The Breakdown - The Altcoin Apocalypse: Understanding Crypto's Weekend Crash

Episode Date: June 12, 2023

Late Friday night/early Saturday morning, the crypto markets started puking, with a handful of altcoins crashing by more than 20% in a single 15 minute candle. On today's episode, NLW explores what happened and why.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, June 12th. Today, we're talking about the Altpocalypse, a brutal weekend for crypto. Before we get into that, if you're enjoying the breakdown, please subscribe to it. Give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod.

All right, friends, happy Monday. As you can tell, I am mostly back to normal or at least close enough to proceed with the voice. Been interesting to get your feedback on the AI readings this weekend. It seems like a lot of you were like me impressed with where the technology is, even if, of course, it's not an exact one-to-one substitute. It won't be my normal plan of action to use AI for Long Read Sunday, but it's good that we know that we now have a tool. If you felt differently and you hated it, also let me know that on Twitter at NLW because so far it's been mostly positive feedback, at least when it comes to the novelty.

But anyway, coming to our show today, if you were watching the coins on Friday night, well, let's just say for the sake of your Friday night, I hope you weren't watching the coins. Today, obviously, we are exploring the alpocalypse that said a slew of tokens down by 15, 20% plus and asking, of course, what drove it. but to do so, we have to go back a little bit earlier. On Friday morning, Robin Hood announced that they would be ending support for all the tokens named as securities in the lawsuits brought by the SEC last week. That delisting will affect Solana, Cardano, and Polygonsmatic. Users will be able to access transfers in trading for the three tokens until June 27th. After that date, Robin Hood will sell user assets at the market price and credit their accounts.

Robin Hood noted that no other coins are affected and that all tokens are safely held in cold storage. Now, this was the capstone on a week that also saw Robin Hood's chief compliance officer Dan Gallagher testifying before Congress around the company's frustration with being unable to register the platform to offer crypto trading. Gallagher, who is formerly an SEC commissioner, said, quote, when Chair Gensler at the SEC in 2021 said, come in and register, we did. We went through a 16-month process with the SEC staff trying to register a special purpose broker dealer. And then we were pretty summarily told in March, that the process was over, and we would not see any fruits of that effort.

End quote. Robin Hood said that the delisting decision was part of their regular review process, however, only all coins named by the SEC were affected. Similar alts, for example, like Avalanche, remain available. Robin Hood tweeted earlier this week the SEC sued crypto companies' Binance and Coinbase. The SEC has alleged that a number of cryptocurrencies trading on those platforms are unregistered securities, including three that are currently supported on Robin Hood Crypto. This introduced a cloud of uncertainty around these assets, and as a result, our team has decided

to end support for them. We believe in the future of crypto, and will continue to advocate for regulatory clarity in the U.S. so that customers can participate in the marketplace with greater confidence. Now, this is all infuriating and seems pretty much exactly like the SEC's goal. Ethereum mainstay Eric Conner said, As much as I'm not a fan of Solana and Cardano, I will absolutely stand against the SEC using bullying tactics to force exchanges to delist them. Complete BS.

Adam Cochran writes, this is the unfair chilling effect of regulation by enforcement. Projects that haven't had their day in court and have no path to defending themselves, getting dropped because Gary said the S word. Coin Bureau said less than two days later. They have announced that they are delisting Cardano, Solana, and Maddo, all based on nothing but accusations by the SEC.

What happened to due process? Now, a few other things on Friday afternoon led to the overall turbulent sentiment. There was an email circulating which claimed that SO-Fi would be delisting eight coins named by the SEC, although I haven't seen confirmation of that yet, so currently I'm treating it as rumor. And then Crypto.com also announced on Friday that they would be suspending their U.S. institutional exchange. They said that the exchange would be shut down within two weeks with Crypto.com claiming that the platform had seen receding demand from U.S.-based institutions.

Crypto.com's retail U.S. offering would remain available. Now, it is also worth noting that neither Coinbase nor Binance are delisting any of the tokens named as unregistered securities, but maybe that's because they've already been sued. So this is all happened during the day Friday, but we didn't see the big leg down. That really started to happen around 8 p.m. Friday, but really especially between 12 and 3 a.m. East Coast time on Saturday morning. Charts had been breaking down all of Friday night, but after midnight, liquidity, broke, and we saw a synchronized plunge across almost all pairs. Now, of course, the damage was

centered on coins that had been named by the SEC. Maddick dropped by around 25% in a single 15-minute candle, and Solana and Cardano each fell by around 20% in the same time frame. Now, Bitcoin and ETH did fare a little better, but still lost around 2% in that 15-minute sell-off before bleeding out overnight. The damage was widespread, however, severely impacting all to cross the board, even if they hadn't been named by the SEC. For example, Avalanche, which has so far steered clear of that unregistered security label, lost 20% during the 15-minute candle of carnage. Overall, Friday night into Saturday morning wiped out almost $50 billion from the combined market cap of all crypto assets. Now, in total, it was still a little bit smaller than other

single-day drawdowns. For example, the loss on the news of the day of the Binance lawsuit was slightly larger, and FTX's closure incinerated around $230 billion across four days, but it was still the most violent move in recent memory. So the question quickly became who was selling the coins, what was happening? The move was extreme enough that crypto Twitter assumed that a large fund had blown up and began looking for bodies. Happy to oblige, a hoax was circulated in the middle of the night that a previously unheard of firm called Cimitar Capital had liquidated $2 billion worth of vaults. The fake post going around was fairly convincing, complete with a Photoshopped article from the Financial Times and caught out some of the sleep-deprived members of the community.

However, before too long, Evgeny Gaeov, the CEO of Marketmaker Wintermute, poured cold water on the rumor tweeting, don't know what I find more hilarious, that someone thinks there is an unknown hedge fund out there with $2 billion worth of vaults, or that somebody thinks liquidating $2 billion of vaults would result in such a relatively mild move. Now, some early speculation also fell on CZ and Binance. Cryptotrater Googly noted a $4.4 billion reduction in the exchanges corporate funds held on chain since June of last year. Googley wrote, TLDR, they either won mass sold coins over the last month

and cashed out the fiat somewhere, or two, they moved a large chunk of Binance's company reserves out of the exchange's cold wallets. My best guess, Binance decided for some unknown reasons to move a large chunk of their corporate funds out of the exchange's wallets and do whatever with it. Nothing necessarily wrong here, but probably one thing to watch

given the current market noise and PTSD we all have. Now, CZ rejected this accusation, quote tweeting and saying, why is the market going up or down? No one really knows. A lot of people claim to know and can often pin it on a single, often wrong reason. In reality, there are many sellers and buyers in a market. Everyone may have their own reasons. A few examples. False narrative. Binance converted its holdings to Fiat, stablecoin reserves used to pay for short-term salaries or expenses decreased. Our crypto reserves increased in the past months' weeks' days. Second narrative,

1.3 billion of Alton Robin Hood could be dot-da-dot. Me, no idea. you probably know more than me. Greed and fear are the two emotions you need to manage in any market. Our job is here to ensure the platform works smoothly. What's notable is less the denial and more the fact that we're in an environment where Cizy felt like he had to address it at all. Now, once the dust had settled, on-chain analysts look on-chain sifted through the rubble. They found that marketmaker Cumberland had deposited $9.8 million worth ofmatic tokens into Coinbase and Binance since Friday morning. Obviously, depositing coins on an exchange is a move that's typically read as an intention to sell. Later, look-on-chain added that exchange inflows had also come

from a whale wallet with prior transactions to Robin Hood, Jump Trading, and Cumberland, and that whale had deposited around $6.5 million worth of Maddock on Friday as well. Scope protocol noted that Marketmaker Jump Trading had transferred around $30 million worth of Madik from accounts held with Robin Hood on Friday, with the bulk of the tokens placed with marketmakers C-2b, before being deposited with Coinbase and Binance. Wintermute joined in with the other market makers depositing 1.7 million worth of Maddick into Binance. Scope also picked up on a 100 million tether deposit into Binance also on Friday. Now, the flow of funds had been suspiciously large in the lead-up to the crash, even in tokens that hadn't attracted the attention of the SEC.

Jump trading moved around $2 billion worth of Eath from their storage wallet with Robin Hood into a trading wallet throughout the prior 10 days. Judging from their holdings, it appears that Jump had a large piece of the market-making action on Robin Hood. With Friday's announcement, we know that, for certain alt coins, there soon won't be a market to make. There were also rumors earlier in the year that Jump were looking to get out of the crypto market making business, at least in the U.S. Adding some credence to the idea that this drawdown was to do with market makers clearing inventory rather than retail selling, many noted up that around the time of the nuke, liquidity throughout crypto markets dried up. Data from analytics firm Highblock showed a

20% drop in their global bid-ask metric, a measure of systemic liquidity across all exchanges. Indeed, even before we got to Friday night, liquidity had been deteriorating in pockets of the market. Analytics firm Kiko released data on Thursday showing that spreads had massively widened on Binance U.S. over the course of the last week. Their metrics, which measure how many trades are executed with a spread of 1% or less, had collapsed by 70% from conditions the previous weekend. Kiko Research Analyst Connor Ryder said, Marketmakers are obviously pulling liquidity from the exchange.

Worsening U.S. liquidity is something that has been playing out over the course of a few months, But this seems to be the straw that broke the camel's back for liquidity on Binance U.S. Algod Trading wrote, people don't get the importance of liquidity and everything has been drying up. Star Killer Capital CIO Lee Drogan wrote, Marketmakers just pulled all the liquidity from every alt coin on Binance. Just absolutely done. Artem, the tech lead at D.D.5, wrote a thread, including the lines, prominent market makers including Cumberland Jump Trading and Jane Street,

withdrew their positions from the market. This panic sell-off by major players in the crypto market, has raised concerns. Wales and institutions are actively offloading alt-coin positions causing substantial price drops. And honestly, at the end of the day, all of this makes sense. Is it totally messed up that Gary Gensler can effectively get exactly the response he wants? Just by claiming something in a lawsuit? Yes. Is it also rational for Robin Hood who haven't been sued yet to try to get out ahead of it and lose these assets? Also, yes. Is it then rational for these big institutional players who are dealing with crypto to also not want to get their hands on these things, which Gensler has now made extremely

politically risky. Yes, yes and yes. Remember, the reality is that market makers are not in the business of holding positions and waiting for a more permissive regulatory environment to emerge. They want to be on the other side of daily trading volumes, not wading it out stuck in illiquid all coins. As Kamikaze Eath summed up, Robin Hood announces it will dump user alts. Hours later, those alts dump hard. Every crypto- Twitter trader. There was no reason for this dump, you absolute fool. go down when people sell, so it was just people selling, you ignorant ass? Stop pretending there's a reason. Now, when it comes to where this leaves the space, sentiment is a combination of dejected and just outright angry. Misari co-founder Ryan Selkis writes, this is what SEC protection looks like.

Aren't you grateful your tax dollars go to Gary Gensler, who already made $100 million from Goldman Sack so he can pull up the ladder behind himself and screw you? Investor Mike Dutas writes, It's very disheartening that the plan was always to issue no reasonable guidance, avoid proactive enforcement, never engage in good faith with good actors, and to afford no economically or legally viable path to comply with regulations. It was always to create instability and fear. Now, speaking of instability and fear, one thing we haven't talked about yet is the metric ton of chatter about DOJ and criminal charges that might be coming next. Now, you guys know me well enough to know that Usually I don't speculate on rumors, and the only reason I'm sharing this right now is that in the

context of the fear out there, rumor is a part of the sentiment. Rumor is driving actual behavior, and it's reaching a fever pitch. Of course, Binance has been at the center of it. Apiabicus wrote on June 6th, update, lots and lots of agency insider chatter that the DOJ is close next week to filing claims against Binance. The specific charges are not yet known. The existence of commingling of funds and the SEC claims will most certainly be one of them, although more serious charges are being whispered. Now, no disrespect to Andrew, who has

often been pretty spot on over the last few months, but an actually journalistic source comes from Jeff Roberts at Fortune who writes, there is another huge shoe to drop in crypto, the DOJ. DOJ has investigated Binance for years, and typically DOJ and SEC suits drop together. Source says possible explanation is Binance and DOJ are still talking settlement, or Gensler decided to front-run DOJ for his own ends. Whatever the case, Crypto Jondo sums up the feeling of many when he says, if the DOJ is really going to prosecute Binance, crypto is done until a new king arises. Now, one other piece of rumor for the sake of rumor completeness, again from AP Abacus, this time on June 11th, update, Gensler isn't finished, multiple sources claiming that

his next targets are low to mid-level crypto VCs. VC's chatter is focused around the fact that Gary Gensler is currently unpredictable and can't be controlled. These are easy, no downside targets for someone with continued political aspirations. So, there you have it. While it would be nice to have some fancy explanation for what happened this weekend, the real one is probably pretty clear. People were already scared. They were already nervous.

The SEC gave more context and specificity to that nervousness and fear. Rational business actors are removing themselves from the implications of that fear, and markets are tanking because of it. And then they fight you was never going to be pretty. Hopefully you guys still managed to have a great weekend, though. I'm sure there'll be lots more for us to discuss this week, so until tomorrow, be safe and take care of each other. Peace.