Fresh out of the studio, Cosmo Jiang from Nova River & host of the Global Coin Research Liquid podcast joined us to discuss the crypto contagion which originated from the recent collapse of the algorithmic stablecoin: Terra-Luna-UST. We dived deep how the ongoing contagion cascaded to the insolvency of Celsius and the shutdown of a prominent crypto hedge fund: Three Arrows Capital and explored what it means for the crypto market globally. Last but not least, we discuss the potential extinction events for cryptocurrencies and how investors can navigate this new bear market with new web3 entrepreneurs and investors in the next few years.
"The reason for that is that all the businesses in crypto are tied primarily to trading and speculation of crypto rather than any productive use cases. So there are some businesses that generate real cash flow, and those are the ones that I focus on at my hedge fund in my portfolio. But even those largely generate revenue from other crypto businesses. So until crypto has more ties to real world productive use cases and has more dollar generation tied to real world activity, it will continue to have this highly internally reflexive nature. As crypto trading goes up, there's more revenue in the system. As crypto trading goes down, there's less revenue in the system and that's not sustainable. It's very circular." - Cosmo Jiang
- Cosmo Jiang (@cosmo_jiang, Linkedin), Head of Strategy, Skolem, Member of Global Coin Research (GCR) and host of Liquid - Web3 investing Podcast by GCR (Apple Podcasts), and founder of crypto fund Nova River
- How did you start your career?
- I understand that you have worked in both hedge fund and private equity in your past life. Can you talk about how that experience shaped you when you entered crypto space?
- In your career journey, what are the interesting lessons you can share with my audience?
- Can you talk about the Liquid Podcast which you host for GCR?
- You are starting a crypto hedge fund Nova River - what is the core strategy?
The Crypto Contagion
- To start this conversation, I want to set up the fundamentals for my audience to understand before we dive into the recent crypto meltdown that happened. Can you first share what crypto hedge funds like 3 Arrows Capital and Alamada Research do and how do they deploy their capital to trade? Which exchanges do they typically deploy their capital?
- In some cases, these funds borrow from lending institutions, for example, Genesis, BlockFi and Celsius. Can you explain how they provide loans and guarantee yields for the hedge funds to trade?
- Now we establish the relationship between the lending institutions and the hedge funds, then we come to the crypto or blockchain protocol. Can you define what an algorithmic stablecoin like UST and how do they collateralize to maintain the peg?
- Can you also explain how crypto protocols like ETH, Solana, Avalanche, Near or Terra work with DeFi protocols such as Aave, Compound, MakerDAO generate yields and provide lending?
- Why are the interest for the yields so high as we have seen for Terra around 19.5% for the anchor protocol?
- One month before the depegging, the founders of Terra used their Luna Foundation Guard (LFG) to make a purchase of bitcoin. What’s the purpose of the purchase?
- What are the circumstances that led to UST being depegged and subsequently engineered the death spiral for Luna and Terra? Reference: the jump crypto analysis.
- What is the immediate impact of the UST depegging? When Luna fell to near zero, how did the Terra team led by Do Kwon do?
- Which institutions were burnt by the Terra-Luna-UST collapse? How does this trigger the contagion?
- So, why did the contagion spread to Celsius, and to a few others who limit withdrawals for example, Babel Finance in Hong Kong, Finblox and others in play?
- What does insolvency mean for a lender, for example, Celsius and BlockFi?
- Of course, in the process, this took out 3 Arrows Capital, which Ryan Selkis from Messari pointed out starts from their GBTC trade, followed by the Terra-UST-luna collapse and then the ETH/stETH? [See tweets by Ryan Selkis from Messari]
- The silver lining is that Sam Bankman-Fried (SBF) in FTX went in and bailed out BlockFi and Voyager. Of course, we now hear the investors, for example, Anthony Pompliano, who’s the host of the POMP podcast, are putting a counter bid for BlockFi, because the investors are being burnt in the process. With the contagion going on, what are the implications moving forward?
- This week has shown that even Genesis suffered from the 3AC contagion and also 3AC has been reprimanded by the Monetary Authority of Singapore. It seems that it all came from the first GBTC trade that 3AC started to have problems with. It also coincides that the SEC has rejected Grayscale to turn GBTC into a spot ETF. What does it mean for the general crypto market?
- The thing about the crypto market is that it’s highly speculative. Currently, BTC is at $21k (~70% down against ATH), and ETH (~75.1% against its ATH). What do you think are likely extinction events that will destroy the market?
- How should a retail investor or an institutional investor navigate the crypto down-market or pending crypto winter?
- Interesting references: 1/ Arthur Hayes, "Number 3" and Luna Brothers Inc, 2/ Tweets from Kevin Zhou from @GaloisCapital who first flagged the issues on Terra/Luna/UST and took a short position, 3/ Twitter spaces conversation by Ryan Selkis from @MessariCrypto - 3 Arrows Liquidation Uncertainty,
- Any recommendations which has inspired you recently?
- Cosmo's recommendations:
- How can my audience find you?
Author's note: BL is an investor to Global Coin Research.