Bitcoin collapse observations

Bitcoin collapse observations

I’m not a crypto investor. I’ve been watching the developments of the last year with some amount of awe, and a lot of ‘told you so’ at the disaster. Cryptocurrencies went from a $3 trillion market cap to just under $1 trillion in the window of Nov 2021 to Jul 2022. That’s a 66% decline in 7 months. Most crypto and Bitcoin investors have seen at least a 50% collapse in value in the first 6 months of 2022. Many others have lost everything in Luna, Terra, and other exchanges that collapsed and went bankrupt.

Some observations:

  1. The pain is real. The top pinned post on Reddit crypto forums quickly became the national suicide prevention line as exchanges went bankrupt and coins collapsed and even went to zero. People that needed their money back for cancer treatment have now lost it all. That’s as real as it gets folks.
  2. Crypto is going through it’s own 1929 market collapse – caused by the same insanely optimistic over-leveraging, over-extension, greed, and lack of regulatory oversight. It turns out a completely unregulated marketplace that can deliver astounding rises can encourage people to invest too much and lack of transparency and risk management can wipe their holdings out overnight. All of this was even predicted.
  3. A shocking number of crypto HODL’ers have a dangerous combination of extremely poor financial literacy and fanatical belief. They often completely ignored risk, dangers, warning signs, and bad exchange policies. Many on their forums seem to lack the ability to do basic due diligence, and understanding of dangerous marketplace behaviors. Instead of informed discussions, forums viciously attack those that expressed the slightest criticism or doubt. As an example during the collapse of Celsius, people were in complete denial that the company was going under even after the bankruptcy happened. Smart investors signaled people about all the warning signs. Yet were viciously attacked as liars, fiat currency fearmongers, and worse. Even after the bankruptcy filing happened the attacks kept coming – even when it was clear their money was gone.
  4. Like the housing market collapse in 2008-2009, unhealthy markets run for longer than you might expect, but the end always comes hard and fast – often before you can get out.
  5. Many crypto promises were lies.
    1. Crypto/Bitcoin has clearly no turned out be a store of value like gold. When push comes to shove, it most closely follows high risk/reward investments like the NASDAQ more than any other market. Like many markets that only rely on promises and have no legal enforcement, it’s only when things turns bad do you learn if they are lying or not. Anyone that denies this fact needs to look at the reality that crypto markets went from $3 trillion valuation to $1 trillion in just a few months and many stable coin collapses happened in just days.
    2. Stable coins were not stable nor safe. Terra went completely to zero and swallowed $60 billion dollars as it flashed to zero in just a few days. Many lied about having funds to back their stakes when the chips were down. Others just backed out of providing promised stakes when they saw the writing on the wall. Most used collateral that was just more crypto – a BASIC over-leveraging failure (much like happened in 1929).
    3. Miners are over-leveraged and facing possible large coin liquidations or bankruptcy. They also are facing huge headwinds with the value of coins dropping over 50%, rapidly increasing power costs, and outright bans (China and New York). It’s unclear how many recent and large mining operations are facing imminent liquidity collapses but it sure appears to be a shocking number.
    4. Small miners are dumping graphics cards because it’s no longer profitable to mine. Each card they bought at top-dollar prices is selling for massive losses. A classic buy-high-sell-low failure. There is also growing evidence the dumping of these cards is seriously impacting sales of new cards and may cause vendors to delay release of next-gen cards.
    5. People didn’t read the fine print and learned exchanges owned their coins (Celsius) so they lost everything when they went under. Exchanges also froze withdrawals of coins and cash before they went under – maximizing customer losses.
    6. Most exchanges used depositor’s coins to make further high-risk loans on crypto. Without regulation, each exchange could decide their own risk profile. This is exactly what caused banking collapses and runs in the 1929 stock market collapse. It’s why we have the FDIC now that ensures deposits up to $250k and regulates banks books to ensure they have proper safe collateral levels and risk profiles.
    7. Many exchanges put their thumbs on the scales and stop trading/withdrawals, freeze trading, stop trading (the list goes on!) when things got bad for them. Things that would land bankers in jail happened time and again. They threw their customers under the bus to eat losses and face margin calls without their money. This all follows the same bank run patterns we had for decades before regulation was put in place and FDIC ensured deposits.
    8. If banks are not your friends, then we’re learning crypto leaders are even worse.
  6. Naïve young investors are getting a rude awakening
    1. Charismatic coin founders that encouraged people to mortgage their homes, leverage any loan they could get their hands on, and put everything they had into crypto turned around and joked, disappeared, lied, went silent, and just shrugged when their investors and coins went to zero. It was sad watching naïve young investors freaking out that their investments were collapsing and foolishly expecting responses and plans via Twitter – even getting arrested showing up on founder’s doorsteps. The very ego-centric folks that gathered investors turned out to be powerless to stop the inevitable falls and even more sleazy than the ‘fiat’ markets they claim to stand against. Most are re-starting their coins and coin operations with the exact same methods.
    2. The promise of ‘community’ was lies. People following crypto leaders and companies are learning that a regulation-free market means there is nothing to keep people honest. It’s very hard to be honest and voluntarily lose millions in a bailout when you don’t have too. Terra still has claimed billions in backing that nobody has been able to find or verify. Either it was a lie, or someone walked away with it.
    3. Crypto companies are coming down hard on ‘woke’ culture that many young people who were attracted to crypto were raised in. Between publishing documents that reject being offended as a valid argument and encouraging employees that disagree to leave.
    4. Scams abound. NFTs and wallets are a prime target of hackers. Which brings us to this development: physical digital wallets.

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