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Down bad

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Welcome back to Chain Reaction.

Last week, we talked about layoffs and the Winklevoss rock gods. This week, we’re looking at a new layer of crypto doom and gloom.

Get this newsletter in your inbox every Thursday by subscribing on TechCrunch’s newsletter page.


crash redux

We’ve talked crypto crashes a couple times already in the short life of this newsletter but the sell off this week has spooked crypto insiders in a very different way. Things are happening so quickly right now that even seasoned crypto investors seem to be feeling uneasy about this one.

While crypto winters have come before, they’ve never aligned with warning signs of a broader prolonged recession. Things have already plunged so quickly at the signal of a recession that insiders fear a lengthy bear market could hit crypto far more brutally than expected — tearing tokens to lows far below the highs of the 2017 bull run.

This means rough things for tokens, but also more brutal realities for the entire ecosystem.

This week, we saw the interconnectedness of major institutions as crypto lending protocol Celsius stuttered and brought down Ethereum prices with it as investors feared a price collapse brought on by reportedly over-leveraged players like 3 Arrows Capital. Despite the decentralization ethos of crypto, the potential for cascading failures seems every bit as possible for the crypto world as it does for traditional finance markets.

If things do fail harder and faster than before, the question is how quickly young startups and crypto communities can adjust to shifting fortunes. Few companies have to deal with the stressed of both crypto and public markets like Coinbase which laid off more than 1,100 people this week, but plenty of startups raised mega-rounds in 2021 to theoretically future-proof their companies. For DAOs and protocols with treasuries sitting in ETH, many have seen their budgets for community efforts and stretch projects decimated, threatening their survival.

Without the promise of riches or with reduced interest in blockchain-based exclusivity, where will consumer demand go? Will governance communities grow more self-motivated and more concerned about short-term goals when their groups have gone from being filled with millionaires to seeing their profits disappear into thin air? How much worse will things get?


the latest pod

Somebody call 911. Crypto lending protocol Celsius isn’t fire burning, but it did freeze all customer withdrawals this past weekend, citing concerns about its own liquidity amid “extreme market conditions.” Since then, the firm, which claimed to have 1.7 million users before the pause, has seen its own token plummet (and then recover, and plummet again), and sent the already-struggling crypto markets into a tailspin. We talked through what went wrong on the Celsius network and how it’s surprisingly intertwined with the rest of crypto.

Regulators are seizing this moment in the downturn, while web3 is already looking pretty shady and investors are pissed about losing money, to crack down on certain firms in the space. From BlockFi to Binance.US, some of the biggest names in crypto are facing lawsuits and/or fines for their practices. 

The tech billionaire bros are still alright, though, for better or for worse. Block’s Jack Dorsey announced this week that he’s ready to cancel web3 and move on to his vision of the internet, which he’s calling “web5.” Elon Musk weighed in with a particularly creative proposal too, which we discussed in this week’s episode. 

Our guest, Aaron Levie, built a successful SaaS business in Box, and now he’s on a mission to beef – respectfully – with web3 stans all over Twitter. Levie explained to us how he manages to walk the fine line of being a crypto critic without landing in the bulls’ bad books. 

Subscribe to Chain Reaction on Apple, Spotify or your alternative podcast platform of choice to keep up with us every week.


follow the money

Where startup money is moving in the crypto world:

  1. Indonesian fintech platform Flip raised a $55 million Series B extension led by Tencent with participation from Block (formerly known as Square) and existing backer Insight Partners.
  2. NFT infrastructure startup NFTPort raised a $26 million Series A round led by Atomico.
  3. ScienceMagic.Studios, a digital asset-focused brand studio, bagged $10.3 million in pre-seed investment from investors including Liberty City Ventures, Digital Currency Group and Coinbase Ventures.
  4. A co-founder of Words With Friends raised $46 million in a Series A round led by Paradigm for their web3 gaming startup, The WildCard Alliance.
  5. Molecule, a platform where DAOs can back medical research projects, secured $13 million in seed funding led by Northpond Ventures.
  6. Metaverse play-and-earn company Atmos Labs brought in $11 million in a seed round led by Sfermion.
  7. Creator-focused web3 sitebuilder Tellie nabbed $10 million in Series A funding from investors including Malibu Point Capital, Galaxy Digital and Dapper Labs.
  8. Crypto payment platform Nume raised $2 million in a pre-seed round led by Sequoia India.
  9. Dutch fintech Bits of Stock, which offers crypto rewards, raised €4.2 million in its seed round from Keen Venture Partners, Yellow Accelerator and others.
  10. Decentralized trading infrastructure startup Orderly Network raised $20 million in Series A funding from investors including ​​Three Arrows Capital, Pantera Capital and Dragonfly Capital.

the week in web3

Crypto markets were down pretty bad last week (though admittedly, it’s only been downhill since then). But temperatures were up in Austin, Texas, as 20,000 people in the crypto community came together to discuss how to navigate their industry looking like it might go up in flames. Anita had the chance to attend the conference, so she’s back with some thoughts from the field: 

I have a lot of friends and acquaintances who aren’t nearly as deep in crypto as I am, and one question I’ve heard over and over again these past few weeks is whether this downturn in the digital asset markets is the death knell for web3. In other worlds, now that the music has stopped, is the party actually over?

I shared my two cents/two Satoshis on the matter on Los Angeles public radio this week (check it out), but I want to use this space to highlight some thoughts I have after hearing from folks in the industry at Consensus. In short, I don’t think this is the end of crypto by any means, but it’s certainly going to be a tough time for the space. 

On a panel about how to invest in web3 in a turbulent market, Arca’s Chief Investment Officer Jeff Dorman made an interesting point about what makes web3 so different from most other sectors, at least as they’re defined by the financial markets. 

“I don’t even think digital assets [are] an asset class. I think it’s a technology that is now wrapping all asset classes,” Dorman said. In tradfi, investors can specialize based on products (e.g. debt, equity, derivatives) or sectors (e.g., industrials, retail, real estate). But in web3, those categories haven’t been clearly defined, because blockchain technology has been used in so many different ways, from file storage, to selling digital art, to tracking peer-to-peer money transfers.  

That’s part of why I think we can’t group “crypto” or “web3” or “blockchain technology” in the same bucket – even those three terms all have slightly different meanings. Perhaps that’s also why the vibe at Consensus felt puzzlingly positive despite the market turmoil. Each project is so different, and each builder has conviction in why their own use case for the blockchain makes sense and isn’t like all those other projects that are losing value or seem like scams. At a time of so much uncertainty, the most important thing reporters and analysts can do is look at this industry with nuance, and evaluate each project case-by-case. It’s going to be a wild ride, but I believe at least some parts of web3 are here to stay, and I see it as my job not only to shed light on what applications of this technology are working and not working but also to try and make sense of why.


TC+ analysis

Here’s some of this week’s crypto analysis you can read on our subscription service TC+ (written by TC’s Jacquelyn Melinek): 

As Celsius accelerates the crypto sell-off, who pays the price?
This week, the global crypto market capitalization fell below $1 trillion for the first time since January 2021 after one of the largest centralized crypto lenders, Celsius, landed in hot water after it paused all withdrawals, swaps and transfers for users. The driver behind its freeze isn’t completely clear, yet, but it resulted in another bank-run scenario similar to what we saw last month with the UST and LUNA situation – and it’s causing another drop in the crypto market. 

Hedge funds plan to buy more crypto amid a down market and potential regulatory clarity
What seemed like a rare sector is now gaining popularity as the number of specialized crypto hedge funds has grown to over 300 globally, according to PwC’s Global Crypto Hedge Fund report. These funds are on “the search for alpha” to beat the benchmarks and are willing to try something new and different, John Garvey, global financial services leader principal at PwC, said to TechCrunch. Even though markets are highly volatile, two-thirds of all hedge funds surveyed that are currently investing in the space plan to deploy more capital into the market by the end of 2022, it said.

As DAOs continue to blossom, here’s how to keep yours from wilting
This past year has been one big growth spurt for DAOs (decentralized autonomous organizations) but not everyone in the space is convinced that they’re being formed properly or in a way that ensures success. But what happens when the hype fades? People stop voting, treasuries can wither and abandoned, dead communities turn into “DAO graveyards.” To prevent that from happening, some say there needs to be a restructuring of the way DAOs are formed.


Thanks for reading and you can get this newsletter in your inbox every Thursday by subscribing on TechCrunch’s newsletter page.

Lucas and Anita

Finance

Teacher, Police And Firefighter Pensions Are Being Secretly Looted By Wall Street

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America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.

Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.

For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.

Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”

Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.

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But that’s not good enough to protect public pension stakeholders.

No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.

The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.

Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?

Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.

Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.

Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.

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Finance

It Is Time To Buy Bonds

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US 10-year note prices are likely to rise through August. The monthly histogram below shows that July and August have been the two strongest months for the note price.

Monthly Return- US 10-Year Notes

Blue: Average Percentage Change

Red: Probability of a rise on that day

Green: Expected Return (Product of the first 2)

These numbers are static in the sense that they change little over the years. This is only one cycle, the one-year cycle, whereas there are many cycles operative at any one time. In order to get a reading on such other rhythms, a scan is run to identify other profitable price cycles. The graph below reveals the most valuable cycles that are operative at any one time.

10-Year Note Monthly Cycle

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These cycles reinforce the seasonal tendency for notes to rise. Prices have risen in 60% to 65% of the time in these summer months. With the dynamic cycle also in ascent, the probabilities rise to about 65% to over 70%. There are similar and supportive developments in the Japanese and German fixed income markets.

The cycle projection must be confirmed by market activity. The daily graph reveals that price broke through a downtrend line.

10-Year Notes Broke Through Resistance

Here is a helpful sentiment indicator that supports the bullish view. The cover page of this week’s Barron’s points to much higher rates. Applying contrary opinion, this suggests lower rates and higher note and bond prices. The first objective is 123.0.

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Finance

Will There Be War Over Taiwan – The Next Spy Thriller

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I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.

Thrillers

Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.

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Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

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