May 18, 2022 | Issue #220
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Conceptualizing The Chaos
Welcome to crypto!
For those not paying attention, the crypto market has been in a downward spiral ever since the collapse of both TerraUSD (UST), an algorithmic stablecoin, and its counterpart, Terra (LUNA).
We highlighted the carnage in our issue last week as we waited for the dust to settle. Today, we can finally begin to make sense of it all...
So What Caused The Terra/Luna Blowup?
To be honest, we don't have enough space (or patience) in this newsletter to breakdown all the compounding events that ultimately led to the Terra/Luna collapse. The details are utterly confusing for your common investor and, as it turns out, the rumor mill is still churning in regards to what exactly triggered it. But to quickly sum it up, Terra/Luna was in a category of its own, relying solely on its algorithmic mechanism. It was a creative albeit risky model from the start that many predicted might fail.
(For those who want to dive a little deeper, this is one of the best summaries we found that explains what happened with Terra/Luna, in laymen terms)
What Does This Mean For The Market?
Many fail to realize this wasn't just another ponzi-like cryptoasset imploding. LUNA was the third largest DeFi token, and both LUNA and UST were in the top 10 largest tokens by market cap before all of this happened. Furthermore, Terra/Luna was also deeply integrated into the rest of the crypto economy. It was held in exchanges all over the map. It was tapped with loads of institutional investment. And tons of funds, startups, and retail investors had exposure to it.
The ripple effects of the collapse smacked the entire crypto market in the face. Since May 5th, $570 billion has been wiped from the market with crypto's total market cap falling from $1.81 trillion to 1.24 trillion. Not to mention, today's falling stock market hasn't helped either, with crypto/traditional markets being more correlated than ever.
What Does This Mean For Other Stablecoins?
The crypto markets are still assessing the aftermath of the Terra/Luna collapse, but one immediate effect has been a drawdown in stablecoin liquidity within DeFi. According to Coin Metrics, the amount of USDC held in smart contracts on Ethereum has fallen by about $5 billion since its peak in March. Similarly, the supply of DAI – another widely used stablecoin – has also fallen about $2 billion. Another ripple effect was Tether (USDT) – the largest stablecoin today by total supply – briefly losing it's peg late last week, causing even more panic as the investors rushed back into fiat.
Although the Terra/Luna may spell the end of algorithmic stablcoins as we know it, traditional stablecoins (those backed by cash and cash equivalents) whether you like them or not, will continue to be a critical part of the crypto ecosystem. Regardless, it's fair to state that stablecoins will undoubtedly succumb to more scrutiny in the coming months.
PSA: If you happen to hold ANY stablecoins, we suggest using them for short-term purposes only (i.e. swaps, trades, and other liquidity events). Holding them in your portfolio over a longer period of time may not be the smartest thing to do in current market conditions.
Our (Hot) Take:
Call it what you want, but had you only read CoinSnacks, you probably wouldn't be a part of this mess. You see, there's a reason we tend to stick the basics (i.e. bitcoin, ethereum, crypto/institutional adoption, the macroeconomic implications of crypto, etc.). It's because we can make sense of it.
The rabbit holes into DeFi, algo stablecoins, and the thousands of altcoins involved come with a double edged sword. Yes, many of these things are groundbreaking and innovative and do serve a purpose to some extent in the world of decentralized finance and banking. But many folks fail to realize just how speculative these projects are. Since its inception, the DeFi space has again and again reminded us of the ICO boom in 2017; copied over whitepapers, endless shilling, deceptive marketing, exchanges listing everything under the sun to drive more fees... the list goes on and on. But most importantly, we saw the retail crowd rush into these assets without any foundational understanding of how DeFi actually operates.
As the saying goes, the important thing is to know what you know and know what you don't know. In other words, stop putting your capital in things you don't understand.
Related Reading: Bitcoin gives you control. That's the fundamental value.
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DEEP DIVES
The Fight Over Robinhood
On Coinbase's Q1 earnings call from last week, there was a brief interaction that made our ears perk up.
You see, although Coinbase takes questions from traditional analysts, they also use a technology, Say Technologies, that allows retail investors to ask the management team questions. Investors are able to then upvote those questions with weighting towards the amount of shares held. This quarter the most upvoted question was: "Do you see a strategic advantage in acquiring or merging with Robinhood?"
Now the answer wasn't what made us interested ("We don't comment on rumors or speculation on any specific M&A transactions"), but rather that the idea has now entered the zeitgeist. As a side note, Robinhood acquired Say Technologies for $140 million last year, so it could just be an overlap of audiences.
Now, Coinbase could acquire Robinhood if it wanted to. Last week, Robinhood was trading at ~$6.4 billion market cap, while Coinbase has ~$7 billion in cash in the bank.
But a move by a competitor may have just put a nail in that coffin.
Last week, Sam Bankman-Fried (SBF), the billionaire founder and CEO of cryptocurrency exchange FTX revealed the purchase of a 7.6% stake in Robinhood worth ~$479 million. The announcement of course sent Robinhood shares up over 30%.
SBF Rugging Coinbase?
Although SBFs 13D filing states that he intends to "hold the Shares as an investment, and does not currently have any intention of taking any action toward changing or influencing the control," it is worth noting that by filing a 13D as opposed to a 13G, SBF can take an activist position if he chooses.
Now we don't expect SBF to go all out trying to control Robinhood directly, as the company has a dual-class share structure which gives the founders voting control, but if history is any teacher, we may just see some indirect control.
Taking a Step Back:
SBF and FTX have a history of strategic investments and acquisitions.
In December, 2021, Alameda Research (SBFs quant trading shop) led Stocktwits' $30 million funding round. Less than two months later and Stocktwits announced it would turn into a brokerage with crypto powered by, you guessed it... FTX.
It's safe to say that when FTX/SBF makes an investment into a retail focused fintech app, it's not to be passive.
Another example is FTXs acquisition of Blockfolio for $150 million. As Mario Gabriele put in his great writeup of FTX, the company "both added to and diversified its customer base, setting itself up for a more retail-friendly future".
By purchasing a retail focused app with millions of users, FTX was able to acquire a type of customer that the company didn't have. And they were able to do it for a great cost ($23 per customer). Mario calculated that FTXs monthly revenue per customer at the time was $337, meaning the company could ROI in mere days.
If we apply the same calculation to Robinhood's userbase of 22.8 million funded accounts, we get a cost of $324 per customer. Assuming a similar monthly revenue per user as August 2021, of $337, the payback period would be less than two months.
The Power of Brand Recognition
Over the past few years, SBF has made it abundantly clear that his fight against other crypto exchanges is not from a product perspective (he believes they have the best exchange on the market), but from a marketing perspective.
This is why FTX has spent hundreds of millions of dollars on advertising in commercials, buying rights to stadiums, and incentivizing celebrity endorsements. To gain exchange market share, FTX has to directly compete against Coinbase's deep retail entrenchment.
But if there is one retail trading app that has more mindshare than Coinbase, it's Robinhood. As SBF pointed out in a tweet-storm last year: "Robinhood barely even needs to advertise; their name conveys their brand and message without the need for any additional color."
This also may be why SBF hired the former head of crypto at Robinhood, Sina Nader to be COO at FTX (note: Sina is no longer COO).
Brand recognition is a powerful aspect of marketing, and by potentially integrating the companies either directly or indirectly, FTX gains access to tens of millions of customers.
So, What Does SBF Want With Robinhood?
Although we don't have any inside information, there are a few possibilities as to why SBF may be interested in Robinhood:
- SBF is just being a good ol' trader to make money. Although possible, the size of investment does raise some questions.
- SBF is trolling Coinbase. Perhaps trolling isn't the right word (we'll leave that for Elon), it is possible that SBF is making a strategic play in case Coinbase or another company tries to make a move.
- SBF wants to buy Robinhood. This seems a little farfetched, but we won't disregard it entirely.
- SBF wants to integrate Robinhood and FTX somehow. This seems like the most likely answer. That slowly, overtime, SBF will exert influence over Robinhood to integrate with FTX rather than a competitor.
Time will tell.
2022 State of Crypto Report
A16Z just released their first-ever State of Crypto Report. Like the venture fund's other reports, it's massive at 56 pages, but also chock full of some great insights.
If the recent market pullback has got you deflated, check this out just to see how early we are in this crypto thing. TLDR here.
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REGULATORY FRONT
Gensler Tells Congress That The SEC Is 'Really Out-Personed' On Crypto
SEC chair Gary Gensler told a Congressional subcommittee today that his agency needs more resources as it looks to regulate the US crypto market.
“I wish we had more to dedicate to this... We’re really out personed."
Gensler also referenced the Terra and UST fiasco (which we reference in the first story) stating:
“There was one crypto complex that went from like 50 billion dollars of value to near-zero just in the last three weeks. I mean these are highly speculative, volatile, and I dare say, the public is not protected.”
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