The Weekly Distillation No.71
LUNA; Crash; Anniversaries; Dolphins; Desalination; WFH
I’m writing this from the Fairmont in St Andrews, the location for key Good Friday negotiations that brought ‘an end’ to ‘The Troubles’ in Northern Ireland. More importantly, it’s a favourite of ours, friends have kindly kept our children and we’re having a rare night away from our children. An amazing hotel and well worth a stay. Pretty special to look out of the window and see the ancient town of St Andrews, the Old Course and the Chariots of Fire beach.
People once said………….
“Robinhood grew from 700 at the end of 2019 to nearly 3,900 in two years, Tenev said. Those days are over. Robinhood “needed to grow that fast,” but the expansion led to “inefficiencies in the organization, duplicate roles and sometimes just more headcount than needed,” Tenev said.” - Robinhood’s executives stating the obvious for clearly out of control hiring. We’ve not heard the end of bad news from this company.
“Crypto is a bet on cooperation at larger scales without needing to pay companies to sit in the middle and coordinate everything.” - Packy McCormick’s definition of Crypto.
And yes Jack, that’s exactly it - we get to look in a mirror at the good, the bad and ugly of humanity.
”Finally, and most importantly, the failure of Terra and UST has, and will continue to have, an incredibly destructive real-world impact on human lives. The r/TerraLuna subreddit is filled with numerous posts in which users state they are contemplating suicide as a result of losing their life savings.” - Bankless
Skim it in a minute
A week of anniversaries
It was my 25th wedding anniversary this week which made me feel really old but also really grateful!
This newsletter also hit its second anniversary on Thursday - thanks for reading, giving feedback, sharing and grabbing me in the school playground (you know who you are) to give me your opinion on NFTs.
This newsletter is a personal hobby project, something I do because I enjoy it - but it’s a great opportunity to take stock and to ask for some input from you, as I think about where to take it over the next year. I’d love to get better, get bigger and make it a more significant part of my week.
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We don’t talk about LUNA (We need to talk about LUNA)
I had a thumping headache yesterday and today, and my headache pills have caffeine in - so I spent a lot of the night awake reading about Terra / UST / LUNA. I’m not sure I’ve got my head around it so I’m going to lay it out in very simple terms below and feel free to correct me if I’m wrong. What happened this week is both highly material, impacts the real world and might be a major pre-cursor to the future of money.
Imagine there’s a country called Goodland. This is a place that is made up of lots of people doing lots of cool things on its land, all of which are captured in a big database. Goodland is basically a blockchain, in this case Terra. All good so far?
To transact and do pretty much anything in Goodland, you need a way of buying and selling stuff, and paying for things. In Goodland, these are Chocolate Coins (‘$CHOC’). These Chocolate Coins represent LUNA in this story.
The people who built Goodland and $CHOC wanted to make sure that the price of the money (the exchange rate) doesn’t wing around too much. They could set a fixed rate against the $/£/Yen but they didn’t really like Central Banks so they decided to create a computer programme and another type of money, Sweets (‘$SWEET’). Each 1 Sweet can be exchanged for 1 Chocolate Coin. So if you don’t want Sweets you sell them and buy Chocolate Coins, and vice versa.
However, and this is where the computer programme comes in, if people want $CHOC more than $SWEET then the price of $SWEET falls as people sell it and $CHOC rises. So….the computer programme eats (‘burns’) $SWEET (causing the price to rise) and manufactures more $CHOC (causing the price to fall). By this clever trading, the price ratio between the 2 can be kept in parity. At least in theory.
One of the fatal flaws in Goodland is that there was a lot more money tied up in $CHOC than there ever was in $SWEET and so the last people trying to leave Goodland (in an unimaginable disaster scenario) were going to find no way to swap their $CHOC and they’d be going home with some pretty worthless chocolate coins. Albeit they could eat them.
There are pools of money (effectively liquidity pools) that buy things like $SWEET and provide confidence to the pool. A week ago, a major negative signal happened with a big trade out of the pool. The leaders of Goodland realised that this might be bad, but had heard of Soros breaking the Bank of England, the Hong Kong peg, the CHF/EUR peg and the Asian currency crisis and new they had to back up their shaky currency with other assets. So they go and buy $1.5bn Bitcoin to buy $SWEET and some other stuff.
Every man, woman and child and dog(e) heads for the exits. Helped, allegedly, by some pretty hefty aggressive trading by a couple of big financial institutions. No comment. At this point no-one wants $SWEET so the price collapses. The ratio between $CHOC and $SWEET is way off 1:1 at this point so the algorithm starts spitting out $CHOC - which causes the price of $CHOC to collapse. The flaw in the Goodlands economy is it works when people want $CHOC or $SWEETS but when they don’t want either then there’s not much value.
Goodlands now has a fleeing population, a run on the currency (finishing the week down 99%) and no-longer has a functional economy, with the leaders promising to rebuild but in the meantime Goodlands is being put into hibernation until they work out what to do.
Remember when the blockchain was decentralised? And no-one would ever be able to hack it or shut it down because we, the people, owned it?
Unsurprisingly regulators are pointing out this could be a systemic risk. The paper value lost this week was greater than the collapse of Lehman Brothers and we all know how that ended. Cue more regulation, greater focus on Central Bank issued Digital Currencies (CBDCs) and push back on any other algorithmic driven stable coins, currencies that are not collateralised and algorithmic trading in crypto generally.
If you want to read the reality of the collapse, then read this, the best explanation I have seen -
I hold no crypto currencies. I don’t provide investment advice. I’ve spoken to someone this week who lost a lot of money in this crash and that has real life and family consequences. It’s easy to be a hindsight investor but last time I checked there were no hindsight investment funds. Be compassionate. The approach I always took in my days in investing for when it came to getting crushed by the markets was:
1) Don’t get emotional. Take a break, go for a walk, sleep on it. Ha. Total rubbish. We often had to decide what to do in minutes after losing tens of millions - “DOUBLE OR QUIT DUNCAN, DOUBLE OR QUIT….WHAT SHOULD I DO!!????”. So of course you’re emotional. Try and bury the emotional response
2) Revisit your thesis. Why did you invest? Is it still valid? Will this still be worth more than it currently is in the long-run?
3) Why did you get it wrong? Is that temporary or permanent? Will waiting it out see the asset bounce back? Is the level of uncertainty too high?
4) Can you afford to be wrong from here on? If not (personal finances, job security, reputation etc) then scale back and take the hit.
5) Use others - test your thesis with people who don’t feel your pain. They also aren’t as emotional.
Some lessons from this week:
- The risk-off move of the markets (rising inflation, war, slowing growth, potential recession, overly careful Central Banks) is starting to ‘kill’ people.
Crypto is still nascent and lots of people are buying altcoins without understanding finance, capital markets or what they are doing. A good recipe for how to lose lots of $
There’s a difference between the future of Web3 and the price of a crypto altcoin. The underlying thesis for DAOs, NFTs and Dapps is the same as it was a week ago - https://threadreaderapp.com/thread/1524613312582799360.html?utm_source=pocket_mylist
Regulators are going to step in large now
Don’t invest in things you don’t understand. I once did this in an oil rig manufacturing yard in Singapore and got it totally wrong. Still not sure why.
Keep an eye out for contagion. All crypto is falling. If money floods out of crypto, a lot of jobs are going, a lot of funds are going to go down and we’re going to live through a very interesting next 12 months.
Softbank is pulling back - https://www.protocol.com/bulletins/softbank-startup-investments?utm_source=pocket_mylist
Are stablecoins stable? Err no….https://www.linkedin.com/pulse/stablecoins-stable-dror-poleg/?utm_source=pocket_mylist
How’s it going at Tiger, the most aggressive crossover fund?
Look at what matters
A few other titbits for you:
Dolphins are working for the Russians
I get super excited about desalination projects. I don’t have time to explain why. But here’s a cool development.
Workers are winning the war on WFH because they are right.
Enjoy the weekend. Thanks for reading. Please fill out the survey and if you liked this week’s newsletter, pass it on.