When I saw the news, my heart sunk…
A bank run was underway… Everyone was in full panic… And if the news was true, part of me wondered if this would be the final nail in the coffin for crypto.
If you don’t know me, my name is Houston Molnar. I’m Daily editor Teeka Tiwari’s chief analyst on his flagship crypto advisory, Palm Beach Confidential.
For years, I’ve watched the crypto industry build tools to prevent fraud.
Hardly anyone used them. And I get it…
Blockchain technology is clunky and slow. And it can be a headache to use…
But we saw a similar learning curve for the internet. At first, it was slow and clunky, too.
Remember how long it took for websites to load on old dial-up modems? And that’s if you were lucky enough not to get knocked off your modem by an incoming phone call.
As time went on, and as the technology improved, the internet became more user-friendly. And today, more than 5 billion people worldwide use the web.
We’ll see the same happen with blockchain technology.
But on November 6, my heart sank. And for a moment, my optimism in crypto wavered.
That Sunday night, fear began to spread like wildfire that FTX, the world’s second-largest crypto exchange, was insolvent.
The news came at the worst time. Crypto was already beaten and bruised.
This past summer, two top crypto lending institutions, Celsius and Voyager, filed for bankruptcy. Combined, they had over 5 million users.
Everyday investors held a large portion of their assets on these platforms. They paid upwards of 10% in crypto income, while banks paid next to zero.
It was an attractive alternative.
But as troubles plagued the crypto industry, Celsius and Voyager halted withdrawals and filed for bankruptcy. And FTX has since done the same.
These bad actors have eroded trust in crypto amongst investors and the general public. And the media has the ammunition to paint this industry as a get-rich-quick scheme.
But if you’re a regular reader of the Daily, you know these problems have nothing to do with the blockchain. The technology is working as intended.
Companies outside of crypto have been going bankrupt for hundreds of years for the same reason as FTX, Celsius, and Voyager: Greed.
These platforms are opaque private companies. There’s no way of knowing how much leverage they’re using. Or who they’re exposed to…
They were black boxes that drew in billions of dollars on a “safe” way to earn high interest rates. True decentralized protocols don’t suffer from these problems.
And that’s why I’m still optimistic (and bullish) about the future of crypto…
We Have the Tools to Avoid This
Blockchain technology came to light with the invention of bitcoin in 2009.
It laid the foundation for a financial system in which anyone can pull back the curtain and see what’s happening under the surface.
Since bitcoin’s inception, we’ve seen many different use cases for blockchain tech. But none are more promising than decentralized financial applications (also known as DeFi Apps or dApps).
Today, you’ll find dApps that enable you to lend, borrow, trade, etc… and the benefit is that you can see what’s happening under the surface.
They use “smart contracts” that automatically execute transactions when certain preconditions are met. And anyone can view these contracts online and in real time.
Now, I won’t get too deep in the weeds, but here are a couple of examples of how decentralization could’ve prevented what happened to Celsius, Voyager, and FTX.
First, if you lend assets in DeFi, you can see the collateral that backs your loan. And loans are over-collateralized on most lending platforms to ensure safety.
As an example, that means for every $1 someone borrows, they might be required to put up $1.50 as collateral.
On top of this, if a borrower’s collateral falls below a certain threshold, the DeFi platform will automatically liquidate it.
Second, blockchain works strictly on computer code. So, the smart contracts only execute if preconditions are met.
DeFi platforms don’t care about your net worth, credit score, or where you live… As long as you provide the collateral to back your loan, you’re good to go.
No favors are given to a select group because the lender has a good relationship with them. This removes any biases that could cause a lender to take on more risk than they should.
And despite the volatility and loan defaults we’ve seen from centralized financial lenders like FTX, no major DeFi protocol we know of has suffered a significant loss yet.
The major DeFi lending platforms and exchanges have continued to operate without issues – mainly due to the advances of blockchain technology.
According to CryptoQuant, crypto users withdrew $2.5 billion Ethereum (ETH) from centralized crypto exchanges. And data shows it’s all going into DeFi platforms.
Decentralized exchanges (DEXs) executed $32 billion in volume in the week following the FTX collapse – a roughly 150% increase from the week prior.
Now, I won’t claim that DeFi is perfect.
The technology is still new and needs to be battle-tested before it gains widespread trust… Just like it took years for the internet to gain that type of trust.
But the tools needed to create a better financial system are there.
And if we want to prevent the likes of another Voyager, Celsius, or FTX collapse, we’ll need to embrace this new technology.
Amid Chaos, There’s Opportunity
I’m not going to sugarcoat it… the crypto markets look terrible.
For many investors, it’s tempting to run for the hills and write-off the space… But that means missing out on a massive opportunity.
After watching major centralized lending platforms and exchanges blow up and cost users billions of dollars – it’s clear that DeFi will become incredibly valuable.
That’s because it continues to function in the darkest times without any issues.
That’s not something centralized crypto lending platforms can say now… or ever.
So investing in a few of these projects today – when blood is in the street and panic is in the air – could lead to life-changing returns when the bull market resumes.
But before you do that, consider investing in the networks that run these DeFi protocols.
Today, the base layer of the DeFi innovation is Ethereum (ETH).
Nearly 70% of DeFi activity occurs on the Ethereum network… And while there are dozens of other blockchain networks out there, they haven’t come close to gaining the number of users or developers that Ethereum has.
You can think of owning Ethereum like owning the Apple app store… rather than owning the individual applications.
Sure, you won’t generate the highest return. But it’s the safest bet to make on DeFi gaining traction.
That’s why I believe ETH is the best asset to own in today’s crypto market. And it’s the best way to profit from the implosion of centralized exchanges.
If you’re looking to get started, consider taking a small position in Ethereum.
With Teeka expecting ETH to soar as high as $25,000 in the coming years, you could potentially see a 20x gain from today’s price levels.
Remember… the collapse of FTX wasn’t due to a flaw in crypto or blockchains. It was pure financial greed.
And thanks to the inherent safeguards of DeFi, it’s only a matter of time before the market recovers and moves on to new highs.
Regards,
Houston Molnar
Analyst, Palm Beach Daily