, crumbling the Ponzi scheme. We have seen this play out — or close variations of it — multiple times this year amid a $1.5 trillion wipeout from the total crypto market cap.

High on the 2021 bullrun, the year started with $2.18 trillion, only to end at $0.79 trillion, a -68% decline. Image credit: CoinMarketCap.com

In May, Terra (LUNA), once among the top 5 blockchains by market cap, was the epicenter of the crypto Ponzi explosion. The blockchain’s pressure point was its main lending dApp, Anchor, having attracted over $20 billion in loans and collaterals. The problem was that Terra was an exercise in Ponzinomics.

Pegged to the US Dollar, Terra’s UST stablecoin was used as collateral for loans, with lenders getting up to 20% interest rate. This unheard-of yield (the average US savings account offers an interest rate of 0.09% as of December 2022) was why the dApp attracted so many investors. This ensured a steady growth of new depositors to pay such enormous returns.

Even worse, UST was not backed by dollars (cash) in a 1:1 ratio. This was an illusion. UST’s stability depended on the price of Terra’s native cryptocurrency, LUNA. UST or LUNA selloffs could then topple the whole scheme, which is essentially what happened.

Enormous trading volumes marked the exit point for UST, decoupling it from USD. Image credit: Nansen.ai

The resulting run wiped out $85 billion, including fallout, triggering a price-suppression cascade in the broader market. Following similar Ponzi-like double-digit yields on deposits, crypto lender Celsius went bankrupt in June, owing its customers $4.7 billion.

Terra’s collapse also brought down the heavily Terra-exposed Three Arrows Capital (3AC) hedge fund, holding ~$560 million worth of UST/LUNA. Another crypto lender, Voyager Digital, also went down because of its 3AC exposure, as the hedge fund defaulted on a $675 million loan.

The mind-boggling crypto ponzinomics crash didn’t end there. Sam Bankman-Fried’s Alameda Researched used FTX user funds so he could buy Robinhood shares worth $546 million. Purportedly, another crypto lender, BlockFi, used those very same shares as collateral to give a loan to Alameda, which also provided a loan to BlockFi. 🤯

Now-bankrupt BlockFi is in court proceedings to claim over 56 million Robinhood shares from FTX.

The last domino to fall was, of course, SBF’s FTX/Alameda, as his top lieutenants already pleaded guilty to multiple fraud charges. FTX bankruptcy manager John Ray described FTX crypto exchange in the following terms:

“Never in my career have I seen such an utter failure of corporate controls at every level of an organization, from the lack of financial statements to a complete failure of any internal controls or governance whatsoever,”

However, it took Binance’s CEO to deal the final Ponzi blow, having called out FTX’s air token FTT.

Image credit: Twitter

Just like with Terra (LUNA), the resulting FTT selloff toppled FTX’s fragile house of over-leveraged and co-mingled token cards. The eroded confidence in crypto exchanges even impacted Binance, the largest global exchange, as it saw billions in outflows in December. Unlike FTX, Binance survived the stress test.

What can we conclude from this mess?

Crypto became popular enough to have attracted an entire centralized infrastructure. This was in direct opposition to bitcoin’s (the original cryptocurrency) original vision of decentralization and user-owned funds.

In a toxic mixture of fraudulence and expectation of unlimited growth, these centralized actors severely eroded confidence in digital assets. This was happening at the same time as FTX using user funds to mass-market crypto as a concept.

Crypto’s popularity originally stems from Bitcoin. But Bitcoin is all about self-custody and wealth preservation against central players. Specifically, against central banking monetary policies.

In turn, this year’s crypto deponzification is a wake-up call on what it truly means to own digital assets. The original vision of decentralized digital assets aimed to utilize algorithmically enforced smart contracts instead of relying on the behavior (and greed) of individuals. The industry is clearly having some trouble achieving this vision, however.

And this was part of 2022’s biggest lesson in crypto: All financial systems rely on varying degrees of trust. Trust in crypto is low, but for reasons contrary to its original view.

Trust is the absolute cornerstone of any monetary system in the history of money. Crypto’s bull run in 2021 resulted in a lot of new investors and traders trusting crypto — only to be taken advantage of by centralized actors who used crypto’s hype to profit from that trust.

It’ll take some time to build that trust back. Investors need to learn what to look for in determining where they give their trust in the crypto space, in order for the industry to evolve and reach its next level.

DeFi Prospects for 2023

Messari: Crypto Thesis for 2023 (link)

Will 2023 Be the Year that Makes or Breaks DeFi?

Just as Bitcoin was designed to be a new form of sound money without an interfering committee, DeFi aims to offer financial services — borrowing, lending, trading — without intermediaries.

In the wake of SBF’s antics, these unique DeFi benefits took fertile ground. Following the FTX crash and Binance FUD, Uniswap decentralized exchange at one point even outpaced Coinbase, the world’s fourth largest exchange.

In a single week post-FTX crash, Uniswap trading volume increased by +177%, gaining the upper hand over Coinbase. Image credit: The Block

This is a remarkable success and mighty DeFi foreshadowing, given that Coinbase has approximately 92x more employees than Uniswap’s devs.

Moving into 2023, Messari’s 168-page report gives us some clues on how DeFi will shape up:

Ethereum’s flagship apps, such as Uniswap, Lido, or OpenSea, are generating more monthly fees than Ethereum’s layer 1 mainnet through its ETH gas fees.
Aave lending dApp and Uniswap exchange dApp, spread out from Ethereum to other chains. Because users themselves are liquidity providers, we are likely to see further liquidity concentration in these DeFi unicorns.
The value of DeFi tokens exceeded Ethereum’s total value locked (TVL) by 3x, $92 billion vs $28.94 billion respectively. Aave is expected to further entrench itself as the lending DeFi giant with the upcoming stablecoin.
MakerDAO adding $500 million exposure to US Treasuries’ yield is a significant DeFi milestone, showing that DeFi can use central banking as revenue to grow DeFi projects.
Replicating traditional ETFs is yet to happen on-chain. Therefore, dApps that facilitate the easy creation of customized on-chain indices could see big growth in 2023.
Synthetic liquidity continues to be exceedingly popular. Blockchains such as Ethereum require locked staking for yields, but liquid staking protocols like Lido and Rocket Pool unlock them by minting synthetic assets stETH/rETH, pegged to ETH. These can then be used in lending dApps.
Soulbound NFTs (SBTs) are expected to expand DeFi use cases. These non-transferable NFTs are bound to users’ private wallets, effectively creating a unique crypto ID. For example, SBTs could be used in DAO voting, based on reputation, instead of proportional token weight voting. Soulbound NFTs could even be used to bar malignant DeFi actors, as we will see below.

The Bad Side of DeFi

For crypto to compete with traditional banks, DeFi must go through the route of under-collateralized lending. Yet, this crypto niche took a hit this year, especially after the FTX collapse.

Moreover, after the Tornado Cash sanction, we will likely see know-your-customer (KYC) rules applied across the board. PancakeSwap exchange, backed by Binance, already geo-locks access based on sanctions issued by the US against Cuba.

This is despite PankaceSwap calling itself “the most popular decentralized platform in the galaxy.”

Even the most decentralized blockchains, such as Ethereum, may succumb to government edicts. Already, up to 70% of Ethereum blocks adhere to US’ blacklisting of wallet addresses.

Ethereum’s true decentralization is now marked by censure compliance imposed by

the Office of Foreign Assets Control (OFAC).Image credit: MEVWatch.info

Next, even when audited, smart contracts may fall prey to code exploits. This year, on-chain exploits resulted in over $3 billion losses. More robust coding practices will have to be devised.

Lastly, one should beware of fake DeFi, vulnerable DeFi and bad actors. Most recently, Avraham Eisenberg, graduated in Mathematics at Yeshiva University, was arrested.

Prolific DeFi market manipulator Avraham “Avi” Eisenberg. Image credit: Twitter

Eisenberg is the DeFi variant of Sam Bankman-Fried. His exploits are numerous, showcasing the extent of damage that can be done by single person:

Eisenberg launched FortressDAO, removed co-founders, minted 190 million FORT tokens to crash its price. Then, he bought FORT tokens at a huge discount, redeeming them at $14 million for personal profit. The FortressDAO is then left defunct.
Within a year after FortressDAO pillage, Eisenberg wrecked Mango Markets on Solana, a cross-margin trading dApp. He bought MNGO token perp longs, pumping the token’s price by 1,300%. Then, he used the unrealized profits to borrow Mango’s entire liquidity pool, worth $115 million, only to default on the loan.
Eisenberg even attempted to pull the rug on Aave’s liquidity, unsuccessfully.

Eisenberg’s arrest in Puerto Rico on Monday is a major DeFi milestone, the first arrest directly tied to DeFi, involving “market-manipulation offenses”.

The arrest could be a double-edged sword, though. On the one hand, it serves as a deterrence for pump-and-dump schemers and market manipulators. On the other hand, DeFi could be hit with a regulatory hammer to make it less-DeFi.

Regardless of any potential regulatory reaction to what we saw in 2022, DeFi continues to be promising, and 2023 could be a massive year for the industry’s future.

In a Bear Market, with Prevelant Fraud, Goldman Sachs is Looking to Buy… Crypto?

Exclusive: Goldman Sachs on Hunt for Bargain Crypto Firms after FTX Fiasco (link)

Bank-Crypto in 2023?

Why would the world’s second-largest investment bank by revenue want to buy FTX’s scraps? As you ponder that, Goldman Sachs is on a bargain token hunt for tokens in Alameda/FTX portfolios.

According to Arthur Cheong, head of DeFiance Capital, Goldman Sachs would get at least a 50% discount on Alameda’s venture capital (VC) token portfolio:

HOLE — $67.5m

Polygon — $50m

NEAR (FTX) — $50m

Port Finance — $33.5m

NEAR (Alameda) — $30m

MINA — $20m

Fuel — $15m

1Inch — $10m

Secret Network — $10m

Euler — $5.6m

These digital assets account for over 70% of VC deals in the last two years, making Goldman Sachs a major crypto player. This is on top of already $690 million invested in blockchain startups CoinMetrics, CertiK, Elwood, Anchorage Digital and Blockdaemon.

In March 2021, the investment bank restarted a cryptocurrency trading desk, focused on Bitcoin futures.

It looks like large banks clearly see the benefits of blockchain, but only if it’s under their control. In December’s op-ed to Wall Street Journal, the CEO of Goldman Sachs, David Solomon, said this about the future of digital assets:

“I still see blockchain as a promising technology if allowed to innovate under the right conditions. Under the guidance of a regulated financial institution like ours, blockchain innovations can flourish.”

These innovations would make investment banks drastically more efficient in confirming transactions for stock trading, derivatives, and real estate. Of course, these transactions would likely go through private blockchains.

Regardless, 2023 could be the year that investment giants apply Nathan Rothschild’s words to crypto: “Buy when there’s blood in the streets.”

Tesla’s Decline In 2022

Tesla Continues to Dip on News of Shanghai Production Cut, Down 5.4% in Premarket (link)
Tesla Closes Down 11%+ as its Longest Losing Streak Since 2018 Continues (link)

Twitter Purchase: The End of Tesla’s Overvaluation?

Much like the crypto market, Tesla (TSLA) stock is an exemplar of the Fed’s bloated (+25%) money supply since March 2020. Aside from triggering 40-year high inflation, the Fed’s liquidity poured into stocks and cryptos.

Yup, Tesla’s year-to-date performance is now worse than Bitcoin’s, an on-risk asset vs. blue-chip company. Image credit: Trading View

But even without excess Fed liquidity, which the Fed started quashing with interest hikes since April, Tesla (TSLA) has always been a special case. Is it a tech company or a car company?

After all, Volkswagen Group (VOW3) has a 5.6x lower market cap than Tesla, but it manufactured 8.3 million vehicles in 2021 vs. Tesla’s 930,400 vehicles. What’s going on?

In short, TSLA can be thought of as a meme-stock. But unlike dog coins, it is on a more solid ground as it derives value from Elon Musk’s superstar-like persona and social media footprint along with his other ventures — SpaceX, Boring Company and Neuralink. These are all cutting-edge companies that push the technological envelope.

Likewise, Tesla spearheaded multiple sci-fi-like features: self-driving, over-the-air updates, formidable acceleration and handling, smooth aesthetic, and luxurious equipment. Elon Musk rounded up Tesla’s futurism with his image as an entrepreneurial genius, regardless if that is correct.

Multiple governments, setting a time limit on oil-based cars, further propelled Tesla’s EVs as inevitability. This situation is quite similar to Ethereum, as the building infrastructure for DeFi, of which much is expected. Yet, it is uncertain if that future will play out for Tesla.

On a five-year timeline, TSLA is still up +486%, as the EV company caught the tailwinds of the aforementioned Fed’s liquidity boost between 2020–21 and positioned itself as a revolutionary company.

But on Tuesday, TSLA closed at -11%, continuing the longest losing streak since 2018, and the most significant single-day downturn. There are multiple reasons why TSLA stock is collapsing:

Recessionary outlook for 2023 doesn’t bode well for luxury EVs.
Costs in labor, materials, chips, and logistics have increased.
Tesla’s Shanghai production reduction, halting from January 20th to January 31st, after already shutting down the production on December 24th.
Consumer Report’s annual reliability ranking positioned Tesla as one of the least reliable cars, at 19/24.
Tesla’s price-to-earnings ratio (P/E) is pretty bad. While the industry’s standard is around 6, Tesla’s P/E is at 33. For comparison, Mercedes-Benz has a P/E ratio of 3, as of December.
Legacy car companies are catching up with Tesla. Recently, Hyundai IONIQ 6, comparable to Tesla Model 3, got a 5-star safety rating from the Euro NCAP.

Lastly, Elon Musk is getting into an expensive social media game. His $44 billion acquisition of Twitter made him sell billions of TSLA shares, with more selloffs to come. On the closing of Twitter deal on October 27, Musk took a $12.5 billion margin loan as part of the $44 billion package.

With that debt structure, Musk will have to pay around $1.2 billion in interest costs annually. At a time when the Fed hikes are already suppressing all assets, this is a major headwind.

Twitter is historically a money sink, having only two positive net income years since 2010. Overall, the Tesla outlook is as bad as it gets.

However, even if margin-called, Musk still has some leeway, as his net worth is still at $137 billion.

Retail investors own 41.9% of TSLA stock. How retail reacts to the macroeconomic conditions and Musk’s activity in 2023 could heavily impact TSLA’s future in the coming year.

Enjoy 5MF? Click to forward it to three friends.

How Bitcoin Miners are Managing their Reserves in Crypto Winter

Public Bitcoin Miners Forced to Sell 99%+ Mined BTC in 2022: Report (link)
Argo Blockchain’s Shares Up 100% as Miner Avoids Bankruptcy with $100M Deal (link)

Another Bitcoin Mining Bankruptcy Avoided

Last week, we explained everything one needs to know about Bitcoin mining, with Core Scientific bankruptcy as the backdrop. If you remember the conclusion, this arena is all about the survival of the fittest. Those mining companies that balance liabilities and expansion go into the next bull cycles, strengthened and consolidated.

As BlackRock warns of unprecedented recession next year, Bitcoin miners are bound to exert more selling pressures. We can see this trend unfolding from Tom Dunleavy’s chart on BTC public miners. The top ten companies have sold 100% of the mined BTC from January to November 30 this year.

Image credit: Twitter

This dynamic is highly volatile for Bitcoin’s prospects next year.

More BTC miner selloff = greater supply over demand = lower BTC price
Lower BTC price = more BTC miner selloff

Of course, every two weeks, Bitcoin mining difficulty is adjusted, which can help make mining more profitable if more miners unplug. In the interim, it is then up to mining companies to reach debt deals to survive the crypto winter.

Argo Blockchain accomplished this on Wednesday after reaching a $100 million bailout from Mike Novogratz’ Galaxy Digital. The result was favorable, as ARBK shares jumped by over +124% over the week.

Argo Blockchain (ARBK) stock since Monday. Image credit: Trading View

Despite this boon, it is anyone’s guess if Argo will go down the road of Core Scientific. The company failed a $27 million funding deal in October, as it warned of negative cash flows. For the time being, Peter Wall sighed with relief.

“Over the last few months, we have been looking for a way to continue mining through the bear market, reduce our debt load, and maintain access to the unique power grid in Texas. This deal with Galaxy achieves all of these goals, and it lets us live to fight another day.”

– Peter Wall, CEO of Argo Blockchain.

It would be interesting to see how mining companies deal with the possibility of an extended bear market in 2023. We can expect the industry’s Darwinistic tendencies to continue until the broader crypto market recovers.

Tweets of the Week

The second half of 2022 was historic for the US housing market 🏠
Transaction volumes froze 🧊
Prices started to decline 📉
Here’s an unbiased and data-backed update on the US housing market heading into 2023 👇

@EPBResearch

2022 proved that global USD debt levels are so high & US NIIP as a % of GDP is so negative that when the USD gets “too strong”, there will be no flood of capital to US assets for safety.
Rather, investors sold US assets at the fastest pace in at least 150 yrs (to raise USDs.) 👇

@LukeGromen

Prediction markets for 2023… 🧵

@DavidSacks

If you are still in #recession denial, then don’t look at the chart below.
US building #permits are falling off a cliff. This happened every time in the run-up to the next recession.

@jsblokland