DeFi DeBrief #17: The (real) cause of crypto winter 🥶
|Welcome to issue #17 of the DeFi DeBrief, your weekly digest of the biggest news in DeFi.
The collapse of the GBTC premium was the cause 🤯
With all Bitcoin ETFs turned down, a firm called Digital Currency Group (DCG) created the next best thing. It rolled out the Grayscale Bitcoin Trust (GBTC), enabling investors to get bitcoin exposure via the stock market.
The issue was the mechanics of the trust meant it didn’t directly track Bitcoin’s price. Instead, it traded at a premium or discount dependent on investor demand.
During the bull market, GBTC sold at a premium. And funds like 3AC could capitalise on this by purchasing GBTC shares from Genesis by ‘giving’ BTC to the trust.
If they then waited six months (and the premium held), they could sell the shares OTC, netting a healthy profit: a strategy so lucrative they bought huge amounts of bitcoin on leverage, knowing the potential profits at hand.
This created a spike in BTC’s price, but then, sentiment changed, the premium turned to a discount, and the likes of 3AC were margin called.
Because of this, the first domino was primed to fall.
Why should you care?
Most people view Luna’s collapse as the trigger of the latest market downturn.
In reality, it came from funds playing cat-and-mouse with the precarious investment strategy outlined above.
The problem was that these funds were taking credit from lending desks like Genesis, which loaned out client deposits in return for yield; these loans then powered most of the high APY ‘Earn’ programs you saw last year.
But when the GBTC trade turned sour, pressure piled on 3AC as its collateral lost value, and the Luna collapse was the last nail in its coffin. Next came the contagion, which continues to play out today (Genesis seemingly still teeters on the brink).
What we’ve learned is centralised lending desks can take on hidden risks, so their APYs come at an unknowably high cost. On the other hand, decentralised finance shows all risks on-chain, better-protecting investors.
That’s why Elitium only trusts DeFi protocols to power platform yields, avoiding the risks of centralised lending desks at all costs.
|IN THE HEADLINES
New Stripe widget brings crypto to the masses 🌐
A core challenge of web3 businesses has been onboarding everyday users, stemming from the difficulty of buying cryptocurrency. But FinTech giant Stripe has a solution: a fiat-to-crypto onramp for Web3 businesses.
The product is a customisable widget that can embed into any decentralised exchange, NFT platform or wallet, designed to allow customers to purchase crypto using fiat instantly and directly within an app.
The service even handles KYC, payments, fraud and compliance issues, which is crucial for widespread adoption.
IN THE HEADLINES
Tokenisation of illiquid assets could be a $16 trillion opportunity 🚀
Boston Consulting Group has just released a report forecasting that the tokenization of global illiquid assets could be a $16 trillion business opportunity by 2030. The report cites efficiency, liquidity, and transparency as the core drivers.
You see, the blockchain enables automation, boosting efficiencies and potentially reducing things like bond issuance costs by up to 90% and fundraising costs by up to 40% versus traditional private placements.
There’s also an estimated $4 trillion locked in private equity (and much more in real estate), which tokenization can open up to a global investor pool.
Five short reads catching our eye this week:
TEMPERATURE CHECK 🔥
*Data last updated at 08:00 on 7th December.
TWEET CHECK 🐦
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