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Tristram Waye for Bitvo | Nov 17, 2022

That Feeling When - TFWOver the last several months we have been subjected to a barrage of events.  It has been ugly.  It’s been painful.  It’s like that feeling when (TFW) you’re being slapped in the face with hot slices of pizza every few weeks.  And the surprises keep on coming. 

  • Managing expectations: There are problems out there. They aren’t limited to crypto. You can see them periodically in every corner of the financial system.  A while back I wrote that this looks like a year where you get ten years of experience in one, this is what I was talking about. One of the big problems is that the scars of events accumulate. Those scars lead to reactions which tend to become more triggered and violent. These events shape expectations.
  • Early 2000's:  There were a series of scandals that came out of nowhere. Well, not out of nowhere.  As each one came and went, it created a hair trigger reaction to everything. Then a rumor was floated about a large Canadian financial company, which turned out to be false. But the leadup to this was a series of high profile failures which gave the rumor credence.
    • Enron. One savvy analyst and short seller named Jim Chanos beat the drum on this one. It took a long time before the stock eventually fell. And when it did, we all discovered what Jeff Skilling and the boys were up to. The scandal was so big it took down the accounting firm Arthur Andersen with it.

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  • Surprises fuel rumours:  The Enron scandal and the aftermath of the dot com bubble bursting was a disaster for many. The scars from this event left people wary of any bad news.  And this is what happened when a rumor surfaced about the company run by “Canada’s Warren Buffett.”  The company was called Fairfax Financial, and it was run by billionaire Prem Watsa.
    • A rumor was floated by someone that the company was in trouble. And because people were so messed up from all the blow ups that had already happened, some started selling.  As the selling increased, illiquid Fiarfax started to fall. The thing was, that the rumor in the case of Fairfax was false, and the stock recovered after an ugly day of trading.
  • 2010 flash crash: In May 2010 the market started to suddenly crater out of nowhere, it brought everything back. The S&P dropped like milk flowing out of a carton onto the floor. And as the market fell it gathered speed.  And we were sitting there in shock. Could this be happening again?
    • Well the market recovered and held up. They blamed a firm that had a sell order in the S&P futures, which was ridiculous. Years later they sent a young guy trading from his parents’ apartment to jail for spoofing the S&Ps causing the infamous flash crash. This happened in one of the most liquid indexes in the world? Right.  All of these reactions are a byproduct of being beat up added to questionable circumstances, resulting in a negative reaction.
  • Sound familiar? In the first week of November 2022, we saw another unthinkable market event (FTX). In a bear market environment, these things happen more often than you realize. And the reason for these frequent gigantic meltdowns comes down to some common problems.
    • Ongoing use and abuse of leverage. And part of the leverage story is the evolving quality of the collateral underlying the leverage. The evolution of collateral quality can be real or perceived. And in a down market it’s usually both.
    • Weak markets create illiquid conditions. These conditions can widen spreads materially and turn normally easy to sell instruments into gaping bidless money pits.

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  • Tough markets require more scrutiny:
    • You want to be careful with leverage in unpredictable markets. And you want to be wary of companies that are using leverage, especially liberal use of leverage in an environment with volatile markets.
    • You want to make sure that your risk management doesn’t leave you vulnerable to those “almost never happen” events. Because in bad markets, these happen with surprising frequency.
    • And making sure you have a cash reserve to give yourself flexibility is always advisable. It allows you to step in when opportunities present themselves.
    • Plus, you should also make use of one of crypto’s key advantages, which is self custody.
    • And if you are prepared for the unexpected, you can identify and take advantage of changes in market sentiment.

Remember, if you’re reading this, you’re still standing.  And that’s the name of the game.

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NCFA Jan 2018 resize - TFWThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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