Mad Hedge Bitcoin Letter
July 7, 2022
Fiat Lux
Featured Trade:
(ANOTHER ONE BITES THE DUST)
(BTC), (VYGVF), (FTX)
FTX cryptocurrency exchange CEO Sam Bankman-Fried said he has more than $2 billion to backstop crypto industry if needed.
That’s a scary statement to issue that most likely assumes the worst scenarios are coming true for his beloved digital gold.
By the way, $2 billion is peanuts considering this industry used to be worth over $1 trillion just a little bit ago.
Not sure if his token $2 billion would make a dent at all, however, it might save a company or 2 if that is what Bankman-Fried is aiming for.
This small sum will do nothing if systemic risk goes from bad to worse and the industry falls apart which would happen if bitcoin dropped to $2,000 per coin.
Perhaps if he could scrounge up an extra $1 trillion or so to buy out the whole crypto industry then we would be in business – literally.
We need to look at the situation with more critical thinking than wishful.
The FTX CEO also said the worst appears to be over for the liquidity crunch in the cryptocurrency industry.
That could possibly be a sneaky way to say that the worst is yet to come.
Why would Bankman-Fried think the liquidity crunch will stop on a dime?
Isn’t that odd?
Well, of course, he has skin in the game, so his words are empty. It’s like a real estate agent telling someone they should buy a house.
Last time I checked, crypto was supposed to be a great hedge to hyperinflation and that has failed miserably.
Little did he know, Central Bank Governor Jerome Powell, in the Fed minutes revealed yesterday, say that the Fed is prepared to act more aggressively to tame inflation with bold rate rises.
If there are more rate rises which the Fed forecast implies, the Fed Fund’s rate is going to 3.75% by 2023, then crypto will be worth even less than it is today if the same dynamics and price behavior hold true.
The dynamics that were working for crypto during the bull cycle and are now working against them.
No doubt Bankman-Fried’s comments had to do with the timing of the newest bankruptcy in the industry of crypto brokerage Voyager Digital (VYGVF).
The trust in crypto infrastructure sinks yet again.
Account holders at now-bankrupt Voyager Digital shouldn’t expect to get all their crypto back as the company restructures.
The crypto brokerage and lender filed for Chapter 11 bankruptcy, creating unresolved legal questions about how digital assets will interact with US insolvency law.
Voyager appears to plan to just walk away from their obligation to return capital to account users.
The company’s plan to exit bankruptcy plainly says it expects account holders to be “impaired” by the Chapter 11 process, meaning they won’t be getting back exactly what they’re owed.
This could be the straw that breaks the camel’s back.
Legally, decentralization could be a farce and if Voyager is able to walk, it means Voyager and its platform is even more centralized than crypto industry’s criticism of fiat currency.
At least fiat currency on exchanges is insured and account holders get their money back in full upon bankruptcy.
Sure, the price of bitcoin is up incrementally today, but the industries’ health couldn’t be at a lower ebb.
There is a high probability that bitcoin will touch $12,000 first before it goes back to $30,000.
“The first one gets the oyster, the second gets the shell.” – Said Industrialist Andrew Carnegie
Mad Hedge Bitcoin Letter
July 5, 2022
Fiat Lux
Featured Trade:
(CRYPTO INFRASTRUCTURE HANGING BY A THREAD)
(COIN), (VAULD), (BTC)
Get your digital coins off Coinbase (COIN) asap. That’s the big takeaway of another crypto platform freezing.
I told you this could happen again, and it did.
This is yet more unwanted optics for the digital gold and its pitiful infrastructure whose bellwether coin crashing down to $19,500 has kicked up an avalanche of system risk.
This asset class simply will not have a future if crypto exchanges, lenders, middlemen, stablecoins, and the broad network just freezes after customers want their money back.
We need to put this under the category of not good enough.
Delivering back funds upon a requested withdrawal is the cornerstone of trust for any industry.
Crypto is failing miserably at basic safeguarding of funds and they have nobody to blame but themselves as crypto lender Vauld on Monday paused all withdrawals, trading, and deposits on its platform and is exploring potential restructuring options.
The shake-out is clearly not over and it’s really who’s guess to which crypto company is next.
Vauld CEO Darshan Bathija said on Independence Day that the company is facing “financial challenges” due to “volatile market conditions, the financial difficulties of our key business partners inevitably affecting us, and the current market climate” which has led to customers withdrawing more than $197.7 million from the platform since June 12.
Many future investors won’t invest in any crypto risk assets if the CEO says one day everything is perfect and a few days later the platform is down.
It’s flat out misleading.
This is certainly a black eye for the “decentralized” thesis that has morphed into a money confiscation operation which will damage long-term trust and accountability of the asset class.
In the next bull market, if there is another one, many investors will remember when multiple lenders and exchanges froze funds when Bitcoin went down in price.
So apparently these platforms only work for the customer if crypto is going up.
The ridiculousness then leads to investors to question at what percentage sell-off is their crypto broker going to pull the rug and screw them over.
This is why many conservative investors gravitate towards regulated market with cash flow which crypto certainly is not.
Also, insurance is another massive failure precisely because it’s unregulated.
This will ostensibly turn into a big negative feedback loop with systemic risk attracting government regulators causing Bitcoin to drop further and then inviting another wave of regulators on top of the first round of regulators.
Who wants to be a part of that circus?
Pushing the false narrative that regulation is akin to communism and that centralized money is the worst thing out there has really come back to bite the crypto community.
The industry was clearly overhyped when it didn’t need to be.
Crypto clearly needs a reset after many of the companies that surround the ecosystem are in panic mode because of insolvency issues.
It’s almost as if the only thing working is Bitcoin itself and nothing else.
Just like the health and military crises which really exposed the thoughts and values of individual people, the rise in interest rates has exposed crypto as not as good as first advertised.
“The best way to predict the future is to create it.” – Said Austrian Management Consultant Peter Drucker
Mad Hedge Bitcoin Letter
June 30, 2022
Fiat Lux
Featured Trade:
(MINERS HEAD FOR THE EXITS)
(HIVE), (CAN), (MARA)
They could only do so much to hang on.
I am talking about the miners – the crypto miners who were operating under sub-optimal conditions.
I could make a case for Bitcoin at $35,000 as it relates to miners staying in the game before they can sell their coin when it goes back up to $65,000.
However, at a pitiful $20,000 per one BTC, mining BTC is a big loss-maker which is setting off a tidal wave of pain in the mining industry.
What once would be considered a story of tenacity for Bitcoin miners has now turned into utter capitulation of bankruptcy.
Like many other businesses, the cost of producing products is important and when the cost of oil is low, crypto miners laugh all the way to the bank.
That hasn’t been the case lately.
It was only just at the end of 2019 that the price of Brent crude was $20 and fast forward to late June 2022, it settled around the $110 per barrel mark today.
There is also a plausible case that we haven’t even seen the inflation caused by the Easter military conflict because inflation and especially inflation comes with a 6-month lag.
It was no coincidence that Bitcoin’s most recent meteoric rise took place when the nominal cost of energy was half of what it is today.
The most glaring unintended consequence is the distressed nature of Bitcoin miners whom many have gone out of business because they simply aren’t profitable amid uncontrollable energy prices and hyperinflation.
To dig deeper in the weeds, electricity comprises 90-95% of Bitcoin mining costs.
Miners also sell coins once they produce them to pay back the energy cost and then pocket the difference. That operation makes no sense today and there’s simply not enough money to pay the electric bill after the coin is sold.
Who are the publicly traded miners?
HIVE (HIVE) is a Canadian miner that produced 278 BTC in March of 2022. The company also mines Ethereum with 2,549 produced, so that can diversify the company away from BTC. However, the company draws down on its ETH holdings to fund its strategic deal with Intel (INTC). The company sold 10,000 ETH to fund BTC rigs.
Ironically, the company has an ETH mining operation in Sweden which is the very nation leading the charge against Bitcoin operations in Europe.
Hive has access to 50MW of power and has an operating margin of 74% at present.
Marathon Digital (MARA) is focused on North American operations, which would shield it from European legislation. Marathon produced a Record 1,259 BTC in Q1 2022, up 556% Year-Over-Year and its total Bitcoin holdings increased to 9,374 BTC.
In the short-term, cost challenges handcuff the best of them and the share prices of stocks like Marathon, Canaan (CAN), Riot, and Marathon are down in the dumps.
When there is either a military peace solution or a recession, the price of energy might come down to bearable levels.
Until then, tough luck for the crypto miners and avoid buying the dip. There’s more pain to come until something meaningfully changes to the underlying situation.
“I have millions of dollars, 20% of my portfolio is now in cryptocurrencies and blockchain.” – Said Canadian Businessman Kevin O’Leary
Mad Hedge Bitcoin Letter
June 28, 2022
Fiat Lux
Featured Trade:
(COINBASE LICKS ITS WOUNDS)
(BTC), (COIN)
