“Companies can’t be great until they’ve almost failed.”
Failing With Style
I was on a London trading desk when the financial system was teetering under the weight of Long-Term Capital Management’s wildly over-leveraged fixed income portfolio.
They had some positions in equities, too: One morning, I heard a rumor from the local brokers that LTCM was long Volkswagen preference shares in worryingly large size.
This nugget of information, I thought, would win me points with the biggest traders on the floor, the event-driven group. So I made my way over to their side office and suggested they might want to be short VW prefs in case LTCM started unwinding.
The response was, “Yeah, we are. Here’s the rest of their book.” And they handed me a two-page printout listing every one of LTCM’s positions, all of which would shortly be hitting the market.
It was incredible information, straight from the committee overseeing the rescue of the global banking system. And, of course, entirely useless by the time it got to a regular equities trader like myself.
The information had plenty of time to find its way to me because LTCM was a slow motion car crash.
Their positions, untenable right from the start, were allowed to build over several years, by which point they were too big to just quietly unwind.
Instead, in-the-know investment banks had weeks to position themselves against LTCM’s books while the Fed figured out what to do about it.
LTCM failed slowly. Which is what made it so dangerous.
Rushing in To Buy
Much like back then in equities, I am similarly always about two weeks behind the curve in crypto.
By the time I’ve learned about something interesting, the whales are fully positioned and ready to unload their bags on me.
It’s a little deceiving in crypto because it feels like the information on Twitter is nearly real-time. But the booms and busts are so quick, the window for any informational edge is tiny.
This is unfortunate for minnow traders like myself. But it’s great for the asset class as a whole: Things in crypto fail too quickly for any one blow-up to pose a systemic risk.
Having bought some altcoins in the ICO craze, I should have been more attuned to the quick boom and bust cycles of digital assets.
To my credit, I knew that I was buying into a bubble in 2017. But George Soros famously said that when he sees a bubble, he rushes in to buy.
So I rushed in to buy.
The bubble burst, of course. That much I expected. But how fast it burst was totally unexpected (by me, at least).
Lesson learned: Everything happens quicker in crypto.
I’ve had to re-learn that lesson a few times recently.
Bubbles like yield farming and protocol-owned liquidity inflate and pop so quickly, it’s difficult to be early enough to make it worth getting involved.
This is a feature of crypto, not a flaw.
The ICO bubble popped long before any normal person was likely to get involved. So there was no real damage done and no regulator required.
If you were capable enough to figure out how to buy altcoins in 2017, you were capable enough to make your own financial decisions.
Same logic goes for, say, the OHM forks. If you’re web-savvy enough to open a digital wallet and buy something as obscure as OHM, you should be free to lose your money any which way you want.
I have recently exercised my freedom to lose some of my own money that way.
But the yield farming, OHM forks and other questionable things I’ve tried have all failed so quickly, it’s stopped me from getting too invested in any new idea.
Crypto’s booms are short-lived — which has made my learning process a lot faster and, most importantly, a lot cheaper than it otherwise would have been.
This is helpful for larger investors, as well.
The venture capital model is famously dependent on a small number of giant winners returning multiples more than the losses incurred on a large number of small losers.
This has worked great in tech investing and should work better still in crypto.
The risk in VC is that a fund invests in multiple rounds of a startup that never makes it to IPO.
In Web3, it’s a much shorter path to issuing a tradable token. And the losers are likely to fail before a second funding round even gets considered.
I’m not sure the winners will be as big as they were in Web2 — crypto may not lend itself to mega-cap aggregators like Google and Amazon.
But for the losers, it will be much less costly.
Crypto succeeds fast, too.
The cost to launch a crypto protocol is far lower than the cost to launch a tech startup, so both builders and investors get many more shots on goal.
Lots of those will be iterations of failed projects, implementing all the lessons learned.
Lots will be iterations of successful projects, challenging incumbents with incremental improvements.
The core tenets of crypto — open source software, composability, decentralized decision-making — will ensure that competition remains fierce in Web3.
Crypto’s positive feedback loop is how quickly poor projects fail and how quickly good projects are challenged.
All of which would be slowed down by government regulation.
Instead, crypto self-regulates by imposing small losses on lots of people like me.
This, again, is a feature, not a flaw.
Attempting to regulate the risk out of finance tends to be counter-productive.
Just recently, the SEC proposed a new rule that would require private funds to publicly report all of their positions.
Which would do nothing other than make it easier for investment banks and others to position themselves against funds that were in trouble — just like with LTCM.
Regulation, in this case, would create the problem it's meant to solve.
With unregulated digital assets, in contrast, positions are on the blockchain for all to see.
Dangerous imbalances are not allowed to build, and untenable positions are liquidated by bots, not committees of front-running investment bankers.
Failure comes quick.
Which means there will never be an LTCM moment in crypto.
Blockchain Association Executive Director Dishes on Crypto Regulation Roadmap — Blockworks
What Is Yield Farming? What You Need To Know — Blockworks
Solana Payment Processor Raises $15M on Promise of Instant Settlements — Blockworks
Solana Protocol Gets $3M in Seed Funding With Aim to Bridge DeFi Margin Trading — Blockworks
Investors Can Now Buy Home Equity Slices Via Fractionalized NFTs — Blockworks
Former YouTube Head of Gaming, Polygon CEO on the Value of Blockchain Integration — Blockworks
Valkyrie Vies To Manage Crypto Companies’ Treasuries — Blockworks
Miami Family Office Backing NFT Fund Launch Helmed by Fine Art Collector — Blockworks
The Investor’s Guide to Yearn Finance — Blockworks
Historic Brazilian Bill Regulating Crypto Heads to Senate Vote — Blockworks
Market Wrap: S&P Drops to Lowest Point Since June 2021 as BTC Extends Losses — Blockworks
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Finding interesting NFT projects early 101 (Continues) (Thread) — WMP
$BITO and $ARKK have both managed to see net inflows YTD (both in top 12% of all ETFs) (Table) — Eric Balchunas
Pet peeves… I love crypto, its people and their unbounded intelligence and optimism. It inspires and humbles me daily! But some things drive me nuts. A few archetypes, lest we become one of them. (Thread) — Jason Choi
web3 music startups doing 1 of 3 things imo.1. packaging up royalties - catalogs as a new asset class. 2. artist nfts + token communities - web3 fan clubs, expanding price elasticity of fan continuum. 3. reinventing labels via a DAO structure - crowd sourcing the next big thing (Thread) — Vance Spencer
81 of the top 100 companies by market cap use blockchain technology — Blockworks