Hi Everyone. I apologize for the 2 week gap from my last post. I will likely not be making 8 paid posts this month, and so in keeping with my policy, everyone who is a paid monthly or annual subscriber (or has a comped subscription) as of today is being gifted 1 free month.
Some of you expressed concern for my absence here, or on social media and I appreciate you all reaching out, it means a lot that you care. Have no fear. I was completely unaffected by the FTX collapse. You’ll remember that my advice has been to take custody of your tokens, I follow my own advice, and as such am fine. I hope that you all were fine as well. The only impact to me is the price of assets that I have no plans to sell anytime soon going down. While I’d be lying if I said this has no psychological impact on me (it does), it however has no real impact on my day to day life, and to an extent, events like this are expected until the macro shifts.
Table of Contents
Market Schizophrenia
FTX and Solana
Conclusion
Internal References
1. Market Schizophrenia
One of the primary mistakes new traders make is to overly focus on fundamentals and technicals while ignoring their own self-assessment and emotional analysis. The primary mistake made by amateur traders is to fall prey to market narratives and trend chasing as they try to tap in to the collective unconscious id that is captured in a chart.
In my last post, I spoke about the stories and narratives that we tell ourselves, and the labels we give ourselves and how they can propel us into toxic behaviors as we grow attached to these labels. But attempts to avoid this can create an entirely different problem.
Did you know that one of the defining features of schizophrenia is that those diagnosed are often incapable of constructing a narrative about their lives? If you are neurotypical, you’re going to be incapable of exhibiting purely schizophrenic behavior over the long term. You might be able to manage it for a little while, but your brain can’t help itself but to tell stories about what is going on.
In fact, the stories your brain unconsciously tells itself are quite helpful and protective. There are many things in this world that it’s better that you simply don’t see, or don’t notice.
The narrative that you tell yourself about your life has you focusing on only a few things in your surroundings. Selective attention, you could say. You’re busy counting how many times the ball is being passed while not noticing the man in the gorilla costume walking through center stage. Consider, Schizophrenics typically lack the ability to explain things in narrative or tell stories about the things they experience. This also can cause them to be unable to focus. If you can’t tell yourself what it is you are doing and why, your attention is broad, looking at everything at once and giving it all the same importance in your mind. A schizophrenic would see the gorilla above despite being told to count how many times the ball was passed because their brain doesn’t tell them to ignore it. What for you might be just an innocuous day-dream, memory, or internal dialogue, can for the schizophrenic have the full force and impact as a real event. Your brain’s ability to sort these things into their correct place within your mind stops you from freaking out or ending up in an institution (or homeless if you’re american). You don’t have to tell yourself that the flying jet ski that has no brakes was actually just a dream symbolizing your feelings of being out of control with a lot to lose. When you wake up, your brain already does that without any input from you, and it’s why you often find yourself forgetting your dreams less than an hour after waking up. Your brain gives it far less importance and the contents of your dream often won’t make it into your working memory without considerable effort from you (a dream journal you write in upon waking).
To a schizophrenic, this event is never sorted in to it’s proper place. The average human hallucinates quite a bit on a regular basis. In fact, it’s a rare person who has no minds eye and no ability to visualize an object in their mind. Most of us can do this and do it often on a regular basis even while our eyes are open to the point that we consider it mundane, and only when it’s not working correctly is any alarm expressed.
A market becomes schizophrenic when it can’t tell proper stories to itself about what’s happening and why. Sometimes participants get burnt out on narrative. Sometimes they are super stoic traders trying to simply get back to fundamentals after being burned 1, 2, 3, or more times in the same year trading narrative. Sometimes they’re just undiagnosed schizophrenics who have ran up $300,000 profit trading crypto and are trying to explain disjointed market concepts to you in the uBer as they drive you to the airport.
The line that you as a trader or investor want to skate is that line halfway to schizophrenia. Not everything needs a story. Your brain should be able to take information/news and sort it to where it belongs so as to be conducive for you to engage in rational action. You should know what it is you’re looking for and need to take note of and what you can toss away with little memory. Tune your brain to one thing and one thing only. We are waiting for a fed pivot. We are not trying to pre-trade rumors about a fed pivot. We are not giving any credence to financial rags like the WSJ, NYT, FT, or CNBC when they state they’ve heard something from an insider. We are watching the press conferences from the central banks ourselves. Treat everything else like the gorilla walking among the kids passing the ball back and forth. You can treat me and this blog like an anti-psychotic medication you take whenever you start thinking that maybe a pivot is coming or that the tea leaves or showing one on the way. Nope. It’s not coming until it is. And the central bank and treasury benefit quite a bit from traders falling for this and supplying liquidity to the markets by trying to front-run the fed. Schizophrenic traders are a regulators best friend.
You should be able to live a life outside of and away from the markets for a while without feeling or thinking any kind of way. In fact, if you fell into a coma today and woke up 5 years from now, your existing positions and holdings should be such that it wouldn’t hurt too bad to be away for that long. If that’s not the case, you need to think about how to achieve that.
It’s not a coincidence that some of the greatest contributions to Mathematics and Economics have come from people on the cusp of schizophrenia. When we lose the ability to tell ourselves stories, we also lose the selective blindness of a brain that is socialized to fool you, the schizophrenic sees the gorilla his first time, but for you or me, we don’t see the gorilla until we are told it is there. But if you lose too much of your storytelling ability you’ll become unhinged.
That is the line that you must dance on, and since you are neither schizophrenic, nor pure human animal you can’t last too long in this space without needing to recharge. You can’t tap into the anima of pre-schizophrenia for too long without singeing the nerves you use to experience the social world.
But beware, do not think that you now understand what Schizophrenia is. When categorizing mental illness, the term schizophrenia is as broad as the term reptile when describing animals. An alligator, a gecko and a snake are all reptiles, despite being wildly different manifestations within the field of taxonomy. This pop-psych masquerading as market depth just to make a point about narratives.
2. FTX and Solana
I’ll be completely honest with you all. I saw the FTX story but have simply not had the time over the past 2 weeks to do enough due diligence to give you something worth reading that you can’t find somewhere else. My main group chat is ~2k unread messages deep in just the past 3 days, probably near 6,000 since this started.
I simply can’t keep up with the details fast enough, and have had some real life events pulling my attention away. This is a major contagion event. FTX (and Alameda) is down for good and maybe $2b or more of user funds are “lost.” BlockFi is going down, potentially crypto.com is going down, Gemini had a withdrawal outage etc. etc. etc. Solana price has finally collapsed irreversibly as has been warned about extensively all year here.
In the Solana example above, the network is incredibly fast, and fairly secure, but it is not decentralized. Making the network a ticking time bomb as it can become unusable at times when users need it to be there.
Ultimately, FTX had a very similar problems on their balance sheet as Celsius and when this was leaked to Coindesk at the start of the month. Binance’s CZ who held $500m of FTX’s $FTT token announced they were going to exit their position (which was smart). FTX’s balance sheet simply had no liquidity within it to cover it’s liabilities, and the most liquidity they had was in their VC crap products, Solana and Aptos. So when they had to try and patch holes in their balance sheet and find liquidity, this came at the expense of Solana.
You may remember back in June, that Solana had a “decentralized” lending platform called Solend that was being manipulated by VC’s to protect the $SOL price from a major liquidation event. Well, the June decision to take over the lending platform should have rang major alarm bells, even though that was nowhere near the first warning sign for that chain, but the downside from that event are now occurring.
Initially last week, the platform blamed network congestion on the platforms inability to liquidate the whale account, but the reality is that the platform lacked the liquidity to do it. So they were liquidating the whale account in pieces as they got access to liquidity. Solana (and Aptos) were mostly supported by VC’s; Multicoin Capital, Alameda, a16z, etc. Considering how unstable the network is due to it’s poor architecture and construction, you have to wonder how Solana will perform in the future without it’s VC investors. How many more network outages will there be until one day the network doesn’t come back?
There is a legit community of users on Solana, but they’re trapped on a blockchain with significant architectural problems that was previously being supported by VC’s. Please note that both the $SOL and $SRM that was on FTX’s balance sheet are both L1 (SOL) and L2 (SRM) on the Solana network. That is (was) $3B of marketcap that was just held by FTX, and they had an interest in protecting their bags. Now that they have dumped/hacked away their bags, the chain will be left without one of its key investors. Of course, there are other VC’s involved in Solana, but how many of them have dumped all or a part of their bags?
The VC business model is centered around creating clear exits. If you want to invest alongside of them, well sure you can do so for the short run, but their SAFT’s (Simple Agreement for Future Tokens) typically have a vesting period, after which they are free to sell. We’ve already covered tracking VC allocations and activity before, the strategy is still the same. But please keep in mind that we are building a cathedral here, while VC’s would rather shit out pre-manufactured homes with endemic problems built in to them and token release runways with inflation levels that put the US government to shame. The projects they create can scarcely even be called crypto at all, but many people are here just to earn USD or whatever their local currency is. While earning money is great, and is a side affect of efficient markets, that is not why we’re here. We’re here to build a superior currency and financial network to the existing fiat system so as to create efficient stores of value that can be readily exchanged and deployed with as few middlemen as possible taking their cut. If we succeed, we will become rich by definition. But there are a lot of people in this space, who’s vision is to simply be bricklayers to feed their families, and unlike the bricklayer who at least contributes to the end goal, these people are more of leeches draining value and slowing the realization of our actual end goal.
Now, if we turn back to Solana for a second, we do need to remember that the Solana Foundation itself is a separate legal entity based in Zug, Switzerland. It has a treasury, employees, and it’s own developers devoted to keeping the network running. It was backed by several other VC’s, not just FTX and Alameda. You can hear it directly from the horse’s mouth what their exposure was to this in a blog post they put out last week.
Their exposure is as follows
$1m in cash/cash equivalents on FTX (they claim this is less than 1% of their total cash on hand)
3.24m shares of FTX
3.43m FTT Tokens
134.54m SRM tokens
If we presume they are being relatively truthful, they maybe have ~$100m in cash on hand to pay for their operating costs. This is probably a slight underestimate as they raised $314m in 2021 in their last round of capital raises. The foundation has significant expenditures and no clear source of income as far as I know. According to public data about their US employees, they have 175 employees in San Francisco making an average of $41k a year (these are literal poverty wages in SF).
This puts their gross expenditure on salaries alone at $7m a year, but please remember an employer spends a lot more on employees than just the salary, there is payroll tax, insurance, bonuses for mid-level and above, overhead costs for compliance requirements from the government and we can safely assume their actual cost on employees is likely double. So lets say $15m a year. Not to mention the Solana network is heavily centralized and the majority of transactions run through just 4 validators that the foundation controls and pays for. Running an entire blockchain network isn’t cheap. I don’t know how much it costs and won’t speculate, but keep this in your mind. They have real estate costs in both SF and in Switzerland (not cheap), they have legal expenditures in both countries, they have rigorous financial reporting guidelines to follow which are not cheap to comply with both to maintain their non-profit status in Switzerland and for reporting requirements to the entities that funded them in their capital raises. How much might their gross annual expenses be? Probably fair to say $20m or more a year, and I suspect this last capital raise was to support expansion of staff, the network, the grant program they run, and many other smaller expenses I didn’t bother capturing here. But with the price of $SOL falling so far and with little expectation for it to recover any time soon, the amount of activity they can fund by selling the $SOL token has to be down quite a bit.
So what are they to do? Taking considerations for how much cash on hand they probably actually have, and their run rate of expenses, and the loss of balance sheet assets they might have previously counted on (FTT, FTX stock, SRM tokens, etc.), I suspect they will have to make a decision in a year or two for another funding raise but in the meantime will be hopefully waiting to see if they can bounce back in the next bull market… but thats unlikely. In order to make a bull run coins must either have hype or legit use cases. You’ll remember that the ETH 2.0 update essentially kills the use case for Solana. And tokens only get 1 hype cycle. Just one bull market to take the most advantage of hype gains. Solana already had it’s cycle in 2021. It won’t get another. They’ll have to decide to have another fund raise (for a lot less money), and will have to either figure out how to cut costs, or form an income stream. This is not a decentralized blockchain like Bitcoin which has neither costs nor income. It’s a company that will have to figure out how to stay in operation. As much as I will never help the SEC to prosecute this industry, it’s important to recognize that they’re right when it comes to their attempt to treat crypto-currencies as Securities. They are securities, posing as crypto-currencies. Bitcoin cannot be stopped even if people wanted to do so, it exists in the ether completely beyond the physical plane. There is no centralized entity keeping it running, no staff, no income, no nothing. Solana and quite a few other blockchains are just securities with grifters trying to cash in on people interested in the concept of blockchain. Some of these have legit use cases. Some of these are even working towards becoming decentralized. But don’t fool yourself here. Bitcoin is the rare asset among these that is sufficiently decentralized.
Don’t fall for the psyop brothers.
3. Conclusion
FTX is dead, and SBF left a backdoor in his centralized exchange that he used to drain the platform of assets after declaring bankruptcy. Upwards of $2b in user funds were stolen. Alameda is likely dead as well. BlockFi is dead. Crypto.com will likely exit stage left in a few months as well. Gemini and others had a moment of shakiness as well.
The conclusion you need to hold in your mind is unchanged. Take custody of your crypto. These centralized platforms all have a ticking clock on them. They will either go bankrupt, steal your assets, or will last long enough to be regulated to the point where you won’t be able to withdraw your assets or meaningfully participate in the crypto economy.
We’ll pour one out for all of those people who lost money during this time. But consider this as well. FTX sold bitcoin and other assets they never had and never took custody of. Genuine demand for bitcoin was shuffled away from buying bitcoin and impacting market price and was instead buying bitcoin that never existed. The gold bugs will make very similar arguments about buying paper gold. The actual amount of bitcoin, ethereum, and other assets in circulation that people want is far less than these entities are representing as being in circulation.
Crypto is still the primary asset to acquire once the secular market bottom is reached. But understand that you are making a bet on one thing and one thing only. Ignore the VC’s, the quick pump projects, the valueless L2’s being pumped out by capital investors trying to show a profit in a 3 year vesting period and instead remember this. We are building a cathedral. The investment is banking on the invention, distribution, and adoption of digital money that is under no individual or government thumb. The goal is decentralization. The goal is escaping the imposed inflation from legislators who are not even worthy to lick your feet clean. The bet that we are making is on the creation and succesful adoption of this. Turn your back to the fumes, and face the fire my friends.
4. Internal References
If you’re new and have a question, please read the FAQ post first.
If you wish to search through my entire substack, please refer to this guide post.
Please refer to Definitions page for any terms or abbreviations that I use that you don’t understand. If a term is missing, please let me know.
I’ve created a twitter account specifically for this substack. Will just be harassing people and quoting my substack in the public sphere. Hope to be joining twitter spaces in time from that account as well.
Substack’s Android app has finally been released. I must say that it is a major improvement in terms of helping me find the content I’ve subscribed too. I rarely scroll through my email inbox. Suggest giving it a try if you are one of the chosen ones with green bubble text like me.
Welcome back! Interested to see if you have more to say on the FTX collapse. Particularly the allegations that it was used as a WEF partner to launder money to the democratic party, via Ukraine. (I feel schizo just typing that)
Glad you’re back bro! Was confident you weren’t Bourdain’d but still, your cool and collected presence was deff missed 🙏