Capitulation. Contagion. Worst on record.

Main update

Words current trending on Crypto Twitter:

• Capitulation.

• Contagion.

• Worst on record.

I chose these words for the title of this issue because months and years from now, when we look back, I want to recall the sentiment and feelings of those of us who survived these brutal market conditions.

The lower the prices get, the more bullish I become, given my long-term conviction in the value of bitcoin and the inevitability of crypto adoption hasn’t waned. I believe opportunities are abound for those of us who continue to pay attention.

However, it’s important that we approach the coming months with level-headed observation and patient accumulation. We’ve never lived through a period where the economy is headed into a recession (high probability event), with 4 decade-high inflation and interest rate close to zero bound. There is no playbook for where we’re headed and the probability of outcomes before us has never been harder to ascertain. We must therefore proceed with great humility.

I’m a fan of buying oscillator extremes and playing mean reversion. The risk-reward of accumulating BTC & company isn’t shabby at the current levels, and so I parted ways with some fiat to accumulate magic internet money this month. Overall, I deployed ~14% cash in June, and have ~50% cash remaining to deploy into further weakness.

Macro

Multiple economic indicators continue to point towards recession, or at least significant economic deceleration/stagnation.

Inflation rose to 40-year high of 8.6% in June, above expectation. In response, the Fed hiked rates by 75bps to 1.75%:

jeroen blokland @jsblokland

BREAKING! The #FederalReserve hikes rates by 75 basis points for the first time since 1994.

US consumer sentiment is at its worst on record:

Until energy is abundant and cheap again, and/or wages are rising faster than inflation, consumer sentiment likely won’t be very high.

Lyn Alden @LynAldenContact

The best sentiment was in 2000. The worst sentiment is now. Unprecedented. via @ycharts

GDP estimate for Q2 2022 is now pointing sharply negative:

Bond continues its worst YTD performance, while bond volatility remain at levels where bad shit has happened in the past.

Jim Bianco biancoresearch.eth @biancoresearch

Bonus #1 Same format as above US Aggregate starts in 1976 Global Aggregate starts in 1990 The pain in the bond market is still intense.

Jim Bianco biancoresearch.eth @biancoresearch

Bonus #2 The MOVE is the bond market's version of the VIX. This series is 30+ years old and is now rarefied air. The handful of other times it has been this high have been major bond market "events." What will be this series ultimate high and what will we call this event?

It’s possible that market expectation of Fed hawkishness has peaked, with peak Fed Funds rate beginning to get priced lower and to occur sooner vs. few weeks ago.

If we see market expectations of forward Fed rate hikes hit a peak and roll over, that could be a key bullish catalyst on rate-sensitive assets prior to the Fed’s actual pause on rate hikes. The Fed is likely unable to tighten as quickly as the market expects, especially by the end of this year, due to increasing recession risk, stressed credit markets by then, and the high level of debt in the system.

Eric Basmajian @EPBResearch

Over the past week, the bond market pulled the peak Fed Funds rate down (4.05 to 3.58) and forward (March to Dec).

Eric Basmajian @EPBResearch

@LynAldenContact When we look back, I think this sudden 75bps hike and market terminal pricing of 4% will look insane. It will be clear (in hindsight) that they accelerated rate hikes and did a surprise 75 as the economy was entering a recession. They don't see it yet but it's there.

ISM crossing <50 has also put considerable pressure on the Fed to cut rates in the past.

Raoul Pal @RaoulGMI

The leg lower in stocks/crypto if it occurs will give us a lot more informational value as will ISM over next 2 months. The Fed have paused or reversed 100% of the time ISM crosses 50 since 1970.

Looking ahead, we have never entered a recession with inflation this high and rates this close to zero bound.

Pentoshi Powell Jr 🔺🐧 @Pentosh1

The fed has never entered a recession with inflation this high and rates this close to zero bound. A situation on our hand that has zero precedent. Most want a pivot that would only entrench inflation

JSC @JSCCapital

2/ In his 45 years as a CIO he has never seen a combination where there is no historical precedent (e.g., 8% inflation into a weakening economy with bond yields at 3%). “I’m about to play a round of golf without a driver or 60 degree wedge”

Takeaway: Proceed with patience and humility.

Crypto

To sum up June 2022, BTC saw its worst month on record, worst quarter on record and worst start to a year. Meanwhile, you could’ve bought ETH at $1971 and lost 55% of your money 18 days later. I added ETH at $1650 thinking it was a bargain, only to add again at $950…

Richard Galvin @richwgalvin

Bitcoins worst month on record closing out its worst quarter on record (-56.3%) and also its worst start to a year on record (-57.0%)🤢

Looking ahead, people have not a clue where prices will bottom.

Importantly, June saw the continued contagion from LUNA’s collapse, with the Goliath of the industry - Three Arrows Capital (3AC) - getting 100% REKT before ghosting its lenders. Here is a more detailed list of affected institutions for those interested.

Each day, more information comes to light revealing the poor risk management practices at “reputable” crypto lending platforms many of us have come to know and trust. With everyone seemingly crowding into the same trade at the same time, the market showed no mercy on anyone who didn’t manage your risk.

Santiago R Santos | #9159 🐒🤖 @santiagoroel

Crypto is going thru a 2008 moment (SBF is bailing out not the govt). Lenders/pseudo-banks clearly not knowing their counter-parties well enough. Problems always arise when people underwriting loans (agents) get paid more to take risk and that risk-taking drive is left unchecked

Arthur Hayes @CryptoHayes

3/ After the sellers dumped their bags, the mrkt quickly rallied on low volume. Given the poor state of risk mgmt by #cryptocurrency lenders and over generous lending terms, expect more pockets of forced selling of $BTC and $ETH as the mrkt figures out who is swimming naked.

Andrew Kang @Rewkang

The acute part of the forced selling is finished, but residual and knock-on effects will drag for months to come at minimum Sad to see OGs fall

Mark Lamb 💪 @MarkDavidLamb

Roger Ver owes CoinFLEX $47 Million USDC. We have a written contract with him obligating him to personally guarantee any negative equity on his CoinFLEX account and top up margin regularly. He has been in default of this agreement and we have served a notice of default.

Arthur pontificates on what might have happened with 3AC that got us here:

Arthur Hayes @CryptoHayes

"Number Three" is a sad but predictable story of #cryptocurrency centralised trading and lending businesses blowing up due to too much leverage. Long Live #DeFi. SOFYL bit.ly/3uflAWe

Interestingly, BTC dominance fell from 48% to 43% in June and we saw declining correlation of BTC/ETH to ALTS. This likely signals that the recent capitulation is led by institutions, with the most liquid assets being sold off the most.

Early signs of miner capitulation is also emerging as prices break below 2018 ATH ($20k). How? Miners typically pledge hardware as collateral to take out a loan to run their businesses. If bitcoin prices fall below production cost, cost of running business exceeds revenue and banks may be forced to repossess hardware if miners default on payments. This process typically takes a long time to resolve.

Pomp 🌪 @APompliano

"Bitcoin’s price sits at the lower bound of its production cost for the first time since the March 2020 liquidity crisis as well. The idea here is that Bitcoin should at minimum be worth the cost of energy to produce it." - @WClementeIII

Will Clemente @WClementeIII

Lower Bitcoin price, higher hash/difficulty, and higher energy costs have put serious pressure on miners margins. Hashprice is now its lowest since October 2020. Hash ribbons have crossed (bot. left), indicating machines unplugging + Miners sending BTC to exchanges. (bot. right)

Wen moon?

Timing wise, the domino effects flowing from the collapse of LUNA has reset my expectation of how quickly and how hard we bounce back. For the time being, my base case is that every relief rally will be sold into and the crypto market will take months to reset its foundation.

It’s better risk-reward to sit tight and prepare a shopping list. There is ample time to get back in and make a killing when macro conditions inevitably recover and all forced sellers get flushed out of the system.

It doesn’t take a genius to tell you that in most likelihood, the bulk of the bearish price action is now done. The real question is when and how fast we turbo back from here.

Jordi Alexander @gametheorizing

6/ Not selling. The selloff has been so bad its required re-evaluating all assumptions, but guiding light is market cap and you’ll have to go elsewhere to find a willing seller at this price. Not buying (yet). Observing to understand the full effect of this forced selling first.

Santiago R Santos | #9159 🐒🤖 @santiagoroel

4/ IMHO the same dynamic will play out this cycle. There'll be a 3-9 month window after markets stabilize (following a Fed decision) to put risk back on & scale in size. There's little incentive to try to front-run that decision. Instead, I'm focusing on building a shopping list

Personally, I’m sticking my nose close to the macro landscape and steadily planting the seeds for future harvest.

CryptoShadow (Temporary Tron Maximalist) 👑 @CryptoShadowOff

The more $BTC dumps from here the more bullish I become

Secrets @SecretsOfCrypto

It's time for me to add more to my long term bags. The bear market is for slowly accumulating, not panic selling. #Bitcoin #Ethereum #cryptocurrency

Inmortal @inmortalcrypto

I lived 2018 very closely, like many here, so I'll tell you something. Trying to hunt the bottom is the wrong business. Keep your exposure low. Only high conviction plays. Whatever you want to accumulate, do it slowly. Day by day.

AngeloƉOGE @AngeloBTC

$BTC / USD The market is well oversold. We nuked for 7 months straight, broke previous cycles ATH, and had massive deleveraging across the board. You are blessed to even be seeing these prices again. Endure the pain in the short term and glory will be yours.

Specific trends and opportunities

Here are the specific rabbit holes I went down in June:

1. Macro update

2. BTC

3. ETC

4. SOL

5. Defi (LFNTY)

6. Infrastructure (SHDW)

7. Other - cross chain bridges, on-chain analytics, “funds are safu”

1 Macro update

In hindsight, it can be argued that it was all ONE TRADE, a trade on the unprecedentedly loose monetary policy since the beginning of Covid-19:

Lyn Alden May 2022 newsletter

I think the Fed will probably get some signals to stop tightening monetary policy prior to hitting very high levels, once something in financial markets breaks. And I think that will happen before they reach 3% short-term interest rates, and/or before $1 trillion is off the balance sheet, but we’ll see.

Overall, my base case is that the Fed will tighten monetary policy until something breaks, which will force them to reverse course. It might be a recession, or it might be a near-recession slowdown.

This chart shows the Fed’s interest rate, with recession shaded gray with red dots. Each time, the Fed is able to tighten monetary policy less than the previous cycle. If the Fed is forced to stop tightening this time, while inflation still runs hot due to supply-side shortages, then we’ll have effectively entered a new policy regime.

Entering global central bank checkmate

• I think major central banks including the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan are nearing the losing side of a checkmate scenario, where economic realities dwindle their set of possible choices to zero. The latter two have likely already been put in checkmate.

• “Checkmate” in this context happens when a central bank encounters inflation that is above its target level, but still can’t stop printing money, due to lack of buyers of their country’s government debt, or due to other critical liquidity problems in their financial markets.

• The fact that both the Bank of Japan and the European Central Bank are forced to continue monetizing government debt even when inflation is above their target in order to keep government bond yields at serviceable levels, is basically checkmate on their policy.

• The UK and the US both have sovereign debt over 100% of GDP, and total sovereign + private debt of between 300% and 400% of GDP.

2 BTC

BTC as a hedge against money supply growth

Contrary to popular belief, Bitcoin is a hedge against global money supply growth, not inflation. This makes sense to me because inflation is a lagging indicator and inflation often doesn’t peak until we’re already in a recession.

The chart below complements this theory well. Currently, global liquidity has all but been drained. I expect bitcoin to outperform all other asset classes once again when the liquidity returns.

Here is a funky chart that complements the above theory:

Murad @MustStopMurad

The most confluential long-term chart I've found in all of crypto. BTC Measured in USD divided by the sum of US M3 Supply and EU (dollarized) M3 Money Supply. In other words, adjusting the BTC price action by the expansion of the widest money supply aggregates. Think about it.

Accumulating BTC here = good risk-reward

Lyn Alden: The average on-chain bitcoin holder is now below their cost basis. This is only the fifth time in bitcoin’s history that this has occurred.

BTC now sits near 2 standard deviation log regression channel:

Raoul Pal @RaoulGMI

Thus in 18 months, the conditions will be more favorable and macro assets tend to discount 12 to 18 months out. But can things get worse? Absolutely. But for my investment framework, we are in the buy zone...right near the 2 standard deviation log regression channel.

Clemente accumulated BTC for the long-term bag here:

Will Clemente @WClementeIII

I finally got the majority of my bids filled today. May not be the pico-bottom, but here's why I was happy to allocate here for the long-haul: - Price below realized price - 200WMA tapped - FTX and Okex quarterlies in backwardation - One of lowest deviations from 200D trend ever

PlanB continues to inject hopium. His S2F is in the bin but admittedly, I do like the risk reward of playing mean reversion and buying oscillator extremes. Now is likely a better time to accumulate BTC than most other times.

PlanB @100trillionUSD

And there it is: dark blue (70% below ATH)! Most indicators (S2F, RSI,200WMA, Realized etc) are at extreme levels. Does that mean that all indicators are "invalidated" "debunked"? No. Investing is a game of probabilities and indicators give situational awareness: BTC is oversold.

3 ETH

On the supply-demand dynamics of ETH post merge

korpi @korpi87

If The Merge happened today, ~$10M of daily sell pressure on $ETH would be replaced by ~$8M of buy pressure. While we now require ~$10M of new money every day to keep the price flat, we would need ~$8M of existing holders to sell their ETH to prevent the price from going up.

Lido dominance continues

Delphi Digital @Delphi_Digital

4/ Not only does Lido hold 32% of all staked ETH, it’s also the largest liquid staking derivative with ~90% market share. These liquidity and network effects are extremely strong and have allowed stETH to be integrated into both @AaveAave and @MakerDAO as a form of collateral.

Arbitrum launched its token incentive program, encouraging users to test out different product/service each week for a chance to earn airdrop. A week later, Odyssey was paused given gas price issues from capacity throttling. Now we have to wait until Nitro is launched. Not sure why they didn’t anticipate this to be an issue in the first place..

Arbitrum @arbitrum

The time has come, arbinauts… 🧑‍🚀 🔵 An 8-week long journey into Ethereum’s premier L2, Arbitrum… The Arbitrum Odyssey has begun - but before you enter, brief yourself below! 👇

Arbitrum @arbitrum

We will be sharing more very soon regarding the Nitro timeline, but once we have launched Nitro we will coordinate with @GMX_IO and @yield on announcing when Week 2 will re-commence. 🫐🧑‍🌾 If you already did the Odyssey Week 2 tasks before the pause you’ll still get credit!

Bankless released a great explainer on how Layer 2 tokens accrue value. TLDR

• rollups generate evenue from 2 sources: transaction fees and miner extractable value (MEV)

• fees are paid to the sequencer, the entity responsible for ordering, batching and submitting transactions to L1

• rollups profit by charging a premium (i.e. the spread between transactions fees paid by users and cost of purchasing L1 blockspace)

• clearest use case of L2 token is by being used to decentralize the sequencer (i.e. requiring sequencers to stake a L2 token, with the likelihood of each staker being selected proportional to the size of its stake)

The Layer 2 Token Endgame

4 SOL

SOL is my largest L1 position outside of ETH, because in my experience, Solana ecosystem has always made a more concerted effort to onboard the next billion non-crypto native users. The bet also seconds as a hedge against the modular blockchain design, should the ETH roll-ups prove too complex to come to market in a reasonable time period.

nathan.eth @nathanweb3

2/ i’ve always said this but the reason i fear solana is bc their devs generally actually grasp the difficulties and confusion normal users face when trying to use ethereum. ethereum’s biggest weakness is its relative onslaught of significant user onboarding challenges.

Solana launched a phone and Solana Mobile Stack, to accelerate the adoption of Web3 by non-crypto native users and on mobile devices.

Solana @solana

3/ Right now, web3 is not made for smartphones, and you need a desktop browser to take full advantage of it. Solana Mobile Stack is a crypto layer built on Android to make the mobile web3 user experience seamless.

solana.comSolana Mobile Stack and flagship device, Saga, changes everythingIt’s time to take crypto mobile. Download the SDK, submit deposits, and get in line for the developer kit today.

5 Defi

My investment research on Lifinity (LFNTY):

Ether Kai @btc21m

Bear markets are where generational wealth is created. Now's the time to double down on research and pay attention. This is my deep-dive on @Lifinity_io, my favourite DeFi protocol on Solana

etherkai.substack.comDeep Dive: Lifinity (LFNTY)Ether Kai Issue 17 (Jun 2022)

Decentralized perp volume grew 10x, but still only 2% of total volume.

Delphi Digital @Delphi_Digital

5/ The top five decentralized perp exchanges accounted for 20 bps (0.2%) of total volume a year ago and have grown to ~2% today – a 10x increase with way more room to grow. Of these, @dydxfoundation continues to dominate weekly volume.

6 Infrastructure

Investment thesis for GenesysGo (SHDW)

Shadow Storage @shadow_storage

What's so special about @GenesysGo? They are the creators of the Shadowy Super Coder DAO #NFT One of the most successful projects in @solana Here are 10 reasons why you should be bullish on GG 🔥 A thread 🧵

7 Other

As Jason says, a must read on crypto bridge risks and design:

Jason Choi @mrjasonchoi

Crucial reading:

blockcrunch.substack.comHow Bridges Can Be the Next Big Risk in CryptoA Simple Risk Framework for Cross-chain Bridges

Crypto needs to improve UI/UX and clarify its use cases before up only again:

On-chain analytics starter pack:

Virtual Kenji⚡️ @VirtualKenji

The Best Threads on On-Chain Analytics: The most honest signals you will find are on the blockchain. Not on Twitter. Not on Youtube. The truth is on-chain. Best learn to read it. Here are the best threads to get you started on your On-Chain journey 👇

When someone comes out and declares funds are safu, funds are almost always not safu:

Pentoshi Powell Jr 🔺🐧 @Pentosh1

On that note people that said funds were safu that weren't safu in the last month LFG 3AC Celcius Finblox (hint, more to come)

Cobie @cobie

Presented without comment

A simple mental model for knowing when bull market has resumed:

Inmortal @inmortalcrypto

How to differentiate between a bear market rally and the start of a new bull market? Based only in the chart, at least we need a break in market structure in high time frames (1D-3D). In 2018 bear market we had 50-100% rallies but not a single Higher High. EXTRA

Portfolio allocation update

Target allocation update

• Meta (gaming) allocation reduced to 2% from 7% to reflect significant drawdown in price performance of JEWEL and MC. I do not plan to add to those positions anytime soon.

New

• No update

Existing

• I deployed 14% of cash into BTC, ETH and SOL, with most of that capital going into ETH.

• Cash remains at ~50% given the rest of my portfolio got rebalanced by the down only market.

Exits

• No update

Contact me

Twitter: EtherKai @btc21m

Email: kai.btc21m@gmail.com

About Kai

Bought the 2017 top, fell down the crypto rabbit hole in 2020, full-time Magical Internet Money HODLer & user since.

Prior: a decade in TradFi (renewables/investment banking/capital markets).

Thank you

@cobie @Pentosh1 @CryptoHayes @zhusu @hasufl @Arthur_0x @FedGuy12 @KyleSamani @mrjasonchoi @woonomic @Rewkang @LynAldenContact @RaoulGMI @DegenSpartan @richwgalvin @finematics @santiagoroel @nic_carter @panicselling @EPBResearch @SBF_FTX @Delphi_Digital @biancoresearch

Disclaimer

This memo is presented for informational and entertainment purposes only and does not constitute financial advice. Individuals have unique circumstances, goals and risk tolerances, so please do your own research before making investment decisions.