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.
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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.
follow the money
Where startup money is moving in the crypto world:
- 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.
- NFT infrastructure startup NFTPort raised a $26 million Series A round led by Atomico.
- 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.
- 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.
- Molecule, a platform where DAOs can back medical research projects, secured $13 million in seed funding led by Northpond Ventures.
- Metaverse play-and-earn company Atmos Labs brought in $11 million in a seed round led by Sfermion.
- Creator-focused web3 sitebuilder Tellie nabbed $10 million in Series A funding from investors including Malibu Point Capital, Galaxy Digital and Dapper Labs.
- Crypto payment platform Nume raised $2 million in a pre-seed round led by Sequoia India.
- 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.
- 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.
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
Bonds See 2023 Recession, Stocks Aren’t So Sure
The yield curve is one of the most robust recession predictors and has signaled a recession may be coming since mid 2022. In contrast, U.S. stocks as measured by the S&P 500 are up materially from the lows of last October and only just below year-to-date highs, seemingly rejecting recession fears. Yet, fixed income markets see the Fed potentially cutting rates by the summer, perhaps reacting to a U.S. recession.
The Evidence From The Bond Markets
The recessionary evidence, at least from fixed income markets, is mounting. The 10 yield Treasury yield has been below the 2 year yield consistently since last July. That is is called an inverted yield curve and has signaled a recession fairly reliably when compared to other leading indicators.
Building on that, fixed income markets see almost a nine in ten chance that the Federal Reserve cuts rates by September of this year. That’s something the Fed has repeatedly said they won’t do on their current forecasts. Yet, a recession could cause it to happen.
The Stock Market
In contrast, the stock market shows some optimism. The S&P 500 is up 7% year-to-date as the market has shrugged off fears of contagion from recent banking issues. In particular, tech stocks have rallied.
In contrast, more defensive sectors such as healthcare, utilities and consumer goods have lagged in 2023. This suggests that the stock market is taking more of a ‘risk on’ position and is perhaps less worried about the economy.
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That said the stock market is a leading indicator of the business cycle, it may be that stocks see a recession, but are now looking past it to growth ahead and are factoring in the lower discount rates that a recession might bring as interest rates decline. Also, the U.S. stock market is relatively global, so the fate of the U.S. economy is a key factor in driving profits, but not the only one.
Monitoring unemployment data will be key. Though the yield curve is a good long-term forecaster of recessions it is less precise in signaling when a recession starts. Unemployment rates can offer more accurate recession timing. Unemployment edged up in February, suggesting a recession may be near, but we’ve also seen monthly noise unemployment. Two similar monthly unemployment spikes during 2022 both proved false alarms.
However, if we see a sustained move up in unemployment from the low levels of 2022 that may be a relatively clear sign that a recession is here. Economist Claudia Sahm estimates that a sustained 0.5% increase in unemployment rate from 12-month lows is sufficient to trigger a recession. Unemployment rose 0.2% from January to February 2023, so maybe we’re on the way there. Of course, the jobs market performed better than expected in 2022 and it could do so again. Still, fixed income markets do suggest a 2023 recession is coming. Stock markets don’t necessarily share that view.
Which States Have The Highest And Lowest Life Expectancies?
There’s a wide variance of life expectancies among the 50 states in the U.S., according to a recent report prepared by Assurance, an insurance technology platform that helps consumers with decisions related to insurance and financial well-being.
Figure 1 below shows the 10 states with the highest life expectancy, starting with Hawaii, the state with the highest life expectancy.
Figure 2 below shows the 10 states with the lowest life expectancy, starting with Mississippi, the state with the lowest life expectancy.
Assurance scoured life expectancy data prepared in January 2023 by the U.S. Centers for Disease Control and Prevention (CDC). With this data, Assurance created several easy-to-understand graphics that offer information about life expectancies.
Life expectancies are a basic measure of well-being
As measured by the CDC, life expectancies are a basic measurement of well-being in a broad population and not a prediction of how long an individual might live. The CDC measures the expected lifespan for a person born in the year of measurement. This measurement is calculated based on the assumption that the individual will live and die according to the rates of death that are prevalent in the measurement year for each age. There’s no assumed improvement or backsliding in the assumed mortality rates in future years for each age in the life expectancy calculation.
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By contrast, an estimated lifespan for an individual would consider their current age, their gender, and some basic lifestyle information. It might also attempt to project future improvements or backsliding in mortality rates based on key factors.
Significant influences on life expectancy calculations
Leading causes of death in the U.S. are heart disease, cancer, and accidents in that order. These immediate causes are significantly influenced by factors in the population such as poverty rates, educational attainment, rates of obesity and smoking, access to healthcare, prevalence of violent crime, and the support people receive from federal, state, and local governments. All these factors can vary widely among different states, which can be a key reason why life expectancies vary by state.
When you think about it, all these factors also have the potential to influence a person’s quality of life. The measured life expectancy rate rolls up all these factors into one objective measurement of well-being that’s based on population data.
In addition to the factors listed above, mortality rates increased and life expectancies decreased in the past few years due to the Covid-19 pandemic. A recent article titled “Live Free And Die” summarized recent research results that show that life expectancies in most countries around the world rebounded after the Covid-19 pandemic but that they continued to decline in the United States. Many of the reasons cited in the article for the continued decline in U.S. life expectancies are the same or similar to the factors listed above.
Why should retirees care about the life expectancies reported here if these measures don’t predict your own lifespan? Life expectancy calculations indicate the general well-being of the entire population in your area. While the living conditions in your area can influence your own lifespan and quality of life, retirees should focus on their remaining life expectancy given their age. They should also consider how the factors listed above that influence life expectancies in the population might apply to them.
You can obtain customized estimates of your remaining life expectancy at the Actuaries Longevity Illustrator. Part of your planning for retirement is understanding how long you an an individual might live, instead of relying on generalized information about larger populations you see in the media.
IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’
Owing taxes can be stressful. Unfortunately, the actions of some companies can make it worse. As part of its “Dirty Dozen” campaign, the IRS has renewed a warning about so-called Offer in Compromise “mills” that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collective excessive fees.
The “Dirty Dozen” is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.
Tax Debt Resolution Schemes
“Too often, we see some unscrupulous promoters mislead taxpayers into thinking they can magically get rid of a tax debt,” said IRS Commissioner Danny Werfel.
“This is a legitimate IRS program, but there are specific requirements for people to qualify. People desperate for help can make a costly mistake if they clearly don’t qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees.”
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Offers In Compromise
Legitimate is a key word. Offers in Compromise are an important program to help people who can’t pay to settle their federal tax debts. But, as the IRS notes, these “mills” can aggressively promote Offers in Compromise—OIC—in misleading ways to people who don’t meet the qualifications, frequently costing taxpayers thousands of dollars.
An OIC allows you to resolve your tax obligations for less than the total amount you owe. You generally submit an OIC because you don’t believe you owe the tax, you can’t pay the tax, or exceptional circumstances exist.
Because of the nature of the OIC—and the dollars involved—the process can be time-consuming. It can also be confusing for taxpayers who may not have a complete grasp on their finances.
First, you must complete a detailed application, Form 656, Offer in Compromise. You must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, with supporting documentation (generally, bank and brokerage statements and proof of expenses).
You’ll also need to submit a non-refundable fee of $205 and payment made in good faith. The payment is typically 20% of the offer amount for a lump sum cash offer or the first month’s payment for those made over time. Generally, initial payments will not be returned but will be applied to your tax debt if your offer is not accepted. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.
The IRS will examine your application and decide whether to accept it based on many things, including the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income—including future earnings and accounts receivables—and your reasonable expenses, as determined by their formula. The IRS will also consider the amount of equity you have in assets that you own—this would include real property, personal property (like automobiles), and bank accounts.
Before your offer can be considered, you must be compliant. That means you must have filed all your tax returns and paid off any liabilities not subject to the OIC. After you submit your offer, you must continue to timely file your tax returns, and pay all required tax, including estimated tax payments. If you don’t, the IRS will return your offer.
Additionally, you cannot currently be in an open bankruptcy proceeding, and you must resolve any open audit or outstanding innocent spouse claim issues before you submit an offer.
You can probably tell—it’s a lot to consider. You may want representation. A tax professional can help marshal you through the process and offer practical guidance, while communicating what fees could look like.
By contrast, according to the IRS, an OIC “mill” will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person’s tax debt for cheap. Also telling: the fees tend to be significant in exchange for very little work.
Those mills also knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing taxpayers money and time. You can check your eligibility for free using the IRS’s Offer in Compromise Pre-Qualifier tool.
“Pennies On A Dollar”
What about those promises that taxpayers can routinely settle for pennies on a dollar? Not true. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full through an installment agreement or equity in assets, including your home. That’s why the IRS tends to reject a majority of OICs that are submitted. The acceptance rate is less than 1 in 3, according to the 2021 Data Book.
The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. It’s true that there’s a formula that the IRS uses to figure out how much they think they can collect from you. But there is some wiggle room to account for special circumstances, including a loss of income or a medical condition. It’s worth noting those are the exceptions, not the rule.
While submitting an OIC may keep the IRS from calling you, it doesn’t stop all collections activities—don’t believe companies that suggest that submitting an OIC will make your tax debt disappear. Penalties and interest will continue to accrue on your outstanding tax liability. Additionally, the IRS may keep your tax refund, including interest, through the date the IRS accepts your OIC.
You may also be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests, and the lien will generally stay in place until your tax obligation is satisfied.
An OIC is a serious effort to resolve tax debt and shouldn’t be taken lightly. Be skeptical—if it sounds too good to be true, it likely is. If you’re considering an OIC, hire a competent tax professional who understands the rules and is willing to level with you about your chances of being successful—including other options. Don’t fall into a trap that can make your situation worse.
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