Analyzing The CeFi Wipeout

and in some cases, who's next. In this episode of Bloomberg Crypto, reporter Emily Nicole interviews Alston Zecha, partner at global venture fund eight Roods, for his perspective on how the crypto winter is affecting sentiment and markets. So you probably read the story that we did. It was like the two trillion has been wiped off the crypto market

cap since November UM. And one of the initial questions that I posed in that article and that I wanted to put to you more deeply, is about how, um, this crypto winter is different from the ones that we've had in the past. So obviously we had a crypto winter period in and Bitcoin had experienced his own little winters, I guess before that. But what do you think is

different this time around? I think this was a classic Minsky bubble or a Minskey moment, which is exuberant over speculation in an asset underpinned by tremendous amounts of over leverage. Minsky moment, a sudden market collapse that follows an extended period of high spending and indebtedness. And I think that is a starting point for a key difference against previous crypto winters, and it starts to look more like dot

com bast um to twenty years ago. Maybe even there's some shades of things that happened in the financial crisis, although I don't want to get too grandiose. There are

a number of other things that are quite different. And I think when it's re hypothlication of assets, rehypathlication using customer or client said fill your own trading purposes that are denominated in other assets that are also part of this spiraling upwards bubble, this creates an almost infinite loop of self referentiality that helps everybody look good on the way up and really accelerates everything on the way down.

And I think that's how I would summarize what's been different here, And of course that's been underpinned by the fact that there's just been so much capsule that has flooded in so quickly. That's partly been a facet of enthusiasm for crypto in particular, And that's partly been the tail end of the over stimulation of the economy, whether that's been in regular tex stocks, whether that's been in

equities or other asset classes in general. I think that's just been very obvious here in the world of crypto as well. So you add all of those things up, and it basically sounds like all of the financial crisis buzzwords that any of us ever studied who are economic historians, and you line them all up, and bingo. Because you mentioned some of those key buzzwords, I guess like rehypothefication

would be one, leverage would be another. UM And those are things that are very specifically playing out right now in the collapses of different players, like three Horos Capital going through liquidation. Three Hourrows Capital one of the biggest crypto head funds out there. It was ordered into liquidation by a court in the British Virgin Island. UM and do you want to kind of explain a little bit more, I guess how you view those as being potentially toxic

during this winter. I think one of the really interesting conversations that I had probably eighteen months ago with UM where they startup that was making a business model off of lending and staking and yield in defy and was promising yields of seventeen And I'm I'm no deep defy engineer, and I'm certainly no market arbitrage expert, but I've been around long enough to know that if something is too good to be true, then it isn't true. And there

is no such thing as ristlessness. And actually, lastly, most importantly, you can't bet against the market and the overall economy. And so if you were thinking that you could get yield on something that was at lower rest than something that was yielding three or four percent, you might get away with that for a few weeks, maybe even a few months, but you wouldn't be able to get with

that get away with that indefinitely. And I think it's that live of hubrist that also crept in to a number of players in the market, this belief that this time it was different, this time we were smarter, this time technology or engineering would make us better. Those were just fundamental aspects of the hubris that crept in that again was reminiscent of the tech bubble. I think one thing that we mentioned previously was about how you almost

picked up on it a little bit there. But the marketing of all of this and the message that was being sold to investors is that, you know, I think in the in the article I wrote, I referenced an advert on a bus that said if you're seeing bitcoin on a bus, it's time to buy It was very famous in the UK and got banned eventually for being too you know, for I guess forth right with them

bitcoins pros and cons. But in that I guess how much of the current crypto window was created by this messaging that was being put out to investors that this was something very easy to get into, very you know, not a risky bet to be making, or at least no more risky than buying bitcoin directly. I think why I've been the best way to put it. You know, it's it's hard for me to judge because that's pretty qualitative and anecdotal. How much more was it created by this?

How much could it be focused on this? And then you'll move into a realm of should it have been regulated? How much more closely should this messaging have been monitored? Now that's equally I'm not saying that it should not

have been regulated. These are financial products, and any time you're promoting financial products to consumers, there needs to be a moderation in your messaging, and there needs to be Dare I say at some level of regulation, which there was not in a lot of these crypto products, and that the complication there, I suppose the does that make

it any different? Again, it makes it different from previous crypto winters because the sheer volume, in the sheer number of people caught up in the exuberance, it was just an order of magnitudes more than anything we've seen in the past. But I think when you're starting to get people who wouldn't normally play and as you've said, less complicated financial products, thinking that they could have riskless, easy access to money with promises of or more per year returns,

that becomes a real problem. And I think there's a There was a great statement that I read in a blog post that this went beyond recklessness and moved into tragedy. And we're hearing stories now of people who plowed their life savings into some of these lending business models convinced that yield class they could do it with. As you said, also no more risk than just buying buying gold or

yeing bitcoin. And I think that's going to have some real world repercussions for a number of people that said. I don't want to overstate it either, because we talked about this notion of systemic risk, but I think that it was self contained, as hermetically sealed within the crypto world. And and obviously we've talked about the tragedy of the implications for individual retail investors who plowed in too far. But I don't think what we're seeing is something that's

having ongoing implications for the wider real economy. And that's probably a good thing. Um. And and that's that's something that I think is perhaps similar to previous crypto winters, that this still has been largely in crypto world, although of course crypto world is now an order of magnitude or more bigger than it was the last cycle. Yeah, And I guess part of that that order of magnitude contributing to that is the fact that the current economic

environment is so difficult. So you know, it was very easy to sell a story of yields and defy when you're getting less than one percent on your savings are count in a real bank um. But kind of going beyond that, we've seen that you know, around two trillion is wipes off the market cap since the November peak, So that's about a two thirds lost for the sector as a whole. What are the consequences of that that you think? And the crypto sector is now going to

be facing. So I don't mean to be overly flippant, but I think the consequences are everything and nothing um. And so what do I mean by that? I was actually looking up the amount of ECTI value destruction again during the dot com bost. I think the estimates range between five and ten trillion, And of course we look at the wider ecty markets and the collapse in share prices also in other parts of the real economy. Again

we're talking of something north of five trillion. So in the grand scheme of things, especially because crypto was reasonably hermetically sealed from the rest of the wider economy, you could argue nothing. Again, it's not going to feel like nothing for the thousands of people who have lost their jobs and for the many consume umors who have lost

very significant investments. But in terms of the grander scheme of things, what are the implications for the real world, for the real economy, also for the innovation cycles that that maybe we'll get onto talking later on in tech also in crypto, you could argue not so much. We'll be right back with more of Emily Nichol's conversation with Austin Zeka of Eight Roads Ventures about the state of

the Sea FI wipeout. So if we're thinking about how crypto might come out of this winter and then go back to that sunshine and summertime of the of the bull market, um, what role do investors play in that journey, both on the retail side but also within venture capital. How much do you guys have a say, in a participatory role in in reversing the winter. Well, the starting point is we do have access to capital that's hopefully supportive.

I think that you will have noticed that in terms of investing into startups in the space, capital has slowed down but not dried up. So being an efficient allocator of capital is supposed to be our job, taking capital to the business moans that we think are sustainable and and whereas I suppose in the over exuberance of the last couple of years a lot of that capital was not allocated effectively or efficiently, and and fueled to a

certain extent too much of the exuberance. Um, I think that everyone has now gone back to basics, and and I'm quite hopeful that we can help we as an industry can be helpful in that regard. And again, secondly, I think in terms of the pattern recognition we ourselves as professionals, or at least in terms of the institutional knowledge that we have, even if we didn't have it personally.

We've been around through many cycles. For example, eight Roads and its predecessor funds have been investing in venture capital since the late sixties, so we've seen quite a few cycles. And hopefully we can therefore bring the pattern recognition, but also a bit more of a sense of when there are some leading indicators that spring is coming to be supportive about the right strategies to to use that capital effectively.

From the perspective of retail investors, who gets involved, especially in terms of crypto itself, that's a really interesting question, and I think that that is potentially a dangerous one until we've got a bit more clarity about the extent to which these business models ought to be regulated, or at least the messaging how much it ought to be moderated to pure retail investors. Obviously retail investors range and sophistication.

For now, I think that there will be a certain amount of market enforced self regulation, but I think that's gonna be an interesting conversation to go on over time. That that said, I think there's a third element here, and that comes back to the infrastructure. I think that will be another very interesting trend during the next turn of the cycle here for digital assets. And then I guess our last question, what should traders and companies be

looking out for in this current environment? You know what, what would be the signs that they should be looking forward to say this is the kind of the ending point or the turning point, because at the moment it definitely feels like we're in the doll drums of the winter.

I'm afraid I'm going to give a very safe answer, which is if I if I knew that perhaps I would be a more active crypto trade in myself, I do subscribe, and I think there have been surveys out there which have said that the consensus is there's more downside than upside in the price at the moment. I think I would agree with that. Then again, I think that's more generally the case for a lot of stocks.

With every passing week, it looks like there's more bearishness about where equities will be trading over the next few months as well. So I definitely think that although people talk about crypto is being a hedge to inflation and non correlated with traditional assets, I think we've not seen that over the last few quarters, and I think that we're going to see a little bit longer of that level of correlation. Well, thank you for joining me. Thank

you very much. You just heard from Emily Nicole, reporter for Bloomberg Cryptom. So glad that she was able to do that interview. You can find more of Emily's reporting on the Bloomberg terminal on Bloomberg dot com, and you can find her on Twitter. She's at Emily J. Nicole. That's n I CEO L L E. On the next episode of Bloomberg Crypto. What do rapper Jay Z and the former CEO of Twitter, Jack Dorsey have in common? It's not music and it's not just that they're billionaires,

it's bitcoin. And if you spend enough time around people who believe in the arguments that crypto can transform society, you'll eventually hear them talking about the idea of financial inclusion. And that's exactly what jay Z has teamed up with Dorsey to do on something that they're calling Bitcoin ac Adamy, which they say has the goal of educating and empowering people through financial literacy, and of course there's a focus

on bitcoin. Bloomberg Proportas, Polina Cachero and Aquila Gardner will join me to discuss Bitcoin Academy and whether crypto is truly the key to a more financially inclusive society. I'm Stacy Marie Ishmael, and this is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app,

Apple Podcasts, or wherever you get your podcasts. Email your questions, comments or suggestions for the show to Crypto at Bloomberg dot net and you'll find us on Twitter at Crypto. The supervising producer of Bloomberg Crypto is Vicky very Galina, our senior producer is Janet Babin. Our producer is Mohammed Farup. Our associate producers Ozanam Suddiki and Moses and um Desta wonder At is our engineer. Original music by Leo Sadrin. The Safe Shot a bl