Tuesday, April 2, 2024

The Left Curve

Muyao Shen explains the concept of the Left Curve in The Big Winners of This Crypto Bull Market Are the `Left Curves’:
There is a surprising amount of respect for people who appear to know nothing about the industry. They’re known as the “left curves.”

The nickname comes from a popular meme in crypto that shows a bell curve with investors on the left who know nothing, or very little, and those in the fat middle of the curve who know something about crypto. On the right are investors who seemingly know everything.
Below the fold I look at the left side of the curve

Why does Shen think those who know nothing about cryptocurrencies are the big winners? Because they are jumping in to yet another cruptocurrency bubble:
For example, a crypto project with pseudonymous co-founders including “Smokey The Bera” and “Dev Bear” has become a unicorn after it raised millions of dollars from institutional investors such as Brevan Howard Digital. Another token with no real utility — only a cute picture of a dog wearing a hat — has increased by more than 1,400 times its value from three months ago. A developer of a sloth-themed memecoin called Slerf claimed they accidentally burned a large amount of the tokens after raising $10 million.

What a great time to be a left curve! In this bull market, forget about highbrow ideas like revamping Wall Street. Give up on dreams of replacing traditional artwork with nonfungible tokens. Instead, don’t overthink it. Just “choose rich.”
Well, yes, but the much-desired retail traders don't seem convinced. Even the mania around spot Bitcoin ETS has died down, as the chart shows. Shen writes:
How did this happen? How did crypto’s greatest comeback take place so fast, so hilariously and — at times — so stupidly? Why did crypto evangelists give up their dreams? At its core, it’s because the market is still living under the shadows of past catastrophes like FTX’s collapse and TerraUSD’s blowup.

In the past bull markets, when Bitcoin went up, everything else went up amid small-scale rotations between major and small-cap coins. But in this bull market, the rotation is more severe: As Solana went up in the past month, the price of Ether went down dramatically — a simple piece of evidence that shows there’s less money being thrown at the crypto market today than three years ago.
The "past catastrophes like FTX’s collapse and TerraUSD’s blowup" may be old news but to their victims they aren't even close to over. The best FTX's creditors can hope for is to get back what their HODL-ings were worth before Bitcoin took off moon-wards, and who knows when that might happen.

Kevin T. Dugan's The Crypto World Has a New Villain starts with the story of one victim of yet another "past catastrophe":
"I had no idea who Barry Silbert was or anything until after November 16, 2022," Eric Asquith told me. That date was when he was pretty sure he had lost his family’s savings of $1,052,000.
Asquith wasn't on the Left Curve but just a bit left of the middle:
He didn’t buy bitcoin or other meme tokens. Instead, earlier that year, he moved over cash from his business — just a little at first, then more — and converted it into digital currencies he thought were as good as cash. The digital coins were called GUSD, and each was worth exactly $1 because the company that minted them — Tyler and Cameron Winklevoss’s crypto exchange, Gemini — backed each one with real money and assets.
But Asquith's GUSD were deposited into Gemini's Earn program to get its 5.5% interest, far more than banks were paying. But Asquith and the other Earn depositors were far enough left on the curve that they didn't know Earn wasn't like a bank savings account:
What Asquith did not fully understand was that his money was no longer with Gemini. In one sense, Genesis, a crypto company owned by Barry Silbert had it, but even that wasn’t quite true. Soon-to-collapse hedge funds with names like Three Arrows Capital and Alameda Research — Sam Bankman-Fried’s personal fund — were quietly borrowing from Silbert’s shop. Asquith’s money, and that of tens of thousands of others, was being used by SBF and others to make giant bets on some of the highest-flying, most volatile digital tokens.
Then Terra/Luna collapsed and things started to fall apart. Amy Castor and David Gerard reported:
One of Genesis’s biggest customers was Three Arrows Capital (3AC), who they’d lent $2.4 billion. After 3AC blew up in May, DCG assumed $1.2 billion of the liabilities to keep the hit off Genesis’ books. Genesis had been the single largest creditor of 3AC.

Genesis also had money on FTX. As FTX was falling apart, Genesis tweeted on November 8 that they had no exposure, and it was fine. Two days later, Genesis admitted they had “~$175M in locked funds in our FTX trading account,” and they were not fine.

Genesis scrambled to find more capital. Genesis and DCG needed $1 billion in emergency credit by 10 a.m. EST on November 14, but didn’t get it. Even Binance turned them down.

So two days later, Genesis suspended withdrawals,
One of Genesis’s biggest customers is Gemini Trust, run by the Winklevoss twins, that operated its own “yield” program, Gemini Earn, for retail investors.

Gemini was supposed to be the safe exchange — but it was exposed to risks via Genesis. There’s now $700 million that Gemini Earn customers can’t withdraw — because it’s stuck on Genesis.
Gemini tried to get the cash:
On January 8, Gemini terminated the Master Loan Agreement with Genesis and emailed customers accordingly. This “requires Genesis to return all outstanding assets in the program.” Genesis did not return the funds by the end of January 10 — so they were officially in default on the loan. At this point, Genesis can pull the pin and try to put Gemini into involuntary bankruptcy.
They did, and there followed a year of legal wrangling between Gemini, Genesis and Barry Silbert's Digital Currency Group, which owns Genesis. The SEC sued both Gemini and Genesis, and so did the New York Attorney General. While the wrangling continued, another of the semi-regular cryptocurrency bull markets took off until in February 2024:
the victims, Silbert’s now-bankrupt crypto-lending operation, the Winklevoss twins, and regulators hammered out a deal to pay everybody back in full. The crypto bull market of 2024 made it possible to pay back Earn customers not some fraction of what they invested but the generally much higher sum of what their holdings would now be worth.
Everyone started cele:wbrating;
Except there was Silbert. Earn victims who had been unfamiliar with him would soon learn that he had made his first fortune by studying the ins and outs of the bankruptcy system and using it to his financial advantage. Since February, the billionaire investor has been relying on a controversial interpretation of bankruptcy law to stop Asquith and all the other victims from getting the bigger payout, the one based on current prices. Instead, to simplify a bit, he would prefer to keep that money himself. “DCG cannot support a plan that not only deprives DCG of its corporate governance rights but also violates United States bankruptcy code,” a spokeswoman for the company said.

The victims have taken to calling it “the Barry Trade”: If Silbert is successful, he would be able to pocket as much as $1 billion in funds that would otherwise be returned to them. At the very least, Silbert may substantially delay the money being returned to Earn customers.
Silbert’s legal logic is that the bankruptcy code sets a date to value victims’ claims in U.S. dollars, and in Genesis’ case, it just happened to be around the market’s lows.
People started talking to the press about Gemini:
Former Gemini employees told The Beast that Gemini Earn’s terms and conditions were highly dubious from the outset. One staffer recalled reading the fine print for the first time, saying, “[We] were like, ‘Holy shit, are you fucking kidding me?’”

Among those terms: Customer assets were loaned out on “an unsecured basis,” which meant that their money would not be safe in the event of a market collapse. The deposits were also not insured, nor were they guaranteed against errors or fraudulent activity.
And Genesis:
“Whatever Gemini may or may not have done pales in comparison to what you see at Genesis, which was more than negligent when it came to protecting customer assets and complying with general best practices,” one former employee said. Among those problems, the person said, was not screening clients who were on, say, the Treasury’s blacklists — an allegation that was supported by a separate January suit filed by New York Department of Financial Services.
This isn't a "past catastrophe". For the victims there is no end in sight:
A ruling isn’t expected until April. Since the settlement announcement, the victims have resigned themselves to an even longer wait as Silbert continues to fight. “A year ago, there was a deal that was proposed. Everyone was celebrating in a very similar way,” Asquith said. “Now, I’ll believe it when it’s in my account.”
This case, like Dickens' Jarndyce v Jarndyce, will run and run.

Update 4th April 2024

This is possibly peak Left Curve. Molly White reports that Project promising to rug pull raises almost $29,000:
A project describing itself as "The world's first memecoin pre-announced as a rugpull" was explicit in its marketing: "do not buy this coin, as it will go to zero."

Despite that, people sent the creator over 8.8 ETH (almost $29,000) for the project's "pre-sale", even as they repeated on Twitter that the project was a scam and that no one should buy it.


Tardigrade said...

I don't understand how Silbert thinks the bankruptcy code entitles him to gains from assets he does not have legal title to. And I don't understand how any judge would say that he does.

David. said...

The people who sent $THEPLAN 8.8 ETH could have learned from Do not rug on me: Zero-dimensional Scam Detection by Bruno Mazorra et al:

"We propose various machine-learning-based algorithms with new relevant features related to the token propagation and smart contract heuristics to detect potential rug pulls before they occur. In general, the models proposed achieved similar results. The best model obtained an accuracy of 0.9936, recall of 0.9540, and precision of 0.9838 in distinguishing non-malicious tokens from scams prior to the malicious maneuver."