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

Let’s see what’s going on this week:

  • Never-Ending Exposure Fallout from Terra Meltdown
  • Strong Russian Ruble but Weak Economy
  • Solend and the Issues of a ‘Decentralized Democracy’
  • Recession: From Vague Possibility to Likely
  • The SEC’s Love for Bitcoin Speculation

Voyager Digital as the Latest to Suffer from Decentralized Crypto Contagion

  • Voyager Digital Plunges on Three Arrows Exposure, Analyst Downgrade (link)
  • CEL Hits $1.5 But “Short Squeeze” Gains Quickly Wiped Out (link)

Pouring from an Empty Cup into Expectant Hands

When times are good, investors generally take on more risk. They see their friends bragging about gains from “stonks that only go up”, the latest NFT which is so much more than a fuzzy jpeg, or how BTC is on track to reach $100k. When you see everyone else winning, it’s only natural to want to jump in and get a piece of the pie as well.

As we all know, the latest iteration of this involved Terra (LUNA). Terra’s 19.5% APY via its (now deceased) Anchor protocol was too good to resist for many. After all, the U.S. national average APY in a savings account is about 0.06%.

And unfortunately, the negative consequences are still being felt. From the grave, Terra (LUNA) still reaches out with its cold dead hands, trying to pull VC capital down. Three Arrows Capital (3AC) had $200 — $450 million in exposure to LUNA. Up until April, 3AC had an estimated $10 billion in crypto assets, a figure which has drastically decreased since that time.

In particular, year-to-date, Ethereum went down by nearly -70%, pulling down staked Ethereum (stETH) as well. Both 3AC and Celsius Network relied on stETH for their customers’ yields. One is a hedge fund (3AC), the other is a lending platform (Celsius), but both are effectively defunct.

Ethereum’s liquid staking generates consistent 4–5% APR over the last year, much higher than even the top performing bank savings accounts. Image credit: Dune Analytics

Most recently, the collapse hit Voyager Digital (VOYG), a publicly traded firm that provides a crypto trading platform to around 3.5 million users. Voyager’s exposure to 3AC included 15,250 bitcoins ($370 million), along with $350 million in USDC. At the time of writing, Voyager has limited daily withdrawals to $10k.

While bailout agreements are afoot for both 3AC and VOYG, the Celsius community tried to enact its own bailout via CEL tokens. As a governance token for the Celsius Network, CEL depreciated by -75% this year. However, some traders had a clever idea — why not enact a GameStop scenario, but for crypto?

As people took bets against CEL by shorting it, others could counter it by setting limit orders to $100. The gambit initially worked, spiking the CEL price by 50%. But the success was short-lived. CEL is now looking at a -75% YTD loss instead of -90% prior to the squeeze.

CEL has had a bad time after Terra (LUNA) collapsed in May. Image credit: Trading View

Yet, the move did buy Celsius some time to seek new VC money supply as its own liquidity dries up. Venture capital flows into crypto decreased by 38% in May, a notable drop from record highs. Yet interest in Web3 and DeFi is still soaring. $852 million was poured into crypto projects over the last ~week alone.

However, the bear market has clearly exposed its liquid vulnerability. It may be difficult (or impossible) to secure funds for total customer withdrawal at all times, but mutual over-staking and over-exposure is clearly not the road to securing DeFi credibility.

TradFi faces a similar reality. In the US, commercial banks are only required to maintain 10% of customer deposits. They’re free to loan out the rest. Most accounts are FDIC insured up to $250k though, which provides trust and security — something that’s still clearly lacking in DeFi.

Why is the Russian Ruble at a 7-Year High?

  • The Ruble Hitting a 7-Year High Against USD is a Problem For Russia (link)
  • Russia Wants Ruble Fix Without Wrecking Inflation Targeting (link)

Potential EU Energy Crisis and Russia’s Economy

It makes perfect sense that Russia, the largest country by land mass, has excess natural resources, making it the royalty of gas/oil exports. Now, with the EU largely dependent on Russia’s resources, and sanctions drastically limiting the flow of those resources into the EU, Europe’s outlook on gas and oil is becoming worrisome.

For years, Germany has been dismantling its nuclear infrastructure. As the EU’s economic engine, Germany took a massive 180: It’s now preparing for gas rationing and an emergency restart of dirty coal power. Austria and the Netherlands are joining the coal resurgence as well.

Markus Krebber, the head of German utility RWE says EU solidarity will come under significant strain this winter if Russian gas supplies are cut off. He’s predicting “chaos” in terms of sharing energy among various EU member states. Krebber said:

“The real fear I have is that European solidarity will come under significant stress if we don’t sort it out before the situation happens.”

So, if countries are turning to coal again, who else produces coal? Surprise surprise: Russia. In fact, Russia is the world’s 3rd largest coal exporter:

Volume of coal exports from Russia in 2021, in million metric tons. Will we see coal priced in rubles next? Image credit: Trading Economics

In the context of the EU trying to work through its own potential energy crisis, the Russian ruble is soaring. In fact, it’s reaching a 7-year high against the US dollar:

Ruble vs. USD. Image credit: Trading View.

So how is this happening, given the multitude of sanctions targeting Russia?

Well, the countries that have sanctioned Russia represent just 16% of the world’s population. Two thirds of the world’s population live in a country that has declined to condemn Russia for the war in Ukraine.

Among them are two massive players — China and India. China alone is now buying more oil from Russia than from Saudi Arabia. As a result, the Russian ruble has reached a 7-year high against the dollar.

However, there is more to the economy than a strong currency. While the ruble has effectively become a commodity-based currency, its strength is a negative for an export-oriented economy. After all, if domestic currency is stronger, this stimulates cheaper imports from weaker currencies.

But, Russia is now finding itself in a dried up import/investment zone from the West. In turn, this decreases economic output, which leads to inflation outpacing economic growth.

Russia’s inflation rate is ranked 24th, at 17.1%. Image credit: Trading Economics.

Therefore, we’re seeing a strong currency further suppress economic growth as it de-stimulates exports. In normal circumstances, Russia’s strong ruble would lower inflation, but only if the economy grows quickly.

In short: Russia’s currency looks good, but its economy does not. Just as the EU depends on Russia for its energy supply, the Russian economy depends on the EU as a buyer of its energy.

Who needs who more? That’s exactly what’s playing out.

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When Decentralized Democracy Turns into Anarcho-Tyranny

  • Solend and Mango Markets Team Up to Handle Whale’s $207M Debt (link)
  • Solend to Not Freeze Whale’s $216M Account After Move Decried as ‘Opposite of DeFi’ (link)

A ‘Decentralized’ Movement to Reduce Risk — but Also Break all Financial Conventions

Picture this ideal scenario. You find a blockchain project that you really like, and you absolutely ape into its initial offering. You even reach whale status. Over time, the project follows through on its roadmap and the tokens appreciate drastically.

With new-found financial power, you now want to collateralize those assets for a large loan. But, other token holders have a different idea. They vote themselves emergency power to take over your account.

Does that sound like a serious financial system?

Well, a nearly identical scenario unfolded on Solend, Solana’s lending protocol like Aave is to Ethereum. A whale with 5.7 million SOL used funds as collateral to borrow $150 million in stablecoins.

If margin-called, the whale would severely impact Solend as the sum represented a quarter of its TVL.

The bear market liquidated 65% of Solend’s TVL in one month since May. Image credit: DeFiLlama

Some may say, ‘it’s a decentralized protocol and people decided in a decentralized way to save the protocol from cascading liquidations’. The problem is, this would be like the bank’s board of directors stepping in and announcing:

‘Listen, the bank did approve your credit, but we don’t like what you used it for so we’re just gonna take over your whole account, OK? Thanks’.

‘No, technically you didn’t do anything illegal. It’s just the risk involved.’

Even in TradFi, there would have to be a court order involved to seize someone’s bank account and take control over the funds.

Seeing how they would lose all credibility as a lending platform, Solend backed off the emergency freezing power. Now, they are considering placing an account limit so that borrowed positions over $50 million are gradually liquidated.

It turns out, governance tokens or not, good ol’ reputational risk has a stronger fairness pull than the frontier of blockchain finance.

“Why Inflation is a Good Thing” Turned Sour Quick

  • Strong Consumer Spending Can Prevent Recession But Pandemic Savings Exhausted (link)
  • Fed Officials Start to Embrace the Possibility of Recession (link)

Get Ready for Recession Tips

Have you noticed a mainstream reporting pattern? When something is bad, the legacy media first denies it, often via “fact-checking”. Then, the bad thing is admitted to exist but it is just ‘exaggerated’. Then, the bad thing becomes actually a good thing.

This was the narrative following inflation for the last year. Even Treasury Secretary Yellen first called inflation fears unfounded, then transitory, then ‘I was wrong.’ The repeat of this phenomenon seems to be continuing with a recession as well, but in a much shorter time frame.

Here are some highlights by the Fed Chair Jerome Powell from yesterday’s testimony before the House Financial Services Committee:

  • “Our judgment in real time…proved to be incorrect.”
  • “With benefit of hindsight, the Fed underestimated inflation.”
  • “The US is on an unsustainable fiscal path.”
  • “Our intention is to achieve a soft landing, but the path to do that has gotten more and more challenging.”

After having couched recession concerns with the usual “possible to avoid” schtick, it appears that this possibility window is barely open.

On the upside, a recession (hard landing) is actually a good thing in the sense that it lowers inflation. As economic output lessens and unemployment rises, this curbs demand which lowers prices. The current unemployment rate still holds at 3.6%, but if it goes above 4%, this would signal a turn to a hard landing.

Is Shorting Good for Crypto?

  • Demand for the First Short Bitcoin ETF Heats Up: $35M Traded on Day After Launch (link)
  • Short Sellers Are Having a Field Day Betting Against Crypto Stocks (link)

More Wages Enter the Crypto Market

On Tuesday, ProShares launched another speculation machine, having been approved by the Securities and Commission Exchange (SEC). This time, it’s for shorting Bitcoin.

Previously, ProShares and other ETF specialists launched Bitcoin long futures funds, as a way for investors to indirectly bet on Bitcoin’s price moves. After the pioneering ProShares Short Bitcoin Strategy (BITI) launched, it racked impressive traffic — over 870,000 shares (worth $35 million) were trading in its first day.

The problem is, why is the SEC approving speculation over a simple spot-traded ETF that gives investors direct exposure to Bitcoin? Isn’t the SEC’s job to provide financial stability and consumer protection?

While it’s good to have futures BTC ETFs as an option, prioritizing these investment vehicles greatly opens up space for price manipulation. The SEC must know that the Bank for International Settlements (BIS), a very powerful and influential organization, issued the following note on Bitcoin futures ETFs:

“The bitcoin ETF may amplify volatility in prices and create risks for investors if the fund is a large share of the futures market. Experience suggests that futures-based ETFs can exacerbate price movements and create additional volatility…”

That doesn’t sound very consumer friendly. What it does sound like is that the SEC is trying to forestall spot-traded Bitcoin ETFs until Wall Street compatriots are bloated with Bitcoin holdings.

Already, digital asset short sellers averaged 130% returns in 2022, compared to 50% returns against auto and software markets. Interestingly, Goldman Sachs also noted there is more shorting activity now than of the last 25 years.

Tweets of the Week

The 30-year mortgage rate in the US rises to 5.81%, its highest level since November 2008. Last year it hit an all-time low of 2.65%.

The 2.76% spike in mortgage rates over the last 6 months is the largest 6-month increase we’ve seen since 1981.


Richest 1% of Americans held almost half of all corporate equities and mutual fund shares in 1Q22 per Federal Reserve data … among bottom 1/5th of households, about half of their wealth is held in real estate⁦



Crypto broker Voyager Digital shares are down 94% YTD

The company announced it might face a default on a $650M loan to 3AC, the crypto hedge fund reportedly facing insolvency risks.


Bull and bear markets since the Great Depression. 🐂🧸


COLUMN: The US can’t use its Strategic Petroleum Reserve forever: it’s a finite stockpile fighting a potentially unlimited flow shortage

More worryingly, it’s depleting its oil cache a lot faster than even the chart [above] looks


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