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Crypto Has a Fraud Problem

The most important thing you should gleen from this article is that, what’s happening in crypto today has nothing to do with the asset class, and it has everything to do with bad actors taking advantage of the lack of regulation in offshore exchanges.

I think the people that really get it understand that this isn’t a crypto problem, this is a fraud problem. In any industry you’ll have bad actors that can cause enormous amounts of damage. So there’s no real defense against bad actors. You can have all the regulation in the world, but it’s very difficult to prevent a bad actor if he’s a good enough liar.

So how can regulation help crypto exchanges? While again, we’re talking about crypto exchanges, not crypto itself, I do think that crypto exchanges should be regulated. And FTX is a prime example why they should be regulated.

The beautiful thing about blockchain assets is that you can track every asset that came in and every asset that went out, so long as that information is publicly available. And it should be made publicly available by exchanges. So I think some good regulatory change will occur out of this damage that’s raging through the market right now.

The Safest Way to Hold Your Coins

Now, for most of us, this really shouldn’t be an issue because, as we’ve always said, you should self-custody. If you can’t self-custody, then look at U.S. exchanges. Up until recently, that was Kraken, Coinbase, and Gemini.

Now Genesis (not Gemini) is essentially on the verge of bankruptcy. Genesis is a lending firm within crypto. It originates trading and has a trading and lending business within crypto. And Genesis was being used by Gemini in order to handle its Earn program.

So what would happen is, people would open up an account with Gemini, they’d buy some ETH or some BTC or something else, and then Gemini would say, “OK, if you give this to us and let us lend it out, we’ll provide a return for you.” And Gemini used Genesis to do that. Now Genesis is essentially out of business. Gemini has had to shut down its Earn program, and people can’t pull their money out of that Earn program.

So what happens if Genesis does go out of business, and then all that money gets vaporized on Gemini’s side? How is Gemini going to fill that gap? Is it just going to tell its clients they’ve got to eat the losses? Is it then going to try to pay for the losses? How much more is going on in Gemini that we don’t know about?

Are Coinbase and Kraken safe? Well, “safe” is a relative term. Now, the “safest” way to hold your coins is if you hold them in your hands personally. But if you’re not willing to self-custody your coins, then I would say the two safest choices – and again, that’s on a relative basis, with self-custody being the safest way to hold them – would be Kraken and Coinbase… not Binance.

Binance is an offshore exchange. We don’t know what it’s financials look like. The beautiful thing about this asset is that we can hold it ourselves. I understand there are some assets that we can’t hold because of wallets and things like that. In that instance, you’re going to have to rely on third parties. But just make sure that it’s not money you can’t afford to lose.

What Happens if Genesis Goes Bankrupt

Now, what happens if Genesis does go bankrupt? Genesis is part of Digital Currency Group (DCG), which also owns Grayscale. And Grayscale has two famous products: It has GBTC, which is essentially a bitcoin trust. For many years it was the only way that you could access bitcoin through the “public” markets. And it has another trust called ETHE, which is Ethereum.

Both of those trusts are trading close to a 50% discount to the actual BTC and ETH they own. So for every dollar’s worth of bitcoin in GBTC, the market’s only giving it a value of 50 cents. Why is that? Well, that is a discount, because there’s no way to redeem the trust assets for actual bitcoin. That would change should GBTC and ETHE be approved for conversion into an ETF, but the SEC has been standing in the way of that reality.

Now, Coinbase has said the bitcoin is there. DCG won’t provide the cryptographic proof that the bitcoin is there. So the bitcoin that’s held in the GBTC trust is held by Coinbase Custody, which is a separate New York-licensed trust company. So what you have to do if you own GBTC or ETHE or any of these products is place your trust in the fact that Coinbase isn’t lying, that DCG isn’t lying, and that the New York-based trust company that holds these assets (or at least we’re being told it holds these assets) isn’t lying.

Now, if a New York trust company is found to be lying, we’ve got bigger problems than what we’re addressing in this article, because trillions of dollars are held by New York trust companies. So there’s no guaranteed way for us to know that those coins are there until it provides some cryptographic proof.

For right now, we have to rely on statements from Coinbase and DCG. Now, that promise is only as good as the honesty of the people within those respective businesses. And given the gross violation of trust that has taken place throughout this industry over the last year, I can’t say with certainty that what they’re saying is true. And there’s really nothing I can do about that until the facts come out.

What this means is, Genesis could go bankrupt. DCG could go bankrupt. I don’t care what DCG says, it could go bankrupt. And the issue there with DCG is it has a lot of assets it owns – I believe 10% of the GBTC trust itself, and it owns a ton of ETHE.

So in a bankruptcy situation, what you would see if DCG does go bankrupt is its assets would have to be sold. And every trader on the Street knows that if it has to sell, it can’t take its time and sell – it has to sell. This is why you’re seeing a 50% discount to NAV, because the market knows the potentiality for a forced seller to come into the market is very high. And if there’s a forced seller in the market, you don’t help that forced seller. You just bring the price down as low as you can, and you scoop it up as low as you can.

So if that’s the case, GBTC will get hit again. It could go down another 50% relative to its NAV, and bitcoin could just stay at the same price. Should that happen, it would certainly be unpleasant to sit through. But it’s that final washout, that flushing of the financial toilet, that will be needed in order to finally get all this crap out of the system – all this leveraged side deal, backdoor dealing BS that’s really been plaguing this space.

Crypto Doesn’t Need a Savior

So the upside of this is that once this is done, anybody who wants to be a player in the exchange business is going to have to show a level of transparency that’s never existed before on Wall Street. As ugly as things look right now, this ultimately will strengthen the case for crypto. And it will ultimately strengthen the infrastructure, because the counter-parties in this space just won’t trust anybody anymore unless you’re 100% transparent with what you have.

Without cryptographic proofs on the blockchain, people just aren’t going to trade with you. They’re not even going to put money with you. So this market will get educated to the point where blatantly bad actors just won’t be able to operate. But that’s a couple years away.

So what we’ve found is that virtually everyone in this space with these centralized products are liars. I mean, just straight-up fraudulent liars. Why should we believe that Tether is any different? I’ve never believed in Tether. I can’t understand how so many tens of billions of dollars could be put behind something where there’s just absolutely no proof of what’s behind it. So I’m concerned about Tether, and I’m concerned about Binance.

This is the beauty of this asset class. It is a trustless network where the participants don’t have to trust each other. All they have to do is rely on these cryptographic proofs and the industry. You’ve got crypto, the asset, and you’ve got crypto, the industry. Well, crypto, the industry, is just this far away from the core tenants of what makes crypto amazing. All it’s done is copy everything from the traditional financial system and everything from centralized servers, that whole model, and taken it to the crypto space.

And we’ve seen it doesn’t work because the traditional financial system has the same amount of fraud that crypto has. It has the same amount of people trying to be kings of the market. The only reason why it works is you have the Federal Reserve. So when it blows up, the Federal Reserve comes in and cleans up the mess. Without the Federal Reserve, the global banking system couldn’t work under its current model because it’s just too easy to commit fraud that ends up in massive financial disaster.

So that’s the ugly truth of why you need the Federal Reserve. It’s a check against moral hazard. Many would say, myself included, that it actually encourages moral hazard. The beauty of the bitcoin network is that moral hazard isn’t an issue if you rely on the tools that the bitcoin network gives you. And what are those tools? It gives you cryptographic proof to prove that you own what you say you own. And it also gives you the ability to custody your own assets so you don’t have to rely on a third party.

This is the beauty of Satoshi Nakamoto’s vision. And this is the beauty of the bitcoin network: It doesn’t have a CEO, it doesn’t have a spokesperson, it doesn’t have a boss, and it doesn’t have a board of directors because it doesn’t need them.

Things Are Going to Get Worse

So where does that leave us? It leaves us dealing with an enormous amount of volatility. And it’s not done. We’re likely going lower. I previously said we’re going somewhere between $12,000 to $15,000, and I still stand by that. If DCG goes under, Genesis goes under, bitcoin could drop to $10,000.

It’s likely going to get a lot uglier before it gets better. And that’s the truth. So what do you have to do? Get your coins off exchanges and self-custody – I’ll always say that. I’m continuing to dollar cost average. If we see $12,000, if we see $10,000, I’ll be buying more. Make sure that’s relevant for you. If you’re not comfortable doing that, then don’t do that.

Bitcoin will survive this nightmare scenario that’s being unleashed upon the sector, just like it survived when Mt. Gox went under. At the time Mt. Gox was housing something like 70% of all bitcoin, so the Mt. Gox blow-up was far worse than what we’re going through right now.

This, again, is a reminder that we can’t rely on centralized third parties. Sure, sometimes you’ve got to move coins to exchanges or move money to exchanges. Do your transaction, then take your money off, take your coins off. Just use these exchanges to do transactions. Don’t keep your money on them because they can’t be trusted. It’s as simple as that.

I wouldn’t be surprised to see if DCG went bankrupt or right before it went bankrupt, if BlackRock came in and just bought all the assets for pennies on the dollar. Now that would be a move I could see Larry Fink at BlackRock pulling off.

And what I’m seeing here is that the big institutional guys, the big banks, they’ve seen this all before. So they’re taking a backseat. They’re, like, “All right, let’s see how this plays out. Let’s see how this washes out.” Again, I wouldn’t be shocked to see them coming in and just starting to buy up these assets on the cheap. And you’ll start seeing this real institutionalization of the assets, which has other problems attached to it… But we’ll get into that in another blog post.

Again, that’s very encouraging to see. It suggests that once we get through this period, you’ll see a greater professionalization of the space and a broadening of overall adoption. And if that’s true, and I believe it is, that suggests much, much higher prices in the future. But between now and then, it’s going to feel like hell on earth for us. It is not going to be pleasant.

People will continue to crap on crypto for the next 12 months. You’re going to be reading so many negative articles on crypto. You’re going to be reading so many experts coming out saying, you know, the crypto dream is dead; crypto’s over. That’s just the nature of bear markets, but it will be more amplified this time around.

And you? You don’t have to do anything. If you’ve got extra cash and you can put it to work and buy more bitcoin on down days, go ahead and do that. If you don’t, then just continue on with your life, continue on with your work, continue on with your career, continue spending time with your family, and bitcoin will sort itself out over time.

By the time we go into the next halving, the stage will be set for us to hit new highs. And that’s the cycle of bitcoin. It brings new people in, goes to crazy heights, crashes to depths nobody would ever imagine, and people sell. And then the whole process starts all over again. So you’ve really got to believe in bitcoin and its long-term value because if you’re one foot in, one foot out, you don’t survive. You just get ripped in half by bitcoin. It’s just the nature of this asset.

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