Crypto in 2022: CONTAGION and FRAUD

2022 was a terrible year in crypto and now digital currency group this massive organization that's been around since 2013 which owns grayscale Genesis coindesk also appears to be on the brink how did this all happen how did this all happen in one year and now that we're at the end of 2022 we can look back in hindsight and piece everything together because this is actually one big story a story of contagion yield and collapse all of these bankrupt companies were tied to each other in a word that has

now marked the year 2022 contagion and in order to clean up the mess we need to understand what actually happened and so we're going to walk through in this video how every single collapsing company fits into this one broader story of contagion throughout 2022 and how we can not do this again in the future first in the cast of characters that caused so much pain and contagion in 2022 the hedge funds mainly 3 hours capital and Alam research 3s Capital were led by these two individuals suzu and Kyle Davies who at the peak of the

crypto markets were treated like demigods who just couldn't fail their egos were present and massive on Twitter and everyone listened to them and they broadcasted their trades loudly for all to hear and then also Alam research which was a hedge fund trading firm that Sam bankman freed started before he started his exchange FTX of course there's the FTX exchange also led by Sam bankman freed uh which turned out to be a complete fraud also in the story of 2022 crypto dwan and the Tera Luna ecosystem the first ecosystem in crypto

to actually go to zero and then the last part of the story which is interestingly also where the Story begins digital currency group this massive conglomerate of companies owned by Barry silbert which includes two key players in this story Genesis and Grace Gale but also just a bunch of other companies that you might be familiar with in the crypto space like coindesk also playing a role in 2022 crypto was Gary gendler and the SEC all of these players had a role to play in how 2022 unfolded the story of contagion in 2022 crypto actually begins all the way back in 2020 with the gbtc

premium and three arrows Capital now gbtc is named after grayscale Bitcoin grayscale BTC since there is not a Bitcoin ETF on the market grce scale made a trust where you could put in one Bitcoin and then you could buy shares of that trust now notably and very important to this story the price of gbtc does not onetoone track the price of Bitcoin now throughout 2020 and into 2021 there was a premium on gbtc as in

one share of gbtc of the grayscale Bitcoin trust was actually worth more than the Bitcoins that it had in its faults in its trust and this created an Arbitrage opportunity which three arrows Capital was first at three Aros Capital would take Bitcoin which they owned 6 months later they would be handed an equivalent amount of gbtc shares but because of that premium the dollar value of the shares that they were able to Mint were sometimes as high as 40% higher than the dollar value of Bitcoins that they put into the trust so gra scale would borrow Bitcoin from Genesis

give it back to Genesis because Genesis would be the authorized participant to Mint gbtc shares and then the grayscale Bitcoin trust was earning 2% of the total value of all assets in the gbtc trust so three capital puts a bunch of Bitcoin inside of the grayscale BTC trust they pocket all that Arbitrage they make free money and 30 capital is one of the largest owners of Bitcoin and ether as the bull market goes from bullish to frothy as 2020 went into 2021 and it's important to note that three capital's Foundation of their books of

their of their assets that they have is gbtc in the start of 2021 that gbtc premium actually turns to a discount it flips so the total value of the gbtc trust is actually less than the Bitcoins that it owns we've always known in the crypto industry that crypto goes in Cycles but suzu and three years Capital were calling for a super cycle as in this is the cycle of mainstream adoption we get two cycles in one this cycle is going to be bigger than all the others and so what does a hedge fund do if they believe that it is a super cycle well

they take more risk so they take their ether and their Bitcoin and they rotate into more IL liquid altcoins you might remember the saluna avac meme salana Luna and Avalanche as ethereum became congested people migrated over to these alt layer ones and these alt layer one token prices also mooned so three ARS Capital sitting on a mountain of cash they have the remaining ether and Bitcoin that they didn't trade into the alt layer one trade they have the alt layer one trade which is doing fantastically and they also have their supply of gbtc which is backstopping a

lot of the loans in Genesis blockfi and many other borrowing and lending desks and it looked really really strong so long as there actually was a super cycle in September of 2021 3 Capital led a massive round into buying locked up avac tokens locked up Avalanche tokens so they weren't liquid they also invested a ton of money into nfts that also are a very IL liquid asset meanwhile during all of this time there's this brand new exchange on the scene FTX led by this brand new seemingly Super Genius

character SBF and people thought it was really difficult to break into the exchange scene after we already have coinbase Gemini and Kraken on the US side of things and binance and a few other exchanges have completely dominated the international side of things FTX still found this way to have this meteoric rise throughout 2021 giving Sam bankman freed this just image of this super successful Trader Builder operator who just could make money no matter what he did one of the main ingredients into ftxs success was its connections to Alam research of course

because Sam bankman freed started both of them and Alam research would Market make on FTX new tokens would be launched on FTX and Alam would make sure that there's a bunch of liquidity for all of them in addition to that FTX would provide leverage Perpetual swap so many Financial products that aren't really allowed to be offered inside of the United States and because they had this mountain of capital in Alam research to provide liquidity to all of them it became a very competitive Exchange in a very short amount of time now the connection between Alam research and FTX was always dubious it always raised eyebrows but so many people in the

crypto space me included are just novice to the fact that a trading firm and an exchange should actually be separated in hindsight it makes total sense in the middle of a bull market we didn't really think about it now just like three's Capital Sam bankman freed and Alam research were all Al really bullish on ethereum Killers this is more or less how 2021 concluded except for another very important player in this story inflation and interest rates inflation of course surges at the very end of 2021 and into 2022 in February of 2022

inflation surges 7.5% the highest since 1982 and in March the Federal Reserve starts to raise interest rates the fastest that it's ever been raised almost ever before now many Market participants in the crypto industry are younger and have never seen an era of high inflation rates so when suzu's super cycle meme goes up against the FED raising interest rates the super cycle meme popped and that was the end of the 2021 bull market between January and may of 2022 the Blue Chips of crypto

Bitcoin and ether are both off 50% off their highs and the ethereum killers are off much worse somewhere between 70 and 80% Luna the one exception is doing extremely well the Tera Luna ecosystem dominated the first part of 2022 as dquan the leader behind teral Luna gets extremely bombastic on Twitter because the Luna price seems to be just Unstoppable in April the Luna ecosystem bought $200 million of avalanche tokens as collateral to ever back stop us the algorithmic stable coin that's the main

product out of the Luna ecosystem and also on May 5th the Luna Foundation guard The Entity responsible for protecting the peg also buys $1.5 billion of Bitcoin from the money that they just just minted out of thin air well when you print a bunch of funny money and buy hard money like Bitcoin you make your Funny Money weaker so not too long after the Luna Foundation bought $1.5 billion wor of Bitcoin did the price of us on the secondary Market start to wobble and then just a few days later it was at zero because one of the big things that we learned in 2022 is that algorithmic stable coins do not

work as the US price faltered the Luna Foundation guard liquidated all of their avax tokens all of their Bitcoin in order to defend the peg but it just wasn't enough and as the US Peg dropped below a dollar this caused a hyperinflation vent in the Luna token Luna is this token that is minted to back stop the price of us but when there's too much selling pressure of us this thing hyper inflates and this is the thing that actually went to zero in 20122 the price of Luna and effectively the whole Luna ecosystem alamer research and 30 Capital owned a ton of Luna and

so now we are in the middle of 2022 Bitcoin and ether are 50% off their highs salana and avax are 80% off their highs and Luna is at zero and this is where the contagion starts and in early June it was discovered that three ARS Capital had borrowed from anyone Under the Sun anyone that would lend any money to them in order to back stop their positions and not sell but on June 15th it becomes clear that three Aros capital is facing bankruptcy 3 Aros Capital borrowed $600 million from Voyager they borrowed over a billion dollars from blockfi they borrowed over $2 billion

from Genesis some of these loans were collateralized others were not the Voyager One completely uncollateralized $600 million uncollateralized insane and this creates the first wave of contagion in the crypto markets blockfi is on the brink of bankruptcy Voyager is going to go under Celsius gets absolutely wrecked but not before the three executive Founders were able to withdraw millions of dollars before customer assets H but something very interesting happens FTX this exchange that rose out of nowhere in 2020 and 2021 comes and offers blockfi a $400 million revolving credit

facility so while blockfi was valued at almost $5 billion in 2021 because of the deal that it makes to keep itself afloat is then valued at $25 million and all of this was largely the result of three Rs Capital because as Bitcoin and ether dropped by 50% and ethereum Killers dropped by 80% and Tera went to zero what did 3os Capital do they borrowed as much money as people would let them borrow and then they borrowed even more because of fraud because they lied to lending desks about the collateral that they had and how solvent they were and so this is when a failing hedge fund

takes everyone down with it and this may to June collapse in crypto prices in 2022 would have been a lot worse if FTX and Alam research hadn't come to save the day and bail out half the industry and this is where Sam bankman freed goes from successful hedge fund Trader SL business Builder to this infallible God who just can't miss and he's backstopping the whole entire industry and so the industry seems to be at the bottom there seems to be no more contagion how naive were we on November 2nd of 2022 coindesk another company in

digital currency group post an article with leaked documents of the state of alam research's balance sheet and as it turns out alam's balance sheet looked pretty damn bad they didn't really have much US Dollars Bitcoin and ether the good monies they basically only had ftt tokens as collateral for a bunch of loans binance has BNB bitfinex has Leo okcoin has okx and FTX had ftt now Alam research had a bunch of ftt and interestingly so does Finance so where

did all of that money come from when Alam and FTX bailed out all of the crypto companies that had the contagion in May well it came from loans that they were using ftt token to collateralize and ftt is a is a Funny Money token they just printed it out of thin air there's only so much ftt that you can sell into the market before the price starts to drop and when this news report out of coindesk reveals that alam's research's balance sheet is basically a bunch of debt and ft tokens this gives CZ of binance a huge red flag and so CZ an

owner in Ft tokens wants to sell his ft tokens before the price collaps if Alam ever gets liquidated and so he broadcast this intention on Twitter very transparently and says hey we are going to sell $2.1 billion of ftt tokens this of course causes the ftt token price to fall which probably liquidated Alama research but most importantly started to trigger concerns about this dubious connection between this trading hedge fund and ft X if Alam research was insolvent and Alam research is Sam

bankman Freed's other company after FTX is FTX also insolvent and so these worries started to trigger some withdrawals from users out of FTX and then it started to trigger more withdrawals and then a classic bankr run ensued not two days after the bank run of FTX gets triggered FTX stops processing customer withdrawals and then it becomes very obvious that Sam bankman freed is searching for immediate emergency funding to facilitate withdrawals and the only reason why why he could be doing that is because FTX is insolvent and this turned out to be exactly the case and this is when the

story goes from pretty bad to absolutely terrible because there were no corporate controls over FTX because the SEC didn't allow FTX to provide the products it wanted to provide inside of the United States they went to the Bahamas where they could do whatever the hell that they wanted without any oversight and so all of the contagion that happened in May of 2021 was temporarily plugged by alamina research and FTX using as much as possible and all of their customer deposits to back stop all the other parts of the industry but they

themselves were also on the brink and they did the same thing that three capital did instead of being conservative and selling their Assets in order to protect their positions they doubl down by taking as much leverage as possible and then stealing customer funds but covering up fraud only lasts for so long and the sad part is when FCX went under and took $8 billion of customer deposits with it it triggered another round of contagion this time going all the way back to where the story began with Genesis and the digital currency group on November 9th after the

collapse of FTX Genesis announced that they took a $7 million haircut but then on November 10th very next day they announced that they actually took $175 million loss by their trading activities on FTX while $175 million is a lot it's not that much in the grand scheme of how big digital currency group is but on November 16th Genesis announces that is pausing customer withdrawals the same thing that happens to every other borrowing and lending desks when they don't have enough money to facilitate customer withdrawals and then it was later revealed that digital currency group was seeking emergency funding the

same way that FTX was the days before it went under digital currency group and Genesis are probably still looking for funding although it sounds like the whole in digital currency group the whole in Genesis is not all that big and they have viable paths moving forward but we're still waiting for the rest of that story to develop and this is where we are today now if you remember this whole bull market was about yield and it was three errors capital and Alam research that connected defi yield Farms to centralized borrowers and lenders and it was these hedge funds that created

all of this contagion throughout this entire industry and as the defi crypto markets dried up once interest rates increased and inflation turned over three Eros capital and Alam research did the same thing instead of being conservative they doubled down and when the markets went against them they doubled down again they borrowed as much money as the centralized crypto lenders would allow for and they are the reason why so much contagion happened throughout crypto in 2022 and so I'm very sad to say that looking back throughout the 2021 bull market the entire thing looks like a gigantic Ponzi

game it's also important to note though that there are many decentralized alternatives to these same lending desks that went bankrupt a compound maker all of these provide similar services to these lending desks where you put up collateral and then you can borrow money but none of these defi applications went under these defi applications are completely fine and I've had my money in these defi applications throughout the 2020 21 bull market and throughout the 2022 collapse and these defi apps held up beautifully in the face of collapsing centralized crypto companies what's the secret sauce why is it so different so

looking back we now know that Alam research FTX and even Genesis all had massive holes in their balance sheet as a result of the Tera Luna collapse and we did not find out about these holes until 6 months later why couldn't we find out about these holes because they are private centralized companies that don't tell you anything they don't want you to know that they're completely insolvent and they're trading with customer deposits in contrast defi applications are inside out you can see exactly where their money is at all times and you can also see the code to

that prevents the defi app from Trading away customer money in the first place so that while the story of 2022 was a bunch of interconnected contagion risk it is also a story of defi resiliency in the face of the harshest conditions that crypto could have thrown at it and it's also a story of where was the god damn SEC on June 29th grayscale filed a lawsuit against the SEC for not allowing the grayscale Bitcoin trust to turn into an ETF and so if grayscale could have turned that gbtc trust into a BTC ETF

that 30% discount between the value of Bitcoin in the gptc trust and the actual value of gptc would have been erased and the balance sheets of all of these companies that had gpcs collateral would have been 30% higher but the SEC never allowed for the trust to turn in to an ETF and as a result of this anyone who's owned gbtc on the secondary Market has been paying basically a 2% management fee to grayscale and this allowed for weakness in the balance sheets of all of these companies that eventually went

under the other thing that the secc did was they really pushed so much us trading activity offshores because the onshore regulated crypto exchanges coinbase and Kraken and Gemini they can't offer so much of the financial products that allowed FTX to to rise to fame and is why FTX had to go to the Bahamas in order to become the massive gargantuan that they were and also what allow them to trade away customers funds because no one was watching them so the SEC let FTX is fraud hit millions of Americans that it shouldn't have and

even though FTX was outside of the United States jurisdiction it was a company run by Americans marketed to Americans with American customers giving Americans products that were actually illegal yet the SEC just sued Kim Kardashian instead what the hell thanks Gary Gensler thanks for protecting us and so that was 2022 two massive collaps hedge funds an even bigger crypto exchange with stole customer deposits an algorithmic stable coin ecosystem that went to zero and blood on the streets

absolutely everywhere because the SEC was just not paying attention 2022 was not a good year in crypto but we did learn some things I think the entire industry now understands to a much better degree how important Federal Reserve interest rates are they are the actual Reaper that comes from all high-risk Investments and all high-risk investors we also know that all crypto grifters kind of sound the same the common denominator between Sam bankman freed three ARS Capital do Quan Alex mashinsky of Celsius they were all loud

bombastic and had huge Egos and really enjoyed their self-image and all of them also refused to take an l and instead of humbly selling their assets at a loss they took more leverage to never ever have to sell they were forced sellers because they were liquidated and we also learned in 2022 crypto the inherent interconnectedness of all of Finance especially when all of these Financial players are blackbox centralized institutions that play with our money and we don't even know about it which brings me to my last lesson that we learned in 2022 crypto is that defi

worked as intended defi didn't lose a dime of customer deposits maker Dow Unis swap a the Bedrock that makes up the ethereum defi ecosystem held up beautifully as ad advertised the way that we've been talking about it since 2018 which brings me to the Mantra that I want to burn into everyone's head to conclude this video protocols not people code not Kings in code We Trust because that is what we are here for a financial system operated outside of human Folly

and human error and into the hands of math and for those of you who plan to stick around with me and the rest of the bankless nation into 2023 and Beyond I salute you if this was your first cycle congratulations you've now earned your stripes this is the pain and suffering that it takes to make it through a bare market and enjoy the Harvest of the eventual 2025 bull market if you're not subscribed to this channel definitely hit that subscription button we're going to make videos like this all of the time and more to prep you for any more

that crypto might throw your away and if you're not subscribed to bank list premium and you want to come chat with me and Ryan in the Inner Circle Discord subscribe to bankless it costs less than 50 cents a day and we get to chat about stuff like this in the Inner Circle Discord on what seems to be very chaotic and never ending Journey but I wouldn't want to be anywhere else thanks for

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