Welcome back everyone. I am Caspian Sea and I'm joined
as usual by my partner in crime. Bennett Tomlin I know how he's
doing, he's doing good. I know how I'm doing.
I'm doing that today we are talking about contagion which is
a bad movie and a pretty mediocre book and a pretty
mediocre book but it also is what seems to be happening in
the cryptocurrency industry right now as we speak as we
record this on 16th Bennett, I think contagion is one of the
things that we have long. Feared, this is, this gets back
to the heart of the problem that we see in crypto currency.
Whether it comes to tether or centralized exchanges.
Like, let's say by Nance the most liquid, crypto currency
exchange in the world. I see contagion risks everywhere
right now. I'm wondering how you're
feeling. If you think that like the cold
that has been caught in the ecosystem, the flu, whatever you
want to call. All it, we won't go with the c
word I guess, either c word actually, there's three c words.
We won't go with anyway. How come there's so many bad
Seward's now, what's up with that anyway?
Do you think we're like part of the way through this disease?
Do you think we're like halfway through three quarters of the
way through? The contagion is already worked
itself out of the system or do you think it's just been caught?
Do you think we're just getting the first?
It's of fever let's talk a little bit about where we're at
for that question. So Celsius Network shut off
withdrawals and is brought in Citigroup to help them
restructure. Black fi had to liquidate
assets, they held for three hours Capital tether had to
liquidate assets. They were holding for Celsius.
Darrell Abbott had to liquidate loans they head out for three
arrows Capital, three years, capital is a A crypto Market
making venture capital and hedge fund.
That had at one point about 10 billion in assets, under
management. Whatever that means in crypto
where liquidity can be fleeting has apparently now ended up
insolvent, and unable to pay some of their debtors.
So where are we at in the contagion?
Well, I think that depends on who's exposed to who, and who's
holding on to something that's going to need to be liquidated
still, right? So Celsius Network, we really
don't know what position they're in or who might still be holding
debts that Celsius hose hoping they'll still be able to pay.
There might still be liquidations or people holding
onto toxic debts, three rows capital is an even more
fascinating example because it seems they were offering to some
of the companies they invested in to Services one.
They would take some of the USD I see where you sdt that you
raised as part of your Venture Capital rounds and they would
manage it for you. Promising, you and 8% return.
The other service three arrows Capital was apparently offering
was Market making for many of these coins.
So depending on how bad the situation is with three o's
capital and what ends up needing to happen, it could potentially
affect a whole bunch of D5. Protocols and affect the
liquidity, for a bunch of protocols across the entire
system. Now, the final part that we've
just kind of hinted at here is, of course, tether to other, who
is fully reserved by assets of unknown quality that every
single day, maintain basically the exact same assets over
liabilities. No matter what happens to the
bond market or the Bitcoin Market, or any of the other
assets, they're exposed to so tethers.
And Miraculous case where we never need to worry about their
systemic risk because they're managed by a team of consummate
professionals who have never made any mistakes and who follow
every rule. So carefully that, you know,
they're not over exposed to any of these things.
So, I think the contagion stops at three rows, capital and goes
no further. More practically.
We don't know exactly how far they can.
I'm going to go because despite cryptos claims of transparency,
there's a lot that still happens in over-the-counter deals
telegram, groups, dark pools, and other things we can't see
the full extent of what debts can't be paid in, what might be
liquidated is unknown and what assets three hours Capital may
end up committing or needing to sell is still unknown.
Yeah. And so, as funny as that was to
hear there is some level of Truth to that statement like any
good joke. And the reason I say that is
because we've experienced this before we've seen insolvent,
cryptocurrency companies, some of them very large, get bailed
out by other companies in the cryptocurrency industry.
The one I'm obviously thinking about is bitfenix and tether
after they had a bunch of their accounts, Frozen, we saw Arthur
Hays and the lads a bit Max and we saw Xiao dong, and the
company rent. Run bit, which I would have seen
his now-defunct and gone and banked the future, which also
had funds with I believe Celsius or Equity was Celsius, and we
should also remind people that tether was the lead Equity
investor in Celsius has early Venture Capital rounds, correct.
And they have a deep history with them in which machine ski
said that he gets you know, billion dollar loans from them
to nominated in tether, but that is troubling to That would again
point to Contagion risks. I would suggest that's quite
possibly what accelerated the Bitcoin sell-off that ended up.
Pressuring Celsius is wrapped Bitcoin maker V, right?
Was that tether said they liquidated the position.
And so if they're talking about the Bitcoin secured loan that
Celsius had and they sold the Bitcoin that were in it.
They might have been largely responsible for then, ending up
putting Celsius networks, other position there die.
Isshin in danger, which would be funny because tether also owns
equity in Celsius. Yeah, yeah, funny crazy.
I keep forgetting to laugh at the funny things.
Well, it's actually fascinating to me because now we're ending
up in what was already a largely centralized ecosystem?
I don't know what else to call it.
And now, we're seeing players plummet and fall off one after
another really fast. I mean, I think the Session of
Do Kwan. Tara Luna followed by this
Celsius thing, followed by this three arrows, Capital thing.
I mean, this is three incredibly large, I wouldn't say trusted by
most, but trusted by plenty and it's troubling.
And to me, I think three arrows is probably the scariest to most
people in the space, in our tether, papers episode with
David Kanellis. I think we talked about them,
but maybe you can talk a little bit more about them.
They've been in the space. For a very long time, it's Zuzu.
And Kyle Davies they they're the partners who run this hedge
fund. It's a hedge fund.
It was originally based in Singapore is now based in Dubai.
They have billions of dollars under management and they were
one of the top receivers of tether.
But yeah, my understanding is that they were basically a
garage fund initially funded by their own initial appreciation
and crypto wealth. Earlier smaller Investments that
they ended up then rolling over and over until they ended up
with, like I mentioned before numbers say about 10 billion in
assets under management, it's a little bit tricky to get an
exact number for that kind of thing.
But that's what you see commonly cited.
And so, yeah, they were a ten billion dollar assets under
management fund. They were early Venture Capital
investors in a variety of different protocols.
They were a major investor in Tara especially in some of the
more recent Sales which might be contributing to some of their
liquidity problems right now. There was some analysis.
I saw that suggested they might have compounded their problem.
By doing the same thing that Celsius did, perhaps moving too
much eith to steak teeth and then being trapped in an
unfortunate position, which seems to be a common mistake.
But yeah. So there a market making fun.
They do a lot of Market making, unlike crypto.com, which was
something we observed, we're writing the tether papers and
they would And Market make for the very tokens that they had
just invested in. And so yeah they were a large
Market making hedge fund and Venture Capital fund because
they have to do it all in crypto and now it seems they can't pay
back people they're supposed to be paying back and it's more
than that though because these guys they had a stake in
derivatives exchange called daraa.
Bet they had a stake in I think Ave I'm not looking at their
website right now but they had large Stakes.
In very, if not important protocols at least protocols and
platforms that block by block Phi that are important to the
community. Now what we've been seeing
recently who knows by the time this comes out but we've been
seeing a lot of these companies and platforms that they have
steaks in come out and say like this is not harmed us, this is
not disrupted us, we're going to be okay.
I think Celsius was saying that before Celsius collapsed.
I think we saw. What is it deploying more
capitals. He Lads from from do Quan.
So so it is common parlance to say everything is fine, don't
worry. And the best way to avoid a bank
run is to tell people. Please don't come to the bank.
So I think I get it and I'm not suggesting they're doing
anything wrong but I am saying that the waters are very choppy
and it does feel like they're still contagion risks going
around right now to me it Seems like we're just getting sick and
like we're just starting to puke for the first time, you know.
There's a chance that black fight did liquidate their
position early enough and weren't overly harmed by three
rows Capital going silent on everyone, right?
But that's only a partial explanation, right?
Because they were previously raising in a five billion dollar
valuation and we're last reported raising at a 1 billion
dollar valuation in 80% down. Round that's going to basically
ruin their cap table. Like it is unclear that without
in Esther's like 30s capital and liquidity provided their, that
blackface going to be able to close that billion dollar round.
And so, there are long-term risks to blackface business,
besides, just them being so exposed with 3, rows Capital,
they would end up in solvent, right?
Liquidity is kind of like a tide when there's a whole bunch of
liquidity. Things are hidden things can
keep functioning you can pull from the future but when the
liquidity goes out things get exposed and you realize where
People had overextended and we're over levered.
Yeah. It's the classic Warren Buffett
When the tide goes out. You know, who swimming naked.
Another aspect of contagion that I really want to touch on here
is stable coins, in general, which we've seen a lot of the
algorithmic. If they didn't completely deep
egg, we saw their market caps, just completely plummet over the
past. 30 days, magic internet money, is down 83% in its market
cap, Faye is down 20% Five percent in its market cap fraks
is down from all-time highs of 2.5 billion to now, 1.5 billion.
So that is a really large decline in all of the
algorithmic, stable coins. And then we have other stable
coins as well. That seemed to be struggling
with liquidity issues and maintaining their Peg outside of
algorithmic stable coins. And we saw the head of trading
at Cumberland stated now this This is a thought experiment, I
don't want to assign any real value to this thread and thing
they wrote and said, but they did mention that the next shoe
to drop that would really mess things up and drop prices and
screw around with volumes and trading would be a top two
stable coin, I guess failing, something along those lines.
There's a lot of hedging in the statement they used if wood and
top to stable coins. So they didn't name any Names
and they said top to which yeah, sure.
Okay. Could be the one that just got
an audit, could be the one that once partnered with the money
launderers. For the Colombian cartels,
either one is Annie. Who knows option?
Yeah. Yeah.
Who knows. But yeah.
Yeah, I think that's the contagion risk that you and I
have been talking about for a very long time that a lot of
people have suggested is simply Black Swan.
Sense doesn't feel that way right now.
I guess this happens every bear Market, though.
It does. And like, well, again, we say
that, but like last bear Market tether was doing a lot of shady
shit, right? That was 2018.
That's when all the worst of the self-dealing was happening and
all the stuff, they were hiding about their insolvency not being
backed. And so we say that like we just
do this every bear Market, but like last bear Market tether did
some pretty bad things and so like it's tethers, Changed, how
there's a new company, they're focused on transparency now but
their asset composition that we know of now is like
substantially worse than what we imagined years ago.
And there's still the risk based on the fact that Bloomberg
reports they've gotten Target letters for bank fraud and like
we know there's other ongoing Federal investigations that
tether could end up doing the Black Swan things, which aren't
Black Swan, if you can predict them.
M-my end up doing the Black Swan thing, where it gets shut down
and wear that pool of what still 70 billion dollars worth of
liquidity, right? They've done like 12 billion in
redemptions or something, but yeah, still like 70 billion
dollars isn't lot of dollars. That's like reserve primary Fun
Size from 2008. It's a really substantial thing
that would fundamentally change the liquidity and the faith in
the system as a whole. Like, that's the ultimate
contagion risk rate, that's The Cumberland people are mentioning
it is because that is the thing. That fundamentally destabilizes,
massive portions of the ecosystem, which is not to say
that no cryptocurrency would ever Survivor that, no,
cryptocurrency company would survive.
It just that many, many people are exposed in Myriad ways to
stable coins, and that's what makes them such a broad
systemic, and contagion risk for the ecosystem.
And that's why it's so important that if you're going to have an
ecosystem based, Based on stable coins that they are well behaved
and trustworthy because they are so fundamentally important.
I was thinking today about, you know, the broader markets and I
think this is an old cliche, but at the idea that like, everyone
is a good Trader in an upmarket, right?
So, I think there's some truth to that and I think part of this
contagion risk that I'm talking about and that we've been
talking about it, relies on this idea that, well, everyone's a
good Trader in an up Market, but in this industry in particular,
Everyone's trading with each other and getting Equity with
each other and getting tokens for loans and this and that
right? Like it is.
So inside baseball that the contagion risk is super
Amplified because they've created it really Jenga like
ecosystem. That is easy to break.
And now we see this and I think one of the best questions that
people have asked for a long time about tether for Instance
is, how are they making money? How are they making money?
It's like a very simple question.
How do they make money? They get their 20 bits or
whatever it is on each transaction, back to redeem or
mint? It's, that's nothing.
How do they make their money and nobody can answer it?
Nobody can say, where, how they're going to do it.
I mean, Zeke Fox did. What did he say in his reporting
when he was chasing down the story for Bloomberg
businessweek? He said that John bet.
That one Carlo Divas, cini was desperately interested in
finding ways to earn more yield unto others reserves and that's
why they've fundamentally restructured themselves in their
promises and that's why like when you say something like
tethers reserves fairly valued or probably less than they're
circulating market cap. A lot of people in
cryptocurrency won't disagree with you because there's this
like implicit understanding that for tether to make money,
they're juicing it, they're finding places to do that.
Things which aren't fully legitimate so that they can get
that kind of yield and so, but I think, what's important to note
there is that when you say they're looking to places to
juice it. Well, there's a lot of places
you could look to juice those numbers.
There's a lot of Industries you could look to juice those
numbers. They're not looking without
their looking with it. And again, these are inherently
huge issues. If tether were to hypothetically
fail, for some random, who knows what reason, I mean, I guess, I
don't know anymore. I keep my feelings change on on
the odds for tethers as time passes.
I just never know. I just never ever know.
Sometimes it's a coin flip. And sometimes it, I think what
seemed like they're only risk being regulatory has transformed
to Serious market and liquidity issue, risks, that are now being
posed. Yes.
Yeah, I have upgraded, those risks in my head.
More recently and I think what you're kind of getting it is way
back in our first episode on Tara before it crashed.
One of like kind of my fundamental arguments against
algorithmic, stable coins is that the entire value
proposition is self-referential, right?
It's valuable because it's valuable and like if you lean
into that, you can get it to a large enough sides, right?
It's an entirely of faith-based episode and in many ways so much
of crypto value is so self-referential, like where we
know tether is partially Backed by Bitcoin in partially backed
by equity and crypto companies and that the loans for tether
the secured loans. They're extending to a whole
bunch of different places are collateralized by
cryptocurrencies. So much of the value proposition
ends up being self-referential in that same kind of way where
it's valuable for as long as it's believed to be valuable and
that when things get bad when liquidity draws out that faith
is harder to maintain, which brings me to the final contagion
risk which I Think is the bleeding into actual markets
that this knock-on effect could present if enough liquidity and
volume dries up from crypto currency markets.
I know Michael sailor is said that microstrategy seems to have
very little risk for Liquidation on all their stuff and that's
fine. I'm not, I'm I'm not going to
try to suggest he's wrong. I know that coinbase is now
trading at around, I think. And I know that they're
definitely companies larger companies and Banks listed
publicly, that could definitely suffer consequences for crypto,
currency issues, like liquidity, drying up and so I wonder if
that's the last contagion that we are.
We would see if this oh does actually run through the system
and hit as hard as some people. Expect it to Fed says it's not
systemic in the FED. Never.
Gets that wrong. It's transitory.
I don't think it's broadly, systemic.
I think that there are certain companies that could get hurt in
certain scenarios, right? Like you named microstrategy, we
can talk about coinbase, we can talk about a lot of companies
which are currently Aunt, dedicating resources to these
things. I don't think it's probably
systemic to the financial system.
I think it's still relatively isolated and so I think that
were not yet At the point where crypto is broadly systemic to
the financial system. But like part of the reason the
Federal Reserve has written papers pushing for stable, coin
regulations, and part of the argument behind, many of the
stable, current regulations, is that at a certain scale, they
become systemic, right? They become like the reserve
primary fun breaking the buck in 2008.
They become a real risk to the financial system because that
liquidity matter so much more, there's two ways.
This episode goes, I guess which is unfortunate for Us either we
look silly because in a week and a half or whatever.
When this comes out people are like, well obviously it was a
massive contagion event, everything's failing already or
they go. Everything is fine and there's
no more problems idiots. So we're walking a thin line
with this episode but I think it's worth talking about because
I do think that this is the risk of these bear markets especially
with speculative assets like you know, worthless Cans in
companies that don't do anything and Ponzi schemes.
So some of these projects are just yes, straight up.
Obvious Ponzi, schemes or broken.
Protocols. I am still blown away that
dumbass Justin son coin exists at all besides Tron.
It has like 25 fucking really dumb coins.
So I I think there's room for more risk and contagion.
I think we haven't seen the end of it.
Who knows? I could be wrong.
We've seen these people bail each other out and it succeed
before, so they could very well do that again.
And it could totally, just be fine, but I don't know, who
knows? I guess we'll see.
I would tell people to be extra careful on any lending
platforms. Be very aware of your
counterparty risk is just generally good advice.
Yea, be cautious on your centralized exchange is now
that's a contagion risk. We haven't even really addressed
at all. If the beds are somehow able to
shut one of these, Down. That would be Bad News, Bears,
big time. And, yeah, that's more
liquidity. Being drained out.
Exactly. And unexpected and not.
Something anyone thinks is going to happen.
So that's a real Black Swan in my, in my humble opinion would
be one of these big big exchanges getting shut down, but
who knows, man, I don't. It's not like I foresee it, we
don't happening. So I just, I just want.
I think we're talking about contagion because we want people
to be aware. It's like if there's a bad cold,
Hang around. You just tell people like you.
There's a bad cold going around here full heads up.
So it's yeah, it's worth. It's worth talking about.
I don't know if it'll lead to anything and maybe it stops here
but it does. Hey guys, I'm recording this
outro for our contagion episode on May the 1st.
And I just wanted to say that if you've been donating to us, if
you've been watching on YouTube we just got monetized.
So all of our funds, everything you're giving to us.
And in fact, all of my personal income and money, everything I
have is now in Celsius Network, Three arrows capital and I have
a ton of Luna and Tara. So You know, we are going all in
on crypto and so give us those likes.
Give us those. Give us those subscribes.
We're going totally in on this and and fingers crossed.
Like And subscribe. I don't know.