Cryptocurrency: No One Is Coming To Save You or Crypto, And That's Ok

grarpamp grarpamp at
Thu Jun 2 01:40:10 PDT 2022

No One Is Coming To Save You Or Crypto

by Scott Hill via

The collapse of the Terra ecosystem in May rocked the Crypto world.
The Luna token dropped to near zero from a prior high over $100. The
stablecoin UST was trading down as much as half from its peg of one

This was the nightmare scenario.

Over $40 billion of market cap was wiped out over the space of a week.
Both retail investors and Crypto funds got caught in the collapse.
Such a widespread collapse of a reasonably credible project hadn’t
previously occurred in Crypto. The closest comparisons are Bitconnect
in 2018, which was flagged as a scam by everyone in the industry, and
Mt Gox in 2014, which occurred in the early days of the industry when
the risk of exchange failures and exit scams was front of mind.

In August last year, Senator Elizabeth Warren warned that a “run on
Crypto” might need a Federal bailout citing a lack of basic consumer
protections afforded to investors in the traditional asset space.

What we saw last month was a run on Crypto. We saw what can happen
with no government backstop and no quality guarantees. We saw retail
investors wiped out. We saw Crypto funds taking heavy losses.

But there was no government bailout.

That’s not to say that government involvement in regulating Crypto
assets would be a good thing. It almost certainly would not be. As
Ronald Reagan said there is no more terrifying phrase than “I’m from
the government, and I’m here to help.” It’s simply important to
remember that there is no oversight body ensuring that Crypto
protocols work and that tokens maintain value.

Even the Korean government, whose citizens were much more heavily
invested in Luna than their stateside counterparts, didn’t flinch at
the loss of wealth. They’re pursuing Luna’s founder Do Kwon and
looking to do everything from freezing assets to holding a
parliamentary hearing. The Korean government even resurrected their
elite financial crimes division, nicknamed the Grim Reapers, to
investigate Kwon and Terraform Labs.

But there was no government bailout. Retail investors will not be made whole.

Nothing in Crypto markets broke. Losses were taken and the market moved on.

Self Funded Bailout

However, there was something that looked a lot like a bailout slightly
earlier in the Luna timeline.

In February, the Luna Foundation Guard, the entity which was created
to hold a Bitcoin reserve fund for the Luna protocol, raised $1B from
investors including Jump Crypto and Three Arrows Capital. These funds
were used to bolster the Bitcoin reserves with the intention of using
them to defend the stablecoin peg.

In retrospect it’s pretty clear that this fundraise represented large
Crypto funds bailing out Luna ahead of time.

The failing protocol also looked for an additional $1B in bailout
funds from Crypto industry heavy hitters as the collapse was occuring.
These industry bailouts have become reasonably common recently. Jump
Crypto bailed out the Wormhole bridge to the tune of $320M after a
hack drained its funds in February.

We need to pay attention to what is going on here.

Firstly, governments are uninterested in bailing out retail investors
who lose money in Crypto collapses. Do not expect the same level of
investor protection and compensation in a Crypto industry failure as
you would from a stock exchange failure or a bank collapse. This
sometimes hamfisted government financial protection often does more
harm than good as was the case with the Cypress bank failures and IMF
global. But it’s important to remember that in Crypto the government
isn’t coming to save you. Nor would we want them to attempt to do so.

Secondly, the industry will intervene if it’s in their own interests.
Jump Crypto is not interested in protecting your investment, but they
will defend their investment.

But Jump won’t throw good money after bad. They weren’t willing to
bail out Luna a second time.

Jump Crypto is not the Fed or the US Government. They can’t print
infinite money to save the system.
Bearer Assets are Different

Crypto assets are fundamentally different to modern stocks or bonds.
They are bearer assets. You are in charge of their safe custody and
how you manage that is up to you. You aren’t shepherded into a
government approved asset custody scheme like you are in traditional

There is no FDIC insurance if an exchange disappears overnight. Your
assets are gone. There is no customer service department that can
recover your private keys if you lose them. If your Bored Apes get
stolen, the Apes are gone.

The catchphrase, “not your keys, not your coins,” is just as
applicable now as it has ever been.

As we enter a downturn where the financial stability of entities in
the Crypto industry will be tested, it’s important to understand which
risks you are taking. Decide who you trust to custody your assets and
ensure you understand how your security solutions work.

If you have no security plan for your digital assets, you have no security.

It’s quite an odd adjustment to make as we’ve all only ever lived in a
world where your bank, your government and your exchange have layers
of security and guarantees to protect your assets. But it’s a crucial
difference to understand. Literally no one in the world cares if you
lose your Bitcoin so it’s up to you to ensure you have the ability to
protect your assets.

If you haven’t done it already, it’s time to review your security. Get
a hardware wallet and learn how to use it safely. Decide how you want
to spread your assets among exchanges. Make active choices about your
risk and your security rather than leaving it to chance.

Do Your Own Research

The other thing that the Luna collapse teaches us is that knowing what
you’re invested in is more important than ever. Luna was actively
promoted and suggested by several big industry experts. I don’t call
them out to throw rocks or to say, “I told you so.” They are all
financial product salesmen of one type or another. They get things
wrong, that’s to be expected. It happens all the time and is
completely normal.

My point is that these people are used as a source of guidance and
advice by the investing public. They are clearly good resources over
the longer term. But we’re no longer in the sort of asset market where
you can throw a dart at the wall and make money. The experts are
getting things wrong. It’s more important than ever to understand what
you are invested in and why. Form your own conclusions from a number
of sources. Seek to understand, rather than blindly follow.

If you can’t explain the difference between Luna’s tokenomics and
Bitcoin’s tokenomics, then you need to do more research.

You don’t have to become an expert or understand everything, but you
do need to take responsibility for your own investment decisions and
understand why you are making them. No one else cares if you lose
money by making bad decisions and taking too much risk.

In Crypto, there is no stock exchange listing board making sure that
assets are safe for the public or that the issuance of tokens is done
in a reasonable way. In Crypto, if you don’t understand how many
protocol tokens exist today and how many will exist next year, then
it’s important to recognize that and take your risk accordingly. We
don’t want the government telling us what we’re allowed to invest in,
but that means that the responsibility to investigate assets falls on
each investor personally.

Following the Luna collapse, the financial press is filled with
anecdotes of people who took out a mortgage or a margin loan to take
excessive risk on Luna. There’s no excuse to ever be surprised when
this sort of bet fails. There’s a reason every newsletter on Crypto
will always say, “don’t trade on margin, don’t lever up, don’t risk
more than you can afford to lose.”

It’s time to listen to those warnings, especially if you feel yourself
trying to chase losses and make it all back in one big trade.

You will have more opportunities to make money in these markets, but
only if you don’t destroy your finances chasing losses.
Risk is Opportunity

Crypto is a really strange market compared to what traditional
financial markets have become. In traditional financial markets, we
have become used to governments and central banks intervening if
things break. Support of risk asset markets and the continual lowering
of interest rates have become entrenched in the way western economies

With inflation above 7%, it’s not clear we can assume these features
will continue.

While Crypto does get impacted by Fed policy and macro conditions, it
is mostly at the mercy of them rather than dictating them. If the
treasury market crashes, you can bet the Fed will be in there the next
day propping it up. If Bitcoin crashes, the Wall Street Journal will
gloat and remind you that you should have just been paying Blackrock
their cut by buying index funds.

We are investing in the frontier of what could be a new and fairer
financial system design but this is all untested theory; we have no
guarantees. That is a big part of why the returns have been so large.
We are taking excessive risk for the chance at excessive reward. We
are providing capital to the dreamers and the builders, the people who
want to remake the world in a way that doesn’t just funnel wealth to
Goldman Sachs.

This piece isn’t intended to scare you, only to open your eyes to the
risk. If we don’t discuss risk then we can’t mitigate risk. You can do
all sorts of things to reduce your risk: research protocol design,
look to multiple sources to inform your thinking, listen to the
skeptics and judge how credible their critique is.

In Crypto, there is no FDIC insurance. There is no Fed bailout. There
is no one in government who cares about protecting your assets. Your
security is your own responsibility. You can take insane risk and no
one will stop you from doing something stupid. If you make a mistake,
own it and learn from it. Don’t expect to be made whole.

No one is coming to save you. You have to save yourself.

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