“It's only when the tide goes out that you learn who's been swimming naked.”
Quoting Mr. Buffett is often cliché, but he perfectly sums up the current forces driving the crypto market lower. The extreme transparency the blockchain offers into company positioning has exposed a significant player’s excessive risk-taking and asset-liability mismatches, forcing asset sales to meet depositors’ redemptions, and adding fuel to an already blazing fire started by a 40-year high inflation print, QT, geopolitics, war, and an everlasting pandemic. What a time to be alive… and what a time to begin smartly allocating.
As a backdrop, it is important to understand the company Celsius, a centralized crypto-bank with over a million depositors and borrowers on the platform that uses crypto deposits to make loans. Users flocked to the platform for high yield on their deposits, looking past the terms and conditions that basically state “if we lose your money, you have no claims or rights.”
This was a great business model in a bull market where overcollateralized loans had near-zero defaults, and depositors were generally unquestioning on the source of high yields on their assets, including stablecoins. However, thanks to some excellent blockchain sleuthing, it became quite clear that Celsius would be unable to meet redemptions at scale given the size of their more illiquid positions if we saw a downturn. Enter the downturn.
We’ll spare your inbox of all the blockchain-level details on Celsius’ positioning in “staked ETH” collateral and loans, but if interested our friend and brilliant trader “Crypto Joe” lays out all the details in this Twitter thread that even caught Mark Cuban’s attention as essential crypto reading. The main takeaways, however, are that Celsius has now suspended customer withdrawals and is liquidating assets to pay down debt where possible. The largest sources of funds are bitcoin, Ethereum, and staked Ethereum as seen in Celsius’ wallet. Thanks to blockchain transparency, we can showcase one large outstanding position of Celsius that has been topped up with bitcoin collateral multiple times today in order to avoid liquidation.
So what can be learned from this? We see this extreme stress further validating the benefits of blockchain-based economic activity. Similar to institutions leading up to the financial crisis 14 years ago, we have a centralized financial services company that took on excessive risk in ways hidden from the general public. The difference here is the balance sheet and exact positions are viewable by anyone who can read the blockchain explorer, in real time, enabling decisions by firms like ours. Additionally, this situation gives validity to the notion of the decentralized application of finance, where coded contracts are law and decisions around corporate treasury allocation are made by tokenholders in a transparent manner. Ironically, the loan screenshotted above is actually executed on such a platform, MakerDAO. There have been no crypto bailouts, miners continue to secure networks at an increasing rate (see figure 3), developers continue to build new applications, and valuations have only become more attractive.
We mentioned in our Motus Missives on June 6th we believe there is still excess to be shaken out of the crypto market, but that projects with increasing revenues that accrue to tokenholders will be rewarded in the long term and we are very excited to be able to patiently accumulate these positions at these levels.
Please don’t hesitate to reach out with questions or feedback.
Motus Capital Management
Past performance is not indicative of future results. This communication does not constitute an offer to sell or solicitation of an offer to buy the Interests in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation in such jurisdiction. This communication is being provided solely as a high-level overview and is not intended to be relied on for the terms of any offering.