The crypto markets are not having their best days right now. Google searches for is crypto dead are skyrocketing, the market cap of all cryptocurrencies has gone down by 65-70% with most coins down 80%+ from their peak. It was time for me to rethink whether I got caught up in the hype or was there really any substance behind my crypto love.

So, what happened? Terra, 3AC, Celsius, and Liquidations

Crypto is not immune to the macroeconomic background. As inflation across the world started rising and most central banks (including US) started to increase interest rates, this led to increased cost of borrowing money. Hence this led to the flow of money out of risky investments across all risk spectrums and crypto was obviously one of the highest risk assets out there. In spite of that, for most part crypto held up okay. Until early May, BTC stuck to 40K and ETH at 3K. Things looked okay.

Then a pretty risky algorithmic stablecoin Terra de-pegged from it’s $1 price and led to the death of a $40B coin in a matter of days. This must have impacted various parties who had high exposure including 3AC (Three Arrows Capital). Apparently this company had borrowed money from various exchanges and institutions promising a high return which came from Terra’s apparently 20% yield. As 3AC started defaulting, various crypto players started declaring insolvency and pausing withdrawals which led to further bank runs eventually leading to Celsius and Voyager bankruptcy. BlockFi barely survived due to backing from FTX while Nexo seems to be okay (perhaps due to term deposits).

I have previously vouched for Celsius in my blogs, so that was one of the biggest surprise for me as well. I had high 5 figures USD in my Celsius account that for now seem to be gone. That said, my strategy around keeping money in multiple places did save me a little bit with my investments in BlockFi, Nexo surviving. However most of my ETH was in Celsius and now I have to wait to see if I recover anything back. As I said, crypto can be risky so the money lost in Celsius will not impact my life significantly but it’s a lesson for me to do deeper research before keeping money on these platforms.

What happens next? Am I getting out?

No, not really. In terms of the fundamentals – nothing has changed. I do believe the builders are still building in crypto world. If anything, a lot of distracting high risk capital in high risk projects is probably getting flushed out. This will help return us to more normal trend lines and over the next few years we will reclaim our all time highs and go further.

ETH transition to POS coming up

At long last, we have a line of sight into ETH2. Sometime in September, if all goes according to plan, ETH will transition to a proof-of-stake (POS) algorithm. This is the precursor to allowing withdrawals of staked ETH (in a few months) and sharding based scaling (6-18 months I guess). The POS transition will reduce the energy consumption of the network and allow more every-day people to hold and stake ETH. The staking of ETH is expected to generate 3-10% income every year. This might potentially transform Ethereum into a native internet bond but that’s to be seen whether institutions will park their idle funds here to earn 3%+ APY.

DeFi held up, NFT is still useful

For all the centralized crypto banks like BlockFi, Celsius, Voyager, Vauld going bust – all the decentralized finance products held up. These products liquidated loans methodically and handled various high volatility events gracefully. Code is code, you can’t fool or run away, you cannot create uncollateralized loan and you can’t take more risk than the software will allow you to take. People complain about how the whole crypto is transparent theory is not valid given how these crypto lenders went bankrupt. However, it was all the off chain activity that was not visible. For eg: Celsius’s loan and lending activity on DeFi protocols like Aave, Maker were all visible for anyone to see. If more things were on chain, people could have easily assessed the soundness of these companies. We could see in real time what they were doing on chain. And the DeFi protocols got paid first for their loans.

NFT is obviously no longer the hot thing. Prices are down 80-90% but the real world use cases of NFTs for credentials, tickets, badges are still holding up. Activity is down but not dead. In July itself – more than $500M of NFTs were being traded. The concept of on-chain token that can be owned, transferred and used for variety of perks is not going away. NFTs are the better way to do loyalty programs and I do not believe this genie can be put back in the bottle.

Crypto history

While reading The Network State by Balaji Srinivasan, he explained the idea of crypto history. Every ruling state tends to over write the historical record to certain extent. Outside of physical laws, how we represent facts change all the time. Perhaps back in the day UK supported German leadership until WW2 was declared but that fact is no longer visible now. What we know today or the news we see everyday may get changed or distorted in the future.

The idea of publishing activity on the block-chain which is permissionless, open and immutable seems like a very interesting use-case. It’s yet to be seen if it will be adopted but if it is, I think this will be a leap forward in human history. When we can trust the news and events (as they happened on that particular day), it will allow us to understand our evolution better and thus allow faster evolution. In the current world where we are trending towards lower and lower trust, we are probably expending far too much time in trying to verify the information we are consuming and less in making use of it to build.

Crypto science

Another idea from one of the podcasts with Balaji S was science based on blockchain. Imagine if each scientific paper was published on chain, with chain based references to every other paper it references. This will create a clear chain of record of what steps were taken to come to a new piece of knowledge. It will also allow better crediting of source, so you can decide what to trust and what not to better. It will also remove the implicit knowledge issues.

For example, let’s say there’s a paper that said eating banana prevents cancer. Let’s say over the next few years, other papers are published that rely on the banana paper as premise. Let’s say this continues for 20 years with layers upon layers of knowledge (and papers) published that rely on banana -> cancer premise. At that point the original paper of banana -> cancer is refuted. How do we now go about and refute all these other papers, we just do not have a way to solve for that right now. An on chain paper publishing product would allow us to have higher quality science.

Store of value

Given the tumble of BTC from 69K to 19K over a few months, it feels inappropriate to call it a store of value. However we are taking a small slice of time here. Over longer periods, BTC has retained its value or increased it in USD terms. Over perhaps any 2-3 year period BTC has remained stable or gone up. And if you ignore USD for a moment but compare BTC’s value for people who live in less stable parts of the world like Venezuela, Iraq, and even Sri Lanka, BTC has held up a lot better for them than keeping money in their own fiat currencies. As we have interest rates rising in US again (at least for now), this is putting even more stress on emerging market currencies. This has led to weaker currencies everywhere in the world (even in JP the USD-JPY has gone down by 20%+).

You can argue that people of these countries could have bought USD and that would have retained better value. That’s true in theory. However I am sure with currency controls, limited financial access etc the people in the bottom 50-80% of these populations have no access to buy and hold USD.

If the premise of the world becoming increasing volatile and uncertain over the next few years holds up, it’s probably a better idea to hold BTC instead of your own currency (assuming you don’t have access to USD). As the network size of people holding and trusting in BTC increases, the chances of it lasting longer than the USD itself also increases. The biggest networks from before the modern age have still survived – i.e religions. If there is utility built into a network that also gives you a chance to store your wealth, it’s probably an appealing idea.

I don’t think people will move whole sale onto cryptocurrencies. But as the network participation grows, it will become increasingly normalized and more people will come into the network. If at that point a network provides you a lot more utility (like financial products or buying tickets or storing credentials), the chances of you sticking on the network and increasing your participation increases.

So what next for me?

I am continuing to hold. I still believe that ETH is more likely to be at 10K in a few years than 1K. I would probably continue to keep rebuilding my ETH position as and when I can given the Celsius debacle. However my preferred yield mode would move to either liquidity pools on Uniswap or just stake my ETH on the network.

None of this is financial advice. These are just my personal thoughts on why crypto is a risky bet but worth taking in light of where the world is going (in my opinion).