Mon, Jun 13, 2022|Whitney Tilson

Worst start to the year since 1962; Continue to avoid cryptocurrencies; Big Crypto Lender Celsius Freezes All Account Withdrawals; Celsius Will Catalyze Major Regulatory Scrutiny of Tether; Bar mitzvah in Chicago

1) The market is crapping out again today – a continued sell-off from Friday's unexpectedly bad inflation numbers (I'll have more on this in a future e-mail – stay tuned) as well as the collapse over the weekend of one of the largest crypto lenders, Celsius Network (discussed below).

As of this morning, the S&P 500 Index was down 20% year to date (officially a bear market) and the tech-heavy Nasdaq Composite Index is down 30%. It's the worst start to a year since 1962.

2) On May 12, under the subject line "Sell your cryptos," I disclosed that we told subscribers of Empire Stock Investor to sell the remaining ethereum (ETH) position we had recommended 13 months earlier, banking a blended 45% gain. I explained:

So why was I a buyer then and a seller now?

...Today, ethereum isn't nearly as good of a speculation, for three main reasons...

First, its price momentum is now completely in the wrong direction, having fallen nearly 60% from its peak six months ago. Normally, when investing, if the price of something falls, it becomes more attractive – who wouldn't rather buy a dollar bill for 60 cents instead of 80 cents?

But when speculating – when it's impossible to value something and you're mostly just hoping someone comes along after you and buys it from you at a higher price – you want price momentum.

Second, the macro environment has also gone in the wrong direction. An overheated economy, supply chain bottlenecks, and the war in Ukraine have sent inflation to 40-year highs. To tame it, the Fed is raising interest rates, which has triggered a stock market plunge... and a full-blown crash among speculative assets of all types.

Lastly, yesterday the crypto markets experienced what we might look back on as a "Lehman Moment" – a term that refers to the day storied investment bank Lehman Brothers filed for bankruptcy on September 15, 2008. It sent shock waves through the global financial system, both because of Lehman's size and numerous counterparties, but also psychologically, as investors realized the government wasn't going to rush in to save them.

On that day, the S&P 500 Index closed down 4.8%, bringing its losses to 23% from its peak 11 months earlier. The many buyers then probably figured the sell-off was overdone... but it was just getting started. Over the next six months, the index fell an additional 43%.

Starting on Monday evening, TerraUSD (also known as "UST") – the third-largest "stablecoin" used by crypto investors, whose value is supposed to be pegged to $1 – "broke the buck" and has been trading wildly ever since, at one point hitting a low around $0.30 yesterday. Its affiliated cryptocurrency, Luna, which peaked at $119 last month, giving it a $40 billion market cap, collapsed by 95% yesterday and another 99% overnight (the last I checked, it was below $0.02!). You just don't see this very often, even in the nutty crypto world... (For insightful commentary on what happened, see Bloomberg columnist Matt Levine's last two missives: Another Algorithmic Stablecoin Isn't and Terra Flops.)

The Terra/Luna collapse has triggered steep declines in nearly all cryptocurrencies and related assets.

Is this the beginning of a much bigger decline? Who knows...

But the odds of a very bad outcome have clearly risen quite a bit, so my Spidey sense is telling me that it's time to get out and wait for another time to rejoin the game.

Since then, ethereum is down nearly 40%, with a particularly sharp fall over the weekend due to this news: Big Crypto Lender Celsius Freezes All Account Withdrawals. Excerpt:

One of the largest crypto lenders, Celsius Network, told users Sunday night that it is pausing all withdrawals, swaps, and transfers between accounts due to extreme market conditions.

"We are taking this necessary action for the benefit of our entire community in order to stabilize liquidity and operations while we take steps to preserve and protect assets," the company said in a blog post.

Celsius lends out customer deposits to other users to earn a return. The company managed $11.8 billion in assets as of May 17, according to its website. It offers users annual percentage yields of up to 18.63% on cryptocurrency deposits.

Not surprisingly, the price of Celsius (CEL) has collapsed to $0.21 as of this morning (on its way to a penny, mark my words). Here's the one-year price chart:

For further background, I recommend these three posts by Chris Irons on his Quoth the Raven Fringe Finance blog, who warned readers about Celsius in November:

3) I think Irons is right in his most recent post that regulators are going to scrutinize the cryptocurrency industry much more closely going forward:

Monday morning, Celsius' implosion is helping fuel a nearly 2% sell-off in U.S. markets. In other words, a $12 billion company that's part of a $2 trillion industry is causing roughly $1 trillion in losses across all U.S.-based public companies...

While regulators may be able to turn somewhat of a blind eye to volatility in crypto markets, they can't ignore what appears to be contagion with equity markets.

This is very bad news for all of the various scams and Ponzi schemes that are rampant in the crypto world. (For example, this is the least surprising headline ever: Seoul Police Probe Allegation of Embezzlement by Terraform Staff.)

In particular, I continue to believe that the leading "stablecoin," Tether (USDT-USD), is the best short I've ever seen. Trading at $0.9985 this morning, you can't lose a material amount of money because stablecoins can't trade above $1... but if it "breaks the buck," look out below!

As I've outlined in previous e-mails, I doubt parent company Tether Limited, which in turn is controlled by the owners of Bitfinex Trading, has liquid assets backing even a fraction of the $72.3 billion of Tether tokens outstanding.

If I'm right and regulators discover this (or investors come to believe it, which may already be happening – see: Tether Cedes Territory to Rival Stablecoins as Crypto Investors Diversify), Tether could quickly plunge, which would not only roil the crypto markets, but, as Irons points out, the overall stock market.

4) We were in Chicago this past weekend for a bar mitzvah. The flights and LaGuardia and O'Hare airports were packed! Here are two pictures (and I've posted more on Facebook here and here):

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.