Now that the music has stopped – it’s time to pay attention

TL;DR For years there have been red flags in the industry marked as "FUD". With people losing their life savings that "FUD" is sounding more like "Truth". Well, here's more truth – LUNA, Celsius, FTX was just the beginning – the entire system is propped up on bad, bad, leverage. You need to stop watching the prices of assets (ETH/BTC) and start watching stablecoins (Tether/USDD) – they are already starting to go bust. The music has stopped and when they go to zero, which they will, we'll see who's been swimming naked.

This is a long read, so buckle up.

For years several people have been raising red flags about centralized exchanges. With the collapse of FTX hopefully we have your attention now. This isn't a I told you so/shit post – this is, hopefully, a post about saving what's left of peoples savings, investments, and life's work. And, just so you know, I'm a big proponent of the tech behind crypto – I do think it's the future, I was heavily invested and pulled out a year and a half ago because of the analysis below. I am absolutely fucking furious at these crooks for taking a beautiful idea and using it to enrich themselves.

What is happening / why did prices increase so much / why are they crashing?

Crypto is a space that is filled with leveraged liquidity – what that means is I borrow your money, invest it, and then make a small percentage off that investment. This is fine in classic finance because I can always give you your money back and I'm backed stopped by the government who guarantees that deposit. Centralized exchanges, like Celsius and FTX, are effectively doing this – they are banks with no backstop. To make it worse they made risky loans into coins that have collapse leaving large holes in their balance sheet – in short they can't pay back the money because it's gone. However, the real driver of the price increases was stablecoins but we'll get into those later.

Exchanges been operating for such a long time, how can they be fraudulent?

Crypto, in terms of financial technology, is unique because several layers of financial fraud can be hidden behind layers of technical jargon and financial instruments. Imagine if you have several banks working together to keep prices high and give each other credit when needed. Now imagine that you hide this behind a series of stablecoins and tokens until the point where everything looks good – everything is holding value, liquidity is being pumped into the system, prices are going up, what can go wrong? Well, when you are over-leveraged and you have a downturn, maybe even not crypto related (say inflation caused by a pandemic), you start to have pressure. Prices come down, people pull out money, and you can't cover up the losses anymore. This is FTX right now.

LUNA started this and FTX is finishing this, so we're good now right?

No. People get caught up in what's on fire right now and the price of assets (specifically how well BTC/ETH is doing). You're looking in the wrong place.

Financial collapses can be hard to predict and take a long time to unfold but I believe the underlying analysis is correct in that the whole system is propped up on fraudulent leverage. There are three things people need to be watching right now: the centralized exchanges, ones that have their own token, and by far the most important – stablecoins.

The first one is simple, centralized exchanges take user funds and gamble them on unsound investments. Could the investments be good? Maybe, without an audit who knows, but a lot of these exchanges wrap up liquidity in incredibly risky positions and with the collapse of tokens these balances sheets are hit hard. What does this have to do with exchange tokens? Centralized exchanges print tokens for one reason – to create credit to then invest in speculation. Now if you're Bitfinex and you're already lending out funds within the exchange and now you're also stretching leverage into a token which value is propped up by your exchange (i.e. your user funds) and those tokens start to crash, what happens? You use your user funds to backstop it. This is what happened to FTX, this is currently what's happening to other exchanges (Binance/Bitfinex). If they have too much leverage on their books – things don't work out so well.

Now, stablecoins. I'm actually fine with you ignoring the above analysis (although evidence of FTX should suggest otherwise). But please for the love of crypto go look into stablecoins – it is a beautiful idea (Maker/DAI) that's turned into a monstrosity by crooks. I'm fine with you ignoring me but go research stablecoins, know what they are, look how they're propagated.

You think, why stablecoins? Who cares about a token that's supposed to be pegged to a dollar? Well, remember that thing about leverage above – what do you think all of that leverage is propped up on? That's right, stablecoins. Now, and this is absolutely fucking wild, who owns the largest stablecoin Tether? That's right, Bitfinex. What stablecoin do these large exchanges (especially Binance) have on their books? That's right, Tether. In who's best interest is it to keep the real price of Tether hidden so that they can leverage up their positions and make wild speculative investments? I think you get where I'm going with this. The entire crypto space is built upon the idea that Tether can be redeemed for actual dollars. That if pressured Tether could return every single cent to every person. But this seems very unlikely. And Tether is everywhere, I used to think Ethereum was safe from Tether but all of the assets (even the good protocols) are propped up with Tether. It has a hold on the entire space.

Let's reword this. I am an exchange, you give me your life savings and I transfer it to Tether, I put your money in investments and since I own the very currency you think you own I can set the price to whatever I want it to be. Now imagine it's not just me but and entire system upon which it's in our collective interest to keep the one currency we all operate on pegged to a dollar. So not only are centralized exchanges operating on a fractional reserve the very stablecoin the system relies on ITSELF IS OPERATING ON A FRACTIONAL RESERVE. That is fucking crazy. That means that even if Tether isn't actually a dollar, which it most likely isnt, we – the exchanges which SHOW YOU THE PRICE OF TETHER – can say it's a dollar. Is this sustainable, can it continue forever? In the wise words of Jordan Belfort "Absolutely fucking not."

No one knows except for the owners of Tether the actual value of Tether and it's reserve ratio – it is absolutely not 1:1 – so what is it? 1:10? 1:1000? 1:10000? What happens if the leverage is too great and Tethers cannot be redeemed? Well, the peg will break and go to zero.

And the peg is already starting to break – the system is already on fire. Please, please get out of the house.