What happens in cryptos, won’t stay i n cryptos

Tuesday, 13 December 2022 — Albert Park

[8 min read]

Dear Reader,

Well, that didn’t take long.

On 6 December 2022, my Daily Reckoning Australia article made the not-so-bold prediction of:

‘The absence of new money coming into the pyramid scheme, all-but assures us of more front-page news stories on the “unexpected” collapse of the crypto holdouts like Binance, Tether and a few others.’

This past week, the opaque practices of the cryptoverse have been once more in the news.

One of the few others I referred to is…Grayscale Bitcoin Trust.

On 6 December 2022, US hedge fund Fir Tree Capital commenced legal proceedings against Grayscale Bitcoin Trust (part of the Digital Currency Group) in the Delaware Courts.

If you are so inclined, you can access the 41-page filing here.

What’s prompted the US$4 billion hedge fund to launch this action?

Fir Tree Capital’s Verified Complaint grievance is made evident in the first paragraph of the court filing (the red underlined emphasis added):

Lack of transparency. Reports of liquidity issues. Stonewalling.

Seems like these are all standard business practices in the mysterious world of cryptos.

The issues now facing Grayscale investors were flagged as potential concerns in the March 2021 issue of The Gowdie Letter:

‘On 1 March 2021, Block Crypto published this article…

‘What’s GBTC?

‘From Yahoo! Finance (emphasis added):

“The Grayscale Bitcoin Trust (GBTC) is the world’s largest bitcoin fund and the first investment vehicle of its kind to report financials regularly to the U.S. Securities and Exchange Commission (SEC).

“GBTC shares are part of a range of traditional financial products that track cryptocurrency prices offered by Grayscale Investments; the world’s biggest digital asset management firm and part of the Digital Currency Group (DCG) led by founder and CEO, Barry Silbert. DCG is also the parent company of Coindesk.”

‘GBTC provides investors the opportunity to invest (or speculate) in bitcoin, without buying it directly.

‘Therefore, the investor avoids the hassle of organising safe storage from hackers and having to remember the password.

‘The Grayscale Bitcoin Trust has proved popular with institutions…

“…nearly 20 institutions already filed paperwork with the U.S. Securities and Exchange Commission last quarter, showing they invested in the Grayscale Bitcoin Trust (GBTC)…”

Forbes, 6 August 2020

‘Apparently, institutions favour GBTC over holding bitcoin directly due to the transparency in the chain of custody…it makes it easier for auditors to verify the institution is actually holding what it says it’s holding.

‘This product feature is why GBTC was Wall Street’s preferred option for bitcoin exposure…and why the fund traded at a premium to its net asset value.

‘What’s the big deal about the GBTC premium collapsing from 25 to 30 percent down to zero?

‘Glad you asked.

‘GBTC will issue new shares to institutional investors for “more or less” par value with one restriction…the shares must be held for a minimum of six months.

‘Over the course of the past two years, an institution could buy a US$1 share, that, on average, could be sold for $1.25 six months later.

‘Money for jam…so why not borrow to get some of this “all-but” guaranteed action?

‘With the evaporation of the GBTC premium…some institutions might start to face margin calls…which could bring more downward pressure on the price.

‘We’ll have to wait and see.’

Here’s the latest on the Grayscale Bitcoin Trust (or should that be ‘lack of trust’?).

GBTC is trading at a DISCOUNT of almost 50% to its ‘supposed’ Net Asset Value (NAV).

Why the hefty discount?

Grayscale report having 643,572 Bitcoins [BTC]’s worth more than US$10 billion (NAV).

But without a verified audit to confirm this, the market thinks it smells a rat…and is erring on the side of caution.

Fir Tree Capital have resorted to legal recourse to get answers.

Does Grayscale have the bitcoins or not?

Or has there been some funny business within the Digital Currency Group…just like Sam Bankman-Fried’s web of corporate deceit?

What happened to the money before and after 11:59pm?

Fir Tree Capital is also a little sceptical about Tether’s UNAUDITED claim its stablecoin is backed US$1 for US$1.

On 12 March 2022, Bloomberg reported:

To quote from the article (emphasis added):

‘Fir Tree Capital Management is making a substantial short wager on Tether, the stablecoin that’s under intense scrutiny from regulators.

‘The $4 billion hedge fund, founded by Jeff Tannenbaum, constructed a way to short Tether in an asymmetric trade, meaning the downside risk is small and potential to make money is great, according to clients of the firm.’

Tether also has an aversion to being fully audited.

Every quarter, Tether posts a ‘Letter of Attestation’ from an accountancy group (at present, Tether has engaged BDO in Milan) that comes with one very critical caveat…underlined in red.

What happened to the funds five minutes before or after 11:59pm on 30 September 2022, is an unknown.

Tether’s resistance to undertaking and publishing a complete audit of its holdings is why Fir Tree Capital and others are betting against Tether surviving the coming crypto winter.

Personally, I think it’s a good bet.

When an audit is not really an audit

On 10 December 2022, The Wall Street Journal (WSJ) headline shone the spotlight on Binance’s lack of transparency:

To quote (emphasis added):

‘Binance recently made a commitment to transparency, but it has a long way to go before it discloses enough meaningful information to give investors’ confidence in its future, accounting and financial specialists say.’

In an attempt to calm investor nerves, Binance engaged the services of mid-tier global accounting firm, Mazars, to conduct an ‘audit’ of its books.

This is why accounting and financial specialists are a little dubious about Binance’s attempt at transparency.

According to The Wall Street Journal article:

‘Mazars said it performed its work using “agreed-upon procedures” requested by Binance and that “we make no representation regarding the appropriateness” of the procedures.’

Binance has not yet realised the days of treating crypto investors like mushrooms is over.

Binance’s request for a blinkered view of its financial position falls just a little (make that a lot) short of accepted International Standards.

This sham audit only served to create even greater doubt over the solvency of Binance.

Can you imagine the Commonwealth Bank instructing its auditor to use only ‘agreed-upon procedures’ for the bank’s Annual Report? The CBA share price would plunge like a stone…bit like the Grayscale Bitcoin (lack of) Trust.

What happens in crypto, won’t stay in crypto

Vegas and cryptos have one thing in common…both are gambling haunts. But, unlike Vegas, what happens in cryptos won’t stay there.

As the truth slowly exposes the lies, deceit, and fakery behind crypto’s higher profile ‘pump and dump’ schemes, there will be spillover into US corporate debt markets.

There is never just one roach in a multi-asset bubble hotel.

Greed and speculation on the magnitude witnessed during the everything bubble, was not isolated to cryptos alone.

Corporates of lesser and dubious quality are certain to be adversely impacted by the coming collapse of the crypto pyramid.

Those default ripples will flow through the bond markets…starting with junk and then working its way up to BBB’s and so on it goes.

Yields blow out.

The value of bonds fall (due to the inverse relationship between higher interest rates and lower capital values).

Pension funds loaded up with higher yielding debt start to sink further into underfunded territory.

And we haven’t even mentioned what falling values in public and private equity holdings will do to the solvency of these receptacles of retirement capital.

Even though the real downside action is yet get underway, the bailout of pension funds has already started:

What happens in cryptos will not stay in cryptos.

The first half of 2023 is promising to deliver the long overdue reckoning on what is destined to be referred to as…‘the greatest episode of mass delusion and speculation in market history’.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

Dear Reader,

Last week came more evidence that inflation isn’t going away. Today, we explain why. From MarketWatch:

‘In data released Friday, U.S. producer prices rose 0.3% in November versus the 0.2% median forecast from economists polled by The Wall Street Journal. The increase in producer prices over the past 12 months slowed to 7.4% from 8.1% in the prior month, and was down from a 11.7% peak in March.

‘The report, which came in above expectations, indicated that there’s less moderation in price pressures than analysts had expected for last month.’

Foretelling much worse inflation sometime in the future, prices for finished consumer goods actually went up at a 16% rate — the highest in 48 years.

Three major busts

But that’s the trouble with a ‘sea of lies’; it inevitably gets stormy. Ships run aground.

The Fed gave out the lie that it could manipulate the economy and make us all richer. It claimed to be ‘smoothing’ the economic cycle. No more bubbles. No more busts.

But thanks to the Fed, we’ve seen three major bubbles in the last 22 years. And three major busts. We’re still in the third one.

The Fed had no magic…no genius…and no common sense. All it was really doing was ‘printing up’ money…and handing it out to its friends on Wall Street…and to the government itself. As long as the money kept coming — they could refinance old debt with new, cheaper debt, and the economy looked stable and healthy.

But it was actually getting weaker and more vulnerable to inflation. The debt, public and private, has ballooned by more than US$60 trillion since the beginning of the century.

And who will pay it? The same people who will pay higher prices for everything. The same people who have been losing income for 20 months in a row…and who will lose their jobs in the next recession.

And this time, the Fed won’t come to the rescue.

Facing US policymakers right now, for the first time in four decades, is a headwind that won’t go away: inflation.

That’s the big difference between the 1982–2020 period and today.

The Fed can no longer support the stock market and the economy, with cheaper and cheaper lending rates. That’s not a detail; it’s fundamental to understanding what comes next.

Demand boosters

In short, neither the government, corporations, nor households are going to be able to rollover their debt at lower rates. Instead, interest rates will be higher. And many debtors won’t be able to refinance at all. Here’s the latest on the debt market, from MarketWatch:

‘U.S. bond yields rose on Friday, giving the 10-year rate its biggest weekly advance in five weeks, after data showed that wholesale price inflation picked up in November by more than expected.

‘The yield on the 10-year Treasury was up 7.5 basis points at 3.567% versus 3.492% Thursday afternoon. It rose 6.5 basis points this week for the largest weekly gain since the period that ended Nov. 4.’

The proximate cause of this inflation is the federal government’s overspending during the COVID Panic…along with a long history of the Fed lending money at rates that are far too low for far too long. And though the Fed has begun a ‘tightening cycle’, its key rate is still about 370 basis points BELOW the inflation rate.

The lawmakers make things worse, too. Spending for 2023 is expected to reach about US$5.9 trillion, or more than 25% of GDP. That will leave it with a projected deficit of US$1 trillion, which will surely go up as the recession begins to bite.

All of these are ‘demand’ boosters. They give consumers (or at least the government) more money to buy things, pushing up prices.

But there are two sides to prices — supply and demand, bid and ask. On the ‘bid’ side, the feds’ money adds to the money supply. But on the supply side, too, there are some nasty rocks in the sea of lies. Supplies of goods and services depend on labour, investment, innovation, transportation, energy, and a host of other in-puts. When those become more difficult to acquire, distorted by phony price signals, or just more expensive, prices for goods and services rise.

Real goods and services are mostly produced by the middle class in the private sector. They drive the trucks…keep the books...run the factories…and make sure the work gets done.

But the middle class is working less and less. The labour participation rate has gone down this entire century. Today, there are nearly 100 million adults who don’t work at all.

COVID-era hallucinations

To make matters worse, those who still work are often beset by busybodies. The private sector is ruled by the public sector. And the public sector aims not to increase output but to stifle it.

During the COVID Panic, for example, the public sector actually shut down much of the private sector. Factories were closed. Restaurants and bars were shuttered. Aeroplanes were grounded. Much supply was lost to bottlenecks and inventory mistakes made under the influence of COVID-era hallucinations.

But even more output is lost to the steady and unrelenting, day after day, growth of laws and regulation. More restrictions…more lawyers…more accountants…more administrators…

….and every one of them is rocking the boat.

Every day, The Wall Street Journal brings more examples.

‘FTC Sues to Block Activision Deal’, said the main headline on Friday.

Then, over in the left-hand column:

‘Pressure is mounting on the SEC to step up enforcement of key hubs of the crypto industry…’

This followed an announcement on Thursday:

‘Federal lawmakers dealt a setback to Boeing, proposing a defense bill that didn’t exempt’…blah, blah…

These, of course, are just the big items. Behind them are thousands of pettifogging rulings…directives and diktats…each of them making output more expensive.

So, don’t count on a quick return to the Fed’s inflation target — 2%. More likely, inflation will be stubborn…forcing the Fed to keep raising rates ‘until something breaks’.

Regards,

Bill Bonner,
For The Daily Reckoning Australia