🪙Issues with cryptos
1. CEX, Centralized Liquidity Lender
Liquidity Problem
CEX’s Liquidity
The lack of information among CEX causes Fear, Uncertainty, and Doubt (FUD) regarding the business's ongoing liquidity and business model creating a bank run on withdrawal funds.
CEX that does not meet the withdrawal demand will be deemed illiquid, a well-contained bank run would subside after a single exchange failure. The FTX collapse, was due to the initial selling of FTT by Binance caused more people to follow suit combined with HODLer also withdrawing funds from the initial FUD.
While the majority of the CEX hold asset one-to-one with its deposits, small CEXs still mix operational funds and deposits together. Causing misappropriation of the deposit leading to lower liquidity issues during withdrawal.
In the context of CEX, HODLer assets are regarded as liabilities as they cause money to store the crypto asset and would be withdrawn sometime in the future.
In order for CEX to earn money from HODLer’s deposits, they would conduct a Liabilities Transformation into revenue-generating assets such as using the deposit fund to invest in HIGH-RISK HIGH REWARD investments.
Overleveraging
Leverage works well during good times when the market is moving in the direction of the trading position, leveraging this would allow traders to obtain above-market returns.
Thus, when market movement is not in the trading position. Leverage may cause returns to be more than the average. This would also cause the value of the collateralized asset to decrease, ultimately causing the loan asset may not be recoverable.
During the liquidity transformation phase and leverage taken by the CEX adds pressure on the centralized platform in order to meet the client's withdrawal demand during a potential “CEX-run”
This poor check-and-balance within CEX’s risk management increases its vulnerability during the market downturn.
Because CEX is not operating similarly to the bank's business model, Moral Hazard and Adverse Selection occur.
2. Cryptocurrency HODLer
Overleveraging (Holder)
Cryptocurrency holders often collateralize owned crypto assets to obtain low-interest asset-backed loans (ABL), that are often placed back onto the platform’s exchange as part of their speculation strategy.
Against the backdrop of collateralized assets + loan, this would add to the correlation to all of the total assets. DOWNWARD SPIRAL.
The downward spiral, causes the LTV of the collateral to drop as HODLer wouldn’t be able to meet the loan obligation. Then the loan asset will now effectively NIL. (Often the loan doesn’t need to be paid back as long as the collateral is able to meet the repayment need)
No real passive income and economic output is derived from Crypto-leveraging other than chasing unrealistic returns through market speculation.
3. Economic output
Overcollateralization
DeFI and CEX platforms provide assets-backed loans with super low-interest rates, some platforms provide ABL that are as low as 20% to the LTV (Loan-to-Value) ratio. Out of the $100 value of the asset, one can only loan as much as $20.
With just 4 iterations of lending, it would achieve as much as 2.04x of the fundamental owned assets. This would exaggerate the total leverage position of the holder in the future.
Because the LoanAmt doesn’t change, when the Asset value drops the LTV Ratio will increase after hitting a certain threshold the crypto holder will be issued with Margin Call.
Such an over-collateralization rate, only advocates for continuous speculation in the crypto market. As it is not sufficient enough to bring real economic output in the FIAT economy (generally pushing for lower acceptance of the general public)
💡 The Internal cycle of money in the cryptocurrency market should be broken pushing the usage of this liquidity to bring good economic output, while paying crypto-user interest payment while investing in such projects.
Position Wealth
The vast wealth that the cryptos industry has amassed is mainly due to crypto’s market speculation, while the underlying issue of speculation of the crypto’s market is due to lacking Economic Output Infrastructure.
The early days of the Crypto industry are fueled by FOMO, and while the industry is maturing itself, the use case of crypto-currency should change as well. The speculative nature of the industry market has made Investors in the crypto market lose more than $ 2 trillion.
The goal of wealth creation should not be to get rich quickly, but rather to build long-term, passive income streams that can provide financial security and freedom for the rest of your life
While the general staking position gives a passive income generation for its holder, the staking rewards are highly dependable on the supply of tokens being staked. The lower the total staking amount the higher the staking reward is, while these tokens are prone to volatile crypto price movement as compared to stablecoins that are pegged one-to-one to Fiat currency.
In general market conditions, investors would look for an alternative platform to invest their money when their position is not up to the market expectation. Driving Staking Reward to drop.
In some cases, the impermanent loss can contribute to a loss of potential income, as it can result in a reduction in the value of an investment or trading position. For example, if an investor holds a long position in a cryptocurrency and the value of that cryptocurrency decreases relative to another cryptocurrency that the investor is short of, the investor may experience a loss due to the impermanent loss.
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