In this episode of Blockworks Macro, Jack Farley talks with the co-founder and partner at JST Capital Scott Freeman about the liquidity in the crypto market, the downfall of FTX, and Digital Currency Group.
Read our notes below to learn more.
Intro
JST Capital is a financial services company that 100% focuses on crypto and digital assets that focuses on quantitative systemic trading for the past 5 years.
Scott started his career as a lawyer and worked at different places including the Federal Reserve Bank of New York.
Introduced to crypto by a friend who asked them to help their exchange with liquidity.
Early Trading in Crypto in 2014 and 2015
Found it difficult at the time with storing private keys and managing wallets.
Onboarding with exchanges was difficult because they wanted to be compliant with the regulation.
Bull and Bear cycles in crypto are not different from what happens with traditional finance.
Crypto in 2020
JST Capital focuses on the volatility, leverage, and liquidity in the market because that will allows them to sell millions of dollars worth of BTC in an efficient way.
Crypto Liquidity Has Declined In 2022
Can find out the liquidity decline by looking at the depth of the order book and trading volume across exchanges.
Important to figure out where to trade than what coin we are trading as a risk because harder to manage if liquidity is bad.
Liquidity diminishes during weekends.
Leverage, Futures, and Options in Crypto
Traders can look at open positions on different exchanges, and can look at the TVL (Total Value Locked) in DeFi ecosystems to understand what coins are people ready to hold to earn yield.
Bitmex innovated perps in crypto early on.
Where Does Yield Come From?
You can lend your coins to protocols where you can earn a % of the fees that the protocol generates.
Users can borrow to long or short a coin, and swap a coin for a different asset while paying a fee to these DeFi protocols.
Was the Fall of Celsius Surprising?
Didn’t know because they don’t work with these companies.
Unfortunate that they went bankrupt and hopefully clients will get some of their money back.
It is a very tough and risky business model, look at BlockFi, Genesis. These are credit businesses involving very volatile and illiquid assets.
Alameda & FTX
Shocked to see how bad FTX situation was because they have known them for years but never borrowed or lent to them.
Lending dollars against a token like FTT is the problem, the lenders think they are protected because they have $100m worth of FTT for a $50m USD loan but the illiquidity of the token will not allow them to liquidate the collateral without taking a big loss.
This happens in TradFi, Enron had borrowed dollars against their stock equity and it caused the collapse of the company.
The Myth of Sam Bankman-Fried
Justin believes SBF did make money off Arbitraging BTC across different exchanges in the world in 2017 and could have made $100s of millions, Alameda was market making but don’t know if they were profitable, and they were farming in DeFi for yield.
It is a red flag if a Quant Shop says they are getting out of their comfort zone and start to think they are better than others.
TODAY’S EDITION IS BROUGHT TO YOU BY LEDGER HARDWARE WALLET
We are all having trust issues with centralised exchanges so we have partnered with the Ledger, who is the industry leader and most trusted vendor in the hardware wallet space.
Using a hardware wallet is the smartest way to secure your assets.
Act now, click the link below and secure your crypto.
Credit Risk on CeFi and CEXs
If FTX took customer funds and lent them to Alameda then what they were doing is illegal.
It is very difficult to know if CEXs are lending out customer funds even if the exchange is compliant with auditors and regulators.
Users shouldn’t keep assets on CeFi if they use it as a bank/custodian.
Cold Storage and DEXs
JST are market makers and traders on DEXs.
They do farming and staking on DeFi with due diligence.
Believes that DeFi is the future but there will be unique risks with DeFi.
General Market Outlook
There could be a lot of potential bankruptcies in the mining space.
If Genesis goes bankrupt, that could have an impact on the market.
We could see a choppy non-volatile market as liquidity is decreasing.
No catalysts to move the market either way till next year.
FED pivoting or slowing down interest rate hikes could be positive news that will allow some people to start taking more risks.
Genesis, Digital Currency Group (DCG), and Grayscale Bitcoin Trust (GBTC)
If there are contagions that could affect GBTC that would be really ugly.
Genesis is one of the biggest institutional players in lending and borrowing in this space, they are also big in trading with options.
Unfortunate to see good players getting hurt because of the inappropriate/criminal activity at FTX.
Would be really shocked if Grayscale doesn’t have the Bitcoins to support GBTC issued.
If Genesis's lending business goes down, Justin hopes that it doesn’t have an effect on Grayscale trust’s GBTC but it is uncertain.
Is There A Silver Lining?
DeFi protocols have held up very well.
They like the fact that the ETH merge went through smoothly.
There’s a lot going on in the NFT space where Intellectual Property is monetized for creators.
Check Out These Important Links
TODAY’S EDITION IS BROUGHT TO YOU BY LEDGER HARDWARE WALLET
We are all having trust issues with centralised exchanges this week so we have partnered with the Ledger, who is the industry leader and most trusted vendor in the hardware wallet space.
Using a hardware wallet is the smartest way to secure your assets.
Act now, click the link below and secure your crypto.