“2022 has been a brutal year, with the collapses of former titans like Terra, 3AC, and FTX wreaking havoc on the industry. The total crypto market cap is down over 71% from its peak, wiping out more than $2.2 trillion in value in just over a year.
But could the worst be over? Chris Burniske believes so. A partner at venture firm Placeholder, Chris is a true crypto OG, having survived numerous cycles. He wrote one of the earliest books on crypto investing, and was the first buy-side analyst to cover crypto. He’s also nailed this bear market, calling the top in November 2021, and urging caution during the July-August rally.
Now when many are questioning crypto’s future… Chris has flipped bullish and believes there’s a strong chance we’ve bottomed.
1. No Forced Sellers
The industry as a whole is also better positioned to weather the FTX storm relative to the collapse of Terra and 3AC, as credit across crypto (and for that matter, TradFi) is much tighter now than it was when those events occurred.
While we may see some bankruptcies, this will not add near-term sell-pressure to the market, as assets held by bankrupt companies will be auctioned off at a much later date. Chris does acknowledge that there is a risk of end-of month selling from fund redemptions, but believes the impact of this on the market may be reduced, as most funds who are getting redeemed have likely been rekt.
2. BTC Is in Deep Value Territory
A variety of on-chain, technical, and quantitative indicators that suggest Bitcoin is in deep-value territory.
3. ETH’s Fundamentals Are Strong
Ethereum’s strong fundamentals also suggest that the bottom may be in. Chris believes the effects of the Merge on ETH market structure and flows are beginning to take hold. ETH’s technicals suggest that it’s in value-territory, as it’s trading below its 200-week moving average.
Chris also looks to the application layer. In particular, DeFi on Ethereum has not skipped a beat. Major DeFi protocols have operated flawlessly, with major lending markets remaining fully solvent and executing liquidations, while DEXs have facilitated billions in trading volumes. Chris believes that capital allocators who are paying close attention to the space are aware of and understand this.
4. Improving Macro
Risk-assets have been hammered in 2022 as the Fed has hiked interest rates. This dramatic increase in the risk-free rate has contributed to multiple compression in the equity market, as investors are no longer willing to stomach nose-bleed valuations now that there is a true cost of capital.
As a result, high-growth tech companies, particularly those in the Nasdaq (which crypto has demonstrated a strong correlation to), have experienced a brutal drawdown of a similar magnitude to the unwinding of the dot-com bubble of the late 1990s.
However, one critical difference between now and then is that the fundamentals of many of these companies are strong, with businesses such as Meta continuing to be free-cash flow machines with a strong grip over the market in their verticals.
Inflation, the straw that stirred the tightening drink, is also showing signs of rolling over, with recent CPI and PPI prints coming in soft. While some may scratch their heads at the market rallying with headline inflation at a 7-handle, it’s important to remember that markets are forward looking.
5. These Factors Are Aligning
With the post-LUNA deleveraging coming to an end, bullish on-chain, technical, and quantitative indicators for BTC and ETH as well as an improving macro backdrop, the stars are aligning for crypto to have put in a bottom. The aforementioned confluence of factors is enough for him to believe that there is a strong probability that the worst (at least in terms of price) is behind us.”
“Whoever was behind the $600 million exploit of crypto exchange FTX started exchanging millions of dollars worth of ether to Ren Bitcoin (renBTC), a token that represents bitcoin on other blockchains, early on Sunday. Funds stolen from FTX were steadily converted to ether over the past week, making the exploiter one of the largest holders of the token.
The use of renBTC may surprise some in the crypto space: In 2021, Alameda Research – the Sam Bankman-Fried-owned trading arm at the center of a multibillion-dollar scandal – said Ren’s development team was “joining” Alameda and would work on expanding Ren’s usage to several blockchains.
As per a study by blockchain analysis firm Elliptic, the Ren bridge has been previously used to launder stolen funds to the tune of at least $540 million – as it may provide privacy to users, per the Elliptic report.“
“An expert review of FTX’s audited financial statements reveals a series of red flag related-party transactions that should have led to more scrutiny of the company’s operations.
This month’s blowup of Bankman-Fried’s empire was like a meteor striking the crypto world, and the shock waves are still upending the industry. But if you knew where to look in the audited financial statements, there were signs that it was coming.”
“Following a discussion with angel investor Balaji Srinivasan and crypto exchanges such as Coinbase, Kraken and Binance, Buterin recommended options for the creation of cryptographic proofs of on-chain funds that can cover investor liabilities when required, also known as safe centralized exchanges (CEX).
The Merkle tree technique is basically as good as a proof-of-liabilities scheme can be, if only achieving a proof of liabilities is the goal. But its privacy properties are still not ideal.
As a result, Buterin placed his bets on cryptography via zk-SNARKs. For starters, Buterin recommended putting users’ deposits into a Merkle tree and using a zk-SNARK to prove the actual claimed value. Adding a layer of hashing to the process would further mask information about the balance of other users.
The best case scenario, in this instance, would be a system that does not allow crypto exchanges to withdraw a depositor’s funds without consent. ‘In the longer-term future, my hope is that we move closer and closer to all exchanges being non-custodial, at least on the crypto side.’ On the other hand, highly centralized recovery options can be used for wallet recovery for small funds.
Fellow crypto entrepreneur CZ, who has been vocal about Binance’s intent for complete transparency, acknowledged the importance of Buterin’s recommendations, stating:
Vitalik’s new ideas. Working on this.”
“FTX, along with 101 of the 130 affiliated companies, announced the launch of a strategic review of their global assets. The review is an attempt to maximize recoverable value for stakeholders. SBF’s replacement, CEO John J. Ray III, confirmed that FTX affiliates have solvent balance sheets, which could be sold or restructured to cut losses.
It will be a priority of ours in the coming weeks to explore sales, recapitalizations or other strategic transactions with respect to these subsidiaries.”
See Also: SBF’s lawyers terminate FTX representation due to conflicts of interest