June 13, 2022

🥛 WOW! The crypto crash explained


This weekend had us saying one thing: “Wow”.

And if you don’t wanna talk about prices and what’s going on in crypto right now, just go watch this compilation of Owen Wilson saying “wow” 100 times instead.

Our wow this weekend this wasn’t the good kind of wow, like most of Owen Wilson's.

This was like the wow in Jurassic Park when the guy sees that the raptors are out of their cages.

3 big things are happening:

  1. Crypto Prices Are Crashing (BTC $22k, ETH $1.1k)

  2. Celsius (a big exchange) halted withdrawals for customers

  3. Lots of traders who borrowed money to buy crypto are being margin called

First, Prices: This weekend we saw an absolute bloodbath in crypto markets.

In fact, today, June 13th shall be known as bloody Monday from here on out.

Happy Bloody Monday to you all.

So Bitcoin and ETH are down 20% this weekend (and 70% total this year). If you’re new to crypto, this is scary.

If you’ve been in crypto for a while, it’s still scary….but you’ve seen these down-cycles before.

In fact, I texted Ben two days ago that a crash like this might be coming:

I bought my first coins back in 2013/2014. Since then I’ve seen 2 big crypto crashes:

I have 4 observations from that data:

#1 – The Swings Are Brutal

Seeing your portfolio go down 80%+ is rough. It kind of breaks your brain.

If you are used to buying stocks, bonds, or real estate. You don’t usually see 80%+ swings (up or down). That’s why crypto is so stunning on the way up (holy sh*t, look at the gains!) and on the way down.

Crypto is like a mechanical bull at a bar. It’s all fun and games till the bull throws the drunk girl off and she pukes.

#2 – Long Term Holders Did Well

Looking at the chart, you can see that the “high” of one cycle becomes the “low” of the next.

This trend may not continue, but that’s what it’s been for the short (~10 years) history of crypto. Long-term holders have seen their investments go up (despite big downswings in the middle).

I remember I bought my first big chunk of bitcoin at ~$700. A few weeks later it crashed to $200. I was complaining about it in the office when my buddy Furqan said to me “this is good right? If you still like it, you can buy it now and lower your avg. cost basis to ~$400”. He was right, and I’m glad I did that.

There’s only one problem…

#3 – It’s Really Hard to “Time The Bottom”

It feels like crypto has already “crashed”. But there could be quite a way still to go. I wouldn’t be surprised if things dropped ~25-50% MORE from here.

There is a lot of leverage in the system (people borrow money to buy crypto). And when prices drop, they get a margin called or liquidated. Already $900M+ worth of leverage has been liquidated.

This is painful but healthy. Like getting a root canal.

During good times, the system builds up lots of leverage (people borrowing due to greed) and during bad times, that leverage gets cleaned out. (circle of life, yadda yadda)

All that leverage is going to show one thing…

#4 – Everyone Is A Genius In A Bull Market

“Only when the tide comes in do we see who was swimming naked”

….well the tide came in, and it turns out this is a nude beach.

Tons of projects (eg. Luna), exchanges (Celsius), and investors who looked great last year are suddenly exposed now that the season of “free money raining on fools” is over.

A natural question is…what’s causing the crash?

Nobody ever really knows the answer. Markets are complicated, and there's no single, clear-cut answer to why something goes up or down.

But let’s take a stab at finding a chain of events leading to the price crash:

Inflation (8.3%+ in the US) —> Fed raises interest rates → Stock prices go down → Investors become fearful → They Stop buying risky assets like crypto → Prices go down Investors start selling to de-risk —> Prices go down more

That’s the big picture.

Now let’s inject steroids:

  1. We just had a 10+ year bull run (stocks, crypto, real estate, trading cards…EVERYTHING went up up up)

  2. So lots of people got greedy, and borrowed money to buy more

  3. Now the music stopped, and everyone’s scrambling for a chair

  4. Those who borrowed, now are margin called, or getting liquidated

  5. This puts even more sell pressure, so prices drop faster

And ON TOP OF THAT… we have a few “straws” breaking the camel’s back.

  • Luna collapsed recently (lots of investors lose $$)

  • Yesterday- Celsius (a crypto exchange) announced it is stopping all withdrawals from the exchange. This is something you only do when you’re facing insolvency.

#2 What the hell is going on with Celsius?

Celsius is a big exchange. 1.7M customers and last year reported ~$20B+ in assets under management.

Unfortunately, they mismanaged those assets.

Their game was:

  • A juicy offer (‘deposit your crypto here and earn 6%+ interest!’)

  • Take the customer money, and invest it in DeFi to get higher yield

  • Keep the difference

But their DeFi investing was risky.

  • They had ~$500M+ on Anchor (part of Luna) but apparently got it out before the collapse (in fact, may have triggered the collapse)

  • They had tons of ETH staked on Lido Finance etc..

  • They lost over $100M+ on various hacks that occurred in defi

Long story short – they gambled with customer funds and lost. Then as the overall market declined, lots of people wanted to sell and withdraw…but they didn’t have enough money liquid to pay customers.

First, they came out with a b*llshit thing called “hodl mode” to slow down withdrawals, before fully stopping withdrawals over the weekend to prevent insolvency.

This is awful for customers who trusted Celsius with their money. The money is not lost (yet) but is locked out of reach.

#3 – Borrowers Getting Liquidated

During bull runs (price going up), people get greedy and borrow money to invest moar.

This can be anyone from a random trader taking out margin on an exchange, all the way to MicroStrategy borrowing hundreds of millions via bond sale to buy bitcoin.

They owe money, at an interest rate, and must have underlying collateral.

But when the underlying collateral prices drop by 60-80%, you risk getting “liquidated” (they take your collateral because your loan is underwater).

This is what really drives prices down. Liquidations are FORCED selling of assets. The forced selling drives prices down more, which triggers MORE liquidations. And so on until the leverage is cleaned out of the system.

So, what happens next? 

Predicting these things is hard. It’s like having a migraine. It’s very painful, but you know it doesn’t last forever.

At the end of the day, there are only 2 possible outcomes:

Outcome #1 – Turns out the skeptics were right.

Crypto is fantasy-internet-money. There is no use case. It was all just speculation/gambling.

Result = everything goes to $0 in the next 10 years.

Outcome #2 – Turns out crypto believers are right.

Crypto is a technology breakthrough on par with the internet and mobile phones.

Greed and speculation cause temporary crashes, but if we zoom out in 10 years, crypto will be a much bigger part of the world than it is today.

Result = temporary pain. Prices find their bottom, and in 10 years we laugh about this the same way we talk about the dot com crash or the crypto crashes in 2015 and 2018.

What you believe will dictate what you do.

Personally, we started the Milk Road because we believe crypto (aka, the invention of digital money assets) is going to be a thing.

None of this is financial advice, but here’s my mentality right now:

  1. I’m a Long Term Believer in crypto. I have held coins for 5+ years and plan to hold for 10+ years. So days like this suck, but ultimately don’t matter because I’m not buying/selling daily.

  2. Mental Health comes 1st: don’t spend all day doom-scrolling twitter. Get outside. Spend time with family. If you’re going to sell or buy, ok go ahead and do it. But if you’re planning to hold, there’s no benefit to constantly checking twitter and price charts.

  3. I’ve Seen Crashes Before. In hindsight, they turned out to be good buying opportunities. But like I said, timing the bottom is unpredictable, and it can take 12+ months for prices to recover.

Alright, that’s all for today, ANDplease for the love of God, stop refreshing prices!


See ya tomorrow!

Shaan aka “Elon’s chocolate milk” & Ben "2% Milk" Levy

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.