The Hardest Lesson We Learned from the Crypto Market (June 2022)
0xa3C5
June 20th, 2022

No Alternative Solution.

The haze of inflation is haunting every single mainstream country around the world.

The Ukrainian war, the pandemic, and the disruption of the global supply chain... It is undeniable that under the trend of globalization during the past two decades, no country can stay away from crisis to thrive and be happy by itself. The tremendous amount of oil and gas from Russia, the high-quality and affordable industrial products from China, and grains produced by Ukraine as the "granary of Europe"... The supply of these readily available daily necessities have all been interrupted abruptly.

Whether it is the United States, Europe or other developed regions, the vigilance of rising inflation has exceeded the desire to stimulate the economy. The 8-10% inflation is enough to put many families into difficult situations. However, due to the disrupted supply chain, it seems that there is only one applicable solution—raising interest rates.

U.S. Inflation Hits 40-Year High
U.S. Inflation Hits 40-Year High

Although everyone knows that raising interest rates will likely bring about a recession, central banks do not have an alternative solution to tame inflation. Only when interest rates are raised and the price of all kinds of assets falls, inflation can be contained.

The United States, in particular, is the most sensitive in this regard. The U.S. raised first, and then Europe, along with the rest of the world, had to follow. It's like the last round of a poker game. The player before has already raised, you have to call even if you don't have any cards in your hands.

Under interest rates raising, all risk assets no longer have any support. Unfortunately, Bitcoin, Ethereum, are just classified as "risk assets" for now.

The Cycle Theory

I am still optimistic on Bitcoin, Ethereum and Crypto for the long term, but the exodus of funds from the market is not at one's will.

Do you believe in the Super Cycle Theory? The so-called Super Cycle means that crypto assets experience a bull and bear cycle every 4 years. The most direct support for this theory comes from Bitcoin’s halving every four years (the change in selling pressure). Admittedly, the Super Cycle Theory has been in effect 3 times since 2011.

The Bitcoin Super Cycle
The Bitcoin Super Cycle

I'm not a fan of the Super Cycle Theory. Because if this is the case — attributing market performance to some sort of fate is undoubtedly killing the efforts of countless builders in the entire crypto industry.

However, if you ask me whether I prefer any predictive graphics, then I'm more aligned with Gartner's Hype Cycle Theory.

The Hype Cycle Curve
The Hype Cycle Curve

What it implies is the law of development and evolution of things, especially technology.

In the very beginning people tend to advocate bubbles because they are never falsified. Once the development becomes too fast, some bubbles are inevitable. The group of people who are not advocating bubbles will try to criticize bubble advocators (like now!). Then, it comes to the time to gradually build and develop.

Then the Hype Cycle goes round by round, one round interlocking another.

It is very similar to the Super Cycle, but not identical:

→ The 2013 Bitcoin bull market enlightened the public to the technology of blockchain, so we got Ethereum in 2015.

→ The bull market in 2017 made everyone realize the strength of smart contracts, so we had DeFi in 2019.

→ The 21-year bull market has made us realize that DeFi and NFT can create so many incredible things, so we are destined to harvest new seeds in the future.

The germination of new seeds needs more time.

So, I remain firmly optimistic on the long-term future of Bitcoin and Ethereum. Of course, in the short-to-medium term, they cannot stay completely independent from traditional financial markets and the global economy. Whether it is Bitcoin or crypto, it is only a technology that has been born for a little bit over ten years. So, we might be facing a very tough period of time.

The Most Expensive Lesson

We always learn something from history. If the next bull market is to be brewed, it is crucial to understand what we can learn from this collapse, which is the title of this article.

I think there is only one thing that we all must learn: don't take a moment as forever.

What does it mean not to take a moment as forever?

Let’s start with the degen APR.

Degen APR
Degen APR

Before the DeFi Summer, we invested in a token. Then it went to Pancake's Farm, and APR was 300%+. Super comfy passive income. Later, that pool was listed by Alpaca again, so that you can leverage it to farm. After the leverage is applied, we don’t even need cash to farm anymore. With that Token, we can collateralize it by itself to borrow and farm. The income can easily reach 10,000%+.

It means that as long as I deposit 200,000 USD, a year later, I theoretically have 20 M.

At that moment, our office was overfilled with joy. After all, even a simple $CAKE can generate thousands of dollars for me everyday, not to mention the additional rewards from using leverage and $Alpaca — I don't seem to need to work anymore.

But is this forever? Obviously not haha. Frens who have farmed pool 2 are familiar with the plot afterwards.

DeFi is like this, so does NFT

Post Mint
Post Mint

Let's talk about another illusion.

If you buy an animal as your avatar, you not only get an avatar, but soon you will get a dog, then a mutated animal, and then some tokens that these animals will use, even two parcels of land where these animals will live in the future…

Furthermore, each of these can be sold. If you think about it, you can earn back the principal and profit within less than a year.

Will you buy it?

I clearly remember that on the eve of the airdrop, my bros and I were very hesitant, super Fomo. It is really hard for us to decide whether we should buy some apes. During the period when $APE was airdropped, the price of BAYC also rose, and the price of $APE also rose. At that moment, the entire metaverse was thrilled.

Of course, at this moment, you and I already know, this is not forever.

Even “Stablecoins”

The moment when UST was the most popular is the moment when UST’s market value of UST exceeds that of DAI. At that moment,  all farmers around the world went wild.

At the time, although MakerDAO executives thought $DAI was better, they could only express a little bit of sourness on Twitter. And this has also attracted cyber violence from Lunatics.

Lunatics
Lunatics

$UST, a tens of billions USD scale "stablecoin", is smoothly transferrable in 10+ chains, and has hundreds of millions of liquidity in Curve and Terraswap. Orders at the level of 10M USD will not generate any slippage at all. What's even stronger is that it can yield a super stable 20% annualized interest rate.

For some Korean companies, even if they work hard for a whole year, they can't earn more than 20%. So it is better to put money into Anchor, safe and sound.

One of the things I heard the most is that UST is "too big to fail" despite it seems to have some problems.

But is it permanent?

When Luna dropped from 120 to 0.00012, some people were still betting that it would return to peg. However, everything could not go back to the good old same way anymore. Many people have lost their money, and then they discovered that this "peg" does not exist at all.

Like I talked before, Curve is a completely neutral tool. Within its central range, even if two assets are totally irrelevant, its AMM algorithm can anchor them and allow people to swap without slippage.

The Curve AMM Curve
The Curve AMM Curve

Once it departs from the central range, as long as a small amount of panicked liquidity escapes, it is enough to bring the AMM curve back to the prototype and accelerate the crash.

For the same reason, there are also: bribes that can bring immediate 3x returns, mysterious internet magic currency, club pass worth 40 ETH, IOUs that can be exchanged to cash 1:1 ratio, etc., I will not list them one by one.

Dominoes

If it is a powerful medicine to remove $UST from crypto, then that's fine. However, what Luna has brought to the industry is more than that.

Luna, once a top 5 cryptocurrency, has spread to every corner. And its demise is bringing a series of tragedies. For what already happened, there are two immediate consequences:

1. Weakened Liquidity

Several super-large crypto MMs, who were crucial liquidity maintainers of the crypto market in the past, have suffered greatly.

Whether it is investing in Luna, lending money to Luna, providing liquidity to UST, or the farmer of UST (except collateralized ETH to borrow UST), without exception, all of them have suffered from severe damage.

Just like in a game, when inhibitors are almost gone, no one is going to defend towers anymore. You can clearly feel that after the collapse of Luna, the liquidity of the entire market was shriveled.

2. Forced to sell

Top institutions, including Celsius and 3AC, have established a good reputation for a long time. They also have a lot of liabilities (whether from LPs, friends or users), which is a normal business expansion behavior. In terms of their size, when the liquidity is normal, they can slowly repay the money without problems.

I believe that at the moment they got the money, both parties were very satisfied.

However, the good times are also not permanent.

Today, cryptocurrencies continue to decline during the interest rate raise cycle. As collateral shrinks, these institutions are left with fewer options. Selling their remaining assets to stop loss is one of the few options. Yet the shaking market performance simply can't handle such a large sell-off.

This is probably a death spiral. The more urgently you sell to repay the debt or make up the margin, the more severe the fall, and the more urgent the debt repayment will become.

Yet to Happen

In addition to these two immediate consequences, there is one more outcome that will probably happen soon.

3. A new round of regulation

With the complaints from Celsius individual investors and the accusations of Luna investors, it's hard to imagine that regulation won't catch up.

At this moment, it is impossible for crypto to draw lines to exclude Luna. The general public outside crypto will not differentiate Luna from other cryptocurrencies at all. When the supervision is in need of materials, the cases of Luna and Celsius will be brought up, and even 3AC. A wave of strong supervision against Crypto is 100% foreseeable.

No Snowflake in an avalanche ever feels responsible. In any case, none of those who once advocated for ponzi ever feel responsible for the current BTC avalanche.

When Luna was at its peak, many organizations believed it was "too big to fail". A lie told a thousand times became the truth. I sincerely hope that everyone will stop advocating any Ponzi, stop believing in any "too big to fail", and stop "taking a moment as forever".

Last few words.

I used to have a "yearly strategies update", updating my understanding of the entire market and my portfolio every year. The recommendation in 2019 is mainly about the Auto-Invest plan of BTC, and the recommendation in 2020 is to switch some positions to ETH.

If you let me talk about a strategy for now, it may still be about waiting for opportunities and the right timing.

My current positions are mainly BTC, USDC/USDT, and a tiny bit of altcoins and PFPs. At this point, there is not much room to panic sell mainstream coins, but there is still a lot of downward room for alts.

About buying the dip.

Buying the Dip
Buying the Dip

I think buying $stETH below $800 might be the right choice for long-term holders.

ETH/USD
ETH/USD

$800 is one of the starting points of the last bull market, and stETH should indeed have some additional discounts. Long-term holders can definitely wait until the day when stETH is converted into real ETH.

For the future technical route of Ethereum, I am very optimistic about the combination of PoS ETH+Rollups. Based on this route, real web 3.0 applications can finally run on Ethereum at an ultra-low cost, and enjoy Ethereum’s security without having to consider high gas fees. The environmental problems and inflation problems of Ethereum will also be solved by PoS.

In addition, BTC is always my favorite. I will choose to start my automatic investment plan when the right time comes. In the past six months, all of us have observed BTC’s excellent liquidity. After all, liquidity is the king. Moreover, the interest rate raise will eventually end, and monetary easing is the eternal hymn.

Meme of Bitcoin
Meme of Bitcoin

Finally, if this is your first time being in a bear market, don't be too frustrated. The war will end, the pandemic will end, inflation will be tamed, and monetary easing will arrive and last. Every second in the bear market is a great opportunity to build and learn. Remember, don’t take the dark moment as forever either.

Arweave TX
uzKTX8_jlUncR1-lQC4DjDYSAc94i1Ngn-WFe1FcLps
Ethereum Address
0xa3C5A5f5bcD29aE08Ba2D62c43D8eA742Dd6edd9
Content Digest
RPzApTfJRAdYzJJcGWgVo8LHFnb8kp4m1jQ2khrDtH0