8/2: Worldcoin Token, MicroStrategy, and An Imminent Crash

Global identity startup Worldcoin’s token WLD is a natural at swimming in crypto’s murky waters. A week after launch, its price is already up by 4.6%. As of this writing, it is changing hands at $2.37, down 1.4% since yesterday. This is despite the fact that governments and regulators around the world have expressed reservations about the technology. The Kenyan government even suspended the startup’s operations.

Much like bitcoin, WLD doesn’t seem to care about regulators. There is a difference between two tokens, however.

Whereas bitcoin largely remains a speculative asset without a defined utility even on its native blockchain, Worldcoin has articulated clear ambitions to create a global identity system using its technology. Therefore, regulator opinions should be an important part of its operations. But this is crypto, a place where tokens operating on janky infrastructure with settlement finality issues command multimillion dollar valuations.

MicroStrategy To Buy More Bitcoin

In addition to prices, another enduring mystery related to crypto is MicroStrategy, the publicly-listed business intelligence company that holds bitcoin on its balance sheet. In its latest earnings report, the company said it might buy more bitcoin worth $750 million this year. The company has a market capitalization of $5.7 billion and holds $4.6 billion worth of bitcoin on its books.

The decision to purchase more of the cryptocurrency when the company’s business is still in the red. Its total revenues from product and subscription licenses fell 1.3% to $120 million from a year ago but it managed to pare its losses to $22.2 million from $1 billion a year ago. Its MicroStrategy inked an agreement with Microsoft last quarter, the leader in analytics and business intelligence platforms. There is not much publicly-available information about MicroStrategy’s share of the overall market, likely because it does not amount to much. There are no noticeable announcements relating to its products; it has remained stuck in the Challenger category for BI platforms in Gartner’s magic quadrant since 2020.

MicroStrategy and Bitcoin

But then who cares about business strategy when you have bitcoin, right? And so, MicroStrategy CEO Michael Saylor devoted the entirety of his earnings call yesterday to discussing bitcoin. He advertised MicroStrategy’s stock as a “quick compliant process” to gain exposure to bitcoin. According to him, MicroStrategy minimizes risk from direct exposure to bitcoin because his company has cash flows to ameliorate losses.

It is difficult to understand Saylor’s logic. Bitcoin’s price volatility is a magnet for investors because it translates to quick and, occasionally, big profits for them. A quick comparison of bitcoin price and MicroStrategy’s stock performance shows that the latter’s price does not mirror bitcoin’s fortunes. Besides, MicroStrategy has sold very little bitcoin since it first began purchasing the cryptocurrency in 2020. In that time, the cryptocurrency has set two price records. A sale of bitcoin, such as the one by electric car maker Tesla, would have boosted the company’s bottom line.

MicroStrategy’s False Argument

One could argue that MicroStrategy is playing the long claim for a bigger payday. But that payout is not guaranteed. In fact, its chances are becoming more remote by the day. Bitcoin’s previous price records were set in good times, when the Federal Reserve pursued a zero interest rate policy or distributed wads of cash as stimulus money to people. The agency has tightened its stance since. High interest rates crimp appetite for risky assets like bitcoin. The approval of a spot bitcoin ETF could further shake the argument for MicroStrategy as a vehicle for direct exposure to bitcoin.

MicroStrategy’s bitcoin strategy also comes with significant crypto-related attendant risks. Scandals and bankruptcies are common in this unregulated corner. MicroStrategy has not disclosed the names of any of its counterparties for bitcoin, except for Coinbase. And that exchange is engaged in a legal dispute with the Securities and Exchange Commission (SEC).

In the past, the company has reported impairment losses because it held bitcoin. What happens when bitcoin price finally crashes and leaves a big hole in MicroStrategy’s balance sheet? Perhaps, Saylor and his company will draw on its digital energy for sustenance.

Curve Finance, Binance, Et al

According to a CoinDesk report, regulators are preparing a case of fraud against Binance, the world’s biggest cryptocurrency exchange by trading volume. While the exchange’s share of the overall trading volume has declined in recent times, the platform is still responsible for slightly more than fifty percent of all trades in crypto. This is a problem for regulators because filing charges could initiate a run on crypto. Or, at least, that’s what the article states.

But that should hardly be a deterrent to charge a company that reportedly has made a mockery of securities laws in the United States. The overwhelming majority of crypto tokens are also worthless and illiquid. That illiquidity is reflected in crypto markets, where traders and investors have run away after booking profits. Trading volumes are down at centralized and decentralized exchanges. The total value locked (TVL) locked at the latter is back to pre-2021 levels, meaning investors have fewer tokens locked in the so-called decentralized finance (DeFi) protocols.

In fact, one could make the case that now would be the perfect time to strike before crypto’s idiosyncratic price movements, instigated by a couple of investors with large holdings, move upwards again and attracts more gullible traders into its grift.

Curve Finance and Tether

Where there is a crypto crisis, there is Tether. The world’s biggest stablecoin by market capitalization had its fifth highest trading volume in a day last Saturday, when the Curve Finance crisis began. Its volumes were “more than the day that (lending firm) Celsius collapsed (last May) and only slightly less than the day that FTX gave up the ghost (last November),” writes Chain Argos, a blockchain analytics firm. The implication here is that USDT may have been printed to buy Curve’s native token, CRV.

Tether’s intervention may not have a lasting effect. CRV’s price has recovered only slightly and its foundations remain wobbly. That wobble is dangerous for Tether’s peg because it is part of one of the biggest liquidity pools on the platform.

A destabilization of Tether’s peg, and the filing of charges against Binance, has severe implications for crypto; the former is its biggest stablecoin and the latter its largest exchange.

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