Dark Cloud Cover
An ominous shadow is hanging over the “crypto” space…
On January 5, 2022 video content was shared on Twitter of a Google Meets video conversation between one Marcin Jakubowski and Vinay Gupta which looks to have taken place on August 15, 2020. In just 3 minutes and 13 seconds, Vinay appears to give details on the precisely speculative bubble within the altcoin space, and particularly the “DeFi” & NFT markets, that the Bitcoin community has so vigorously called out. The full video can be found in the link below, the point of the conversation I’m referring to begins at around 25 minutes in.
Executing Towards an Ethical World — Vinay Gupta
There has been MUCH conversation, particularly by mainstream media and newcomers to the market (including legacy entities a16z, major retail outlets like adidas, and others), around how the ETH token and multiple other smart contract protocols have absolutely ballooned vs Bitcoin’s price action.
Vinay Gupta provides a very brief and concise elaboration on WHY these protocols and projects have sprung up. One question that has been very key to this entire space as it has been unfolding, that I couldn’t particularly parse out; why are they all built on top of the ERC-20 token? Simple answer: to capture the value of the Ethereum token, so that “gains” can be realized without crashing the USD-priced value of the paternal token.
- ETH price is high, and heavily centralized to a small percentage of the market
- Holders want to be capable of realizing the return, without crashing the market by the selling of these whales
- Spool-up some “side-chains” and “layer 2” protocols that are built atop of the ERC-20 token, so there is interchangeability between the two different assets.
- Establish an exchange rate for the new protocol’s token vs ETH
- Allow for interested parties to get in on the “funding” phase, where the exchange rate is heavily discounted — favoring the ETH bag holders
- The new token takes on a market of speculation all its own. If this independent value takes-off vs ETH or USD, this allows the for the ETH holders the option to not only capture the gains of their ethereum, but it also allows for the new token’s market to essentially be used as a line of cannon-fodder.
“cRyPtO dIvErSiFiCaTiOn” = 2008 MBS “Diversification”
Why is this so important? Well, to be completely honest — in my opinion, all we need to do is look back at Lewis Ranieri and the financial blunder that was 2008. I wrote an article many moons ago that touches on this topic briefly (here), but there is one particular dynamic of that time period that I believe needs to be looked at very closely.
“The creation of MBS’s — compounded by their success — opened the floodgates for financial engineering. The redistribution of wealth, rather than the creation of wealth…you now know what financialization is. The act of inventing new methods to rearrange who has money without actually creating a new product.”
The problem is that the aforementioned process of these ERC-20 tokens being utilized to capture returns without crashing the underlying value of the ETH market, has now been co-opted by VC & Hedge Funds and Legacy Market participants. How is this being done? By both directly investing in the project (and token) itself and by “diversifying” their exposure to “crypto” (sometimes including exposure to bitcoin). Do you remember what banks and Wall Street did with the Mortgage Backed Securities when they ran out of the high quality product? They “diversified” them; by throwing together a significant quantity of medium- to low-grade quality products until the risk exposure was deemed to be diminished by spreading out the surface area of the exposure across varying degrees of quality (aka risk).
What got the financial world into a blunder was that this strategy was widely and ignorantly adopted without proper due diligence. Which led to the reality that too many people were taking out too many loans and not paying down their mortgages, which resulted in the mortgages themselves running belly-up, causing the securities themselves to fall below a threshold that rendered them worthless. So, I ask — what happens when these bafoons realize that the vast majority of these protocols (including NFTs) do not have any real value, or provide legitimate services (aside from acting as derivatives and gambling).
In 2021 alone, we saw a relatively large number of “crypto” funds spring up seeking exposure to the wider cryptocurrency market. With very little focus around Bitcoin, with so many of these funds corralling into these assets & protocols without taking the time to understand how these systems operate [especially in comparison to Bitcoin] we get an extremely unstable powder keg scenario, just waiting for someone (or something) to accidentally trip a spark that lights the whole nightmare up.
What’s worse is that the protocols themselves have dedicated marketing teams that literally sell hope & excitement to these wildly under educated individuals and teams. After which the investors and funds go about talking their own book, which props up the powder keg even further from where it is already propped. And then these funds feel like they are “diversified” by being allocated into the wider cryptocurrency market thinking that their risk is diminished, when in reality, because so many of these projects are built on top of Ethereum, they have effectively expanded their risk exposure, by an order of magnitude, or more.
Do you see the correlation to 2008?
To make matters even worse, the stablecoin market is also heavily reliant upon Ethereum.
And this is all without even considering the powerful blunders that Ethereum has around its own existence; with regards to the impossibility of auditing the network (with regards to the distribution of the ETH token, seeing how it is necessary to perform actions with/on the network) with certainty, and the absolutely abysmal attempt to shift to a Proof of Stake system — which would effectively remove the validity of the role of miners, and would weaken the Ethereum network.
In My Eyes…
We’ve got a market that is almost as thicc as the market cap of Bitcoin, but the whole space is built atop a rickety foundation that only gets weaker, and weaker, as more funding and irresponsible backers pile-on.
I wouldn’t want to be near that monstrosity once reality comes calling…
