1/ There are a lot of smart VCs concluding the demise of Luna set in motion contagion.


The collapse of the GBTC premium was the main culprit.

It created, for a time, the perception of a perpetual motion machine disguised as a ‘carry trade’…

🧵 #bitcoin pump + Genesis
2/ The trade was:

- buy Bitcoin spot
- Deliver to the Grayscale trust in 6 months (per the rules) in exchange for USD
- Pocket the premium between GBTC and Bitcoin (up to 30%+ for 6 month holding risk)
- Repeat (and add leverage)

You ‘carry’ the GBTC for six months and sell it.
3/ Normally the carry trade refers to FX markets.

HFs would borrow in Japan at nearly 0%, and then lend in a higher interest rate country. The HF bets the FX rates are stable.

Also, HFs would buy bonds yielding 3% and borrow on margin at .5%.

Same idea - spread capture.
4/ This pattern of borrowing with cheap leverage and buying risk assets boosted all asset classes to record levels in 2021.

Crypto assets, SPACs, tech stocks, bonds, and housing were all beneficiaries of ultra low rates and QE.

Inverse price / yield relationship on steroids.
5/ GBTC was a billion dollar trade.

DCG and others spent $750 MM+ buying bitcoin with leverage from Genesis (and BlockFi et al).

This $Bn in purchasing caused a boost in the price of bitcoin to record highs.

That momentum attracted additional buying - FOMO money.
6/ The end of the premium, together with higher rates, caused an unwind in the GBTC and other carry trades.

These mechanisms started to go in reverse. The unwind sent bitcoin on a roundtrip back to pre-leverage lows.
7/ The marginal demand from the largest buyers of bitcoin were no longer buying.

They were getting margin called. 3AC was liquidated.

Animal spirits were replaced with Survival instinct. Fear replaced Greed.

Luna added another narrative violation.
8/ Elimination of the GBTC premium kicked out a major revenue driver for CeFi.

BlockFi, 3AC and other market leaders made hundreds of $MM on it. They raised VC money on an unsustainable and highly risky revenue source.
9/ Many of these crypto banks were actually capital markets businesses in disguise.

They made money on the GBTC premium. Or captured spread as a prime broker.

The ‘cover brand’ looked like a neo-bank app. The internal operations resembled a wall street trading desk.
10/ The end of the GBTC carry trade is similar to the inversion of the yield curve.

The GBTC flip gave crypto investors a 7 mo warning before the Nov 21 peak in asset prices.

Prices and the bear market started 5 to 6 months before Luna collapse.
10/ Side Note: Lumida passed on investing in BlockFi for this reason.

It was easy to see the GBTC trade was the primary revenue driver and that was not a sustainable business model.

Also, the ‘non-bank acting like a bank’ story was a major concern point.
11/ Lumida also called out Celsius CEO Alex Mashinsky in late May at the FinTech Nexus event before Celsius blew up.
12/ When DCG on July 6th announced they were ‘assuming certain liabilities’ in connection with 3AC, we pounced on that back in July.

It’s all variations on a carry trade at work.

13/ GBTC was the first warning sign to reduce risk.

Luna accelerated issues.

But the structural shift started with the GBTC carry trade failing.

This ended layer upon layer of these perpetual motion machines.

It set in motion credit loss & contagion across lending books.
14/ I explain this on @laurashin Unchained podcast releasing this Tue. Stay tuned!

Let’s get the autopsy right to prepare for the next cycle.
15/ If you enjoyed this thread, please give a like and a retweet.

Also follow @LumidaWealth where we focus on institutional grade insight and wealth management (SEC Registered).

Stay tuned for a research drop coming soon re: another key player in the crypto ecosystem.

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Great thread Ram! First time reading it. I found your other thread going over Barry’s letter to shareholders helpful in my research. But this GBTC premium trade dynamic was well known to any analyst who has closely followed this market over the last 5 years.