Finally Some Good News, The Merge Trade, & Lessons From Celsius

CoinSnacks

July 20, 2022 | Issue #228

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Coin Snacks

 MUST READS 


Prices Are Up... Why?

Since we last hit send on CoinSnacks two weeks ago, crypto prices have rebounded a bit.

BTC is up ~13%, ETH is up ~30%, and the entire crypto market is back up above $1 trillion. Even Coinbase (COIN) is up nearly 45%.

So what gives?

Some are pointing to the upcoming Ethereum Merge which we cover below. Others point to the fact that the overall market is up due to better than expected corporate earnings. Or maybe it is because the long-dreaded liquidity crisis seems to coming to a halt?

For all we know it's because Biden fist bumped MBS!

We don't know. What we do know is that the crypto market continues react to the overall economy as much as people don't like to believe it does. So with CPI coming in at 9.1% in America (9.4% in the UK), the USD strengthening against almost every other currency, and Central Banks around the world raising interest rates, we have no doubt that money flows will in some way impact crypto prices.

But, and this is a big but, let's back up and remember one thing: Crypto continues to put the power in the hands of the people and take it from kleptocracy that have intentionally stolen wealth from future generations.

The price action, the blowups, the megalomaniac personalities...

The rug pulls, the gambling, the bailouts...

...It all still exists in crypto and will continue to do so.

But underneath the surface is an opportunity for people to take control of their future and fight against the situation our elected officials have gotten us into. When Bitcoin’s first ever block was mined, Satoshi Nakamoto encoded a message to remind people of this.

So while we are in a moment of calm, with some sort of temporary bottom in place, we suggest taking a step back, evaluating your portfolio and asking yourself why you're here.

Celsius Kicks The Can

Regular readers of CoinSnacks should be well aware of what’s happening with Celsius.

For those needing a quick refresher, Celsius was a crypto lender that took customers’ funds and earned a yield. At its peak, it was one of the largest crypto lenders, managing $26 billion in assets in October 2021.

As you may have noticed, we use the word “was” when talking about Celsius. That is because, as of July 13th, Celsius is officially bankrupt.

A Fall From Grace
We have covered what went wrong with Celsius in previous issues, but because this is probably (and hopefully) the last time we talk about Celsius, let’s quickly recap what happened.

As a crypto lender, Celsius made money by taking people’s money and using it in various DeFi projects to earn a yield. The idea was that it simplified the process for people. Instead of having to figure out DeFi yourself, Celsius did all the work for you.

As we now know, the people over at Celsius, at best, had some degenerate tendencies and, at worst, wholly mismanaged the money.

Think of a way to lose money, and Celsius probably did it. Hundreds of millions of dollars lost in hacks and protocol failures. $500 million lost in Terra. Overleveraged investments into illiquid assets that suffered in the market downturn. Seriously, you name it; they did it.

Add it all up, and a company once flush with cash now has a $1.2 billion hole in its balance sheet.

The Bankruptcy
The numbers thrown out in the bankruptcy statement are quite stunning.

In addition to the $1.2 billion hole, Celsius only has $167 million in cash. Moreover, their assets under management have declined from $14.6 billion at the end of March to just $1.7 billion on July 14th. To top it all off, they currently owe $4.7 billion to customers, almost triple of what they have under management.

The company states that it plans to make it all back with its bitcoin mining operation, Celsius Mining. To make this plan work, they are asking the court for funds to finish building out their mining rigs in the hope of mining up to 15,000 bitcoin in a year.

The feasibility of this plan merits plenty of skepticism. As CoinDesk notes, mining alone will not be enough to fill their massive debt at current prices. Celsius, on the other hand, makes the case that mining will become more profitable as the crypto market rebounds. Although true, nobody knows when that will happen.

For the people with money still stuck in Celsius, this can’t be reassuring.

Where Are the Customer’s Yachts?
The company’s more than 1.7 million customer base is what makes this story particularly painful to cover. A large majority of them will turn out to be just average retail investors. Unfortunately, now it looks like they will be the ones who lose the most.

Celsius is arguing that customers transferred custody of their assets to Celsius, meaning those customers are unsecured creditors. Because Celsius is not subject to the same tight regulations that banks and traditional finance brokers are, they can file for Chapter 11 bankruptcy.

Chapter 11 allows them to restructure their finances instead of immediately liquidating, as seen in a Chapter 7 bankruptcy. Simply, Celsius can pay back their creditors in any order they like. Naturally, they are refunding institutional investors first... rather than customers.

Who knows if there will be enough money left over for retail investors. The probable answer is no. That means hundreds of thousands of innocent people will lose their money.

When you step back and look at the situation, it becomes clear that Celsius has left crypto with nothing but a black eye. It’s hard to say that luring hundreds of thousands of retail investors in by promising something unrealistic, woefully mismanaging their money, and then confiscating it to settle their debts with institutional investors is anything other than predatory. To top it off, a company that once proudly stated “banks are not your friends” now runs to Citibank for help with the restructuring. Embarrassing.

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After a Clean Sweep On Shark Tank, Now It’s Your Turn


Coin Snacks

What flies through the air and is Shark-approved?

That would be xCraft, the drone startup that is revolutionizing the market for unmanned aerial vehicles (or UAVs, for short).

Dubbed “America’s Drone Company,” xCraft isn’t just designing and manufacturing drones that go extremely fast and far (although its drones do do that). Its mission is to bring highly efficient and practical solutions to a burgeoning industry.

With a proven history of disruptive innovation, xCraft is tackling everything from government and commercial applications like surveying disaster zones, to developing concepts for urban air mobility (AKA flying cars).

Poised for huge things, xCraft just solidified a partnership with T-Mobile. The combination of T-Mobile's nationwide 5G network and xCraft’s UAS solutions will create endless broadband opportunities for businesses around the world. xCraft + T-Mobile 5G = Game Changed.

Yes, the future is truly upon us, and for a limited time you can get in on it through xCraft’s CF campaign. With a total addressable drone market of over $35 billion by 2026, it’s no wonder that xCraft walked away from Shark Tank with nods from all five sharks (Mr. Wonderful included). A truly rarefied distinction.

Strap in for the ride and learn more about investing in the future of UAV technology.

 DEEP DIVES 


Ethereum Merge Update Sparks Rally

After months of bad news and poor price action, we are finally getting a little relief.

The Merge, Ethereum’s (ETH) long-awaited transition from proof-of-work to proof-of-stake, is now tentatively scheduled for September 19th.

The news is not just exciting from a tech-innovation standpoint, but it’s a beacon of light for investors as well – both of which, we’ll discuss in greater detail below. Nevertheless, since the announcement on July 14th, the crypto market has strongly rallied as investors cling on to the latest and greatest narrative since markets began tumbling last spring.

Here At Last?
Although The Merge has been teased for several years, it always managed to get delayed. However, this time seems to be different.

With the successful merges of the testnets Ropsten and Sepolia, the last testnet Goerli is scheduled to merge on August 11th, and the finale now scheduled for September 19th. It looks like The Merge is finally happening.

Impact of The Merge
This is excellent news for crypto investors, especially for those holding Ethereum.

Why?

Because the transition to proof-of-stake reduces the issuance of new ETH by 90%. For those fluent in Bitcoin, that’s equivalent to three Halvings. As a result, millions of dollars of daily sell pressure will be erased. Add in the EIP-1559 burn mechanism that has already permanently removed 2.5 million ETH from the supply since last August, and ETH has a legitimate chance to become deflationary. Meaning, for the first time, Bitcoin might have some real competition as a store of value.

Price catalysts aside, The Merge represents a resounding technological upgrade with nearly every relevant party immediately benefiting.

Concerned about the climate impact of crypto? The move to proof-of-stake cuts Ethereum’s energy emissions by 99%.

Worried about security and decentralization? The Merge lowers the requirements to run a node, decreasing centralization and improving security.

Looking to earn a sweet yield? APR for staking ETH is expected to increase by 50% post-Merge.

Tired of paying a small fortune in “gas” (fees users pay to make transactions on Ethereum)? The Merge isn’t going to fix this right away, however, The Merge does set the stage for the eventual implementation of sharding. Combine that with rollups like Optimism and Arbitrum, and Ethereum has a clear roadmap to fixing its scaling issues.

Holder of an alternative “Layer-1” like Solana (SOL), Cardano (ADA), and Avalanche (AVAX)? If so, it’s arguably a good time to take a look at your portfolio allocation. The advantage of such “ETH-Killers” was that they scaled better than Ethereum. But with rollups gaining steam and sharding on the way, this might not be true for too much longer. Because Ethereum already has the advantage in decentralization and security, it’ll be interesting to see what happens to such ETH-killers when/if the efficiency of Ethereum catches up.

ETH holder looking for price to go up? ETH prices have climbed ~30% on the news of a tentative launch date alone. Now just wait until The Merge officially goes live. Combine this type of momentum with the deflationary supply catalysts we briefly mentioned above, and it’s fair to say that ETH investors have a lot to look forward to.

Just remember, despite all the excitement and the seemingly too good to be true network benefits, we should also be cognizant of this “number go up” mentality that's spreading like wildfire.

It’s clear that investors (rightfully so) are excited about The Merge, but it’s going to take a lot more than better supply dynamics to crawl our way out of today’s bear market. At the end of the day, we still need applications and protocols that can deliver real utility and value. This is what’s ultimately going to strengthen the network (and prices) in the long-run. 

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 REGULATORY FRONT 


Crypto Enforcement Takes Center Stage in SEC Appearance Before Congress

Yesterday, Gurbir Grewal, the director of the SEC’s division of enforcement, testified before the investor protection subcommittee of the House Financial Services Committee.

Meetings like these are where, for the most part, Congress gets to jab the SEC on why they failed to protect ordinary American's from losing their savings on things like meme stocks, insider trading, SPAC implosions, and – of course – the latest "catastrophic" crypto crash.

Some would say it's a pretty boring affair. But, add a bunch of congressmen attacking the SEC about crypto regulation for the larger portion of it... and, well, that's when things get pretty entertaining.

The Backdrop
When it comes to crypto, concerns around ESG reporting, insider trading, and the lack of regulatory oversight have been at the forefront of the Biden administration's agenda. It's why we've seen countless remarks from SEC Chairman Gary Gensler calling for expanded enforcement, heaves of crypto energy consumption FUD/chatter, US Reps like Brad Sherman urging the SEC to "go after" crypto exchanges at all costs, and largely explains why the SEC recently doubled the size of its Crypto Assets and Cyber Unit. (According to reports, to add, the SEC is still seeking additional funding to expand these units).

To sum it up, there's a BIG push for greater crypto regulatory oversight in the halls of today's government.

But some members of Congress, specifically Tom Emmer, aren't at all happy with the progress. In fact, he's claiming that some of what the SEC is doing is actually "unconstitutional."

Wait, What?
In by far the most significant clip to come out yesterday's hearing (you can watch it all unfold here), Grewal fails to refute that the SEC is cracking down on companies outside its jurisdiction. Emmer points out that the SEC has unfairly authorized extra-jurisdictional "industry sweeps" for crypto companies, and that they would create "a bloodbath" for those who would not cooperate.

Emmer concludes his argument with statement:

"Under Chair Gensler, the SEC has become a power-hungry regulator, politicizing enforcement, baiting companies to “come in and talk” to the Commission, then hitting them with enforcement actions, discouraging good-faith cooperation."

So here we have the SEC – who by the way has still yet to provide ANY meaningful regulatory clarity for crypto businesses – baiting companies to comply with "voluntary" sweep letters (subpoenas), despite the SEC, in some cases, having no enforcement authority to begin with.

Sheesh. There's no better way to stifle domestic crypto innovation than to bully companies into corners rather than actually working together with them.

All things considered, it's no wonder the crypto industry is racing for a registration regime with the Commodity Futures Trading Commission (CFTC) instead.

 TWEET OF THE WEEK 


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