NICO BRUGGE: Here's why you should watch today's briefing. Coinbase has posted a massive loss. Should you be worried if you have any crypto on it? We'll discuss what the numbers show. Plus in the wake of the Terra meltdown and continued questions over Tether, it's more important than ever to understand how stablecoins work, we'll do a deep dive into our interview with a digital bank CEO and leave you with the key takeaways.
Welcome to Real Vision Crypto Daily Briefing. I'm Nico Brugge. As always, Ash Benington is here with me. Let's get right into the latest price action.
Inflation pressures in the US have eased a bit following the latest CPI report. Consumer prices rose 8.5% in July compared to a year ago. That's less than expected, which is giving the crypto market a boost. Bitcoin virtually flat before the announcement has gone up 5% after it. That's despite some negative news for the wider sentiment the day before. So, Ash, why do these inflation numbers matter so much when it comes to crypto?
ASH BENNINGTON: Nico, that's exactly the right question to ask. It matters because of how tightly correlated everything is right now in terms of the way these markets are trading. Risk assets, the joke is the correlation goes to one, we got a CPI print of 8.5 for July, last quarter was 9.1. The fear here is if you get a significantly higher print, for example, you get a 10.1% or something completely crazy like that, what winds up happening is the Fed gets backed into a corner and asked to hike maybe 100 basis points, whatever the number is.
In other words, what you're seeing here is this reaction formation where you see this pricing of risk on Fed based liquidity and that all comes down to inflation. Exactly as you said, Nico, this came in below consensus. Consensus was 8.7, consensus range 8.5 to 9.1, came in at the bottom of the range. And of course, as we said, lower than prior. So, that's what you're seeing right now, why you're seeing at least one series of drivers in price. One reason why you might be seeing this increase in the price of Bitcoin and other digital assets, Nico.
NICO BRUGGE: Thank you for that, Ash. Very helpful explanation. So, onto today's top story. Shares of Coinbase have opened higher despite its latest results. The largest US exchange reported an after-tax loss of 1.1 billion in the last quarter. This comes on top of recent layoffs and multiple investigations against the company and of former employees. So, Ash, what else was in this report? What did the CEO say exactly?
ASH BENNINGTON: Well, we should say stock's backed off its highs a little bit here. It was up about 7% in early morning trading right after the open. It was up about 2% pre-market. Now, it looks like up on my screen about 5%. So, there's a little bit of volatility on that, probably not a surprise. So, what's happening here, obviously, is we're seeing a decline in revenue, in earnings. It was a miss on revenue and earnings. This is clearly not great news for the company.
We saw a drawdown from peak I believe, of 65% in the value of the stock price and the assets, the underlying assets that Coinbase owns have declined by I believe 60%, which is right about where we're seeing relative to revenue. So, obviously not a great quarter for Coinbase.
NICO BRUGGE: Definitely not. Now, I know SBF, Sam Bankman-Fried, inserted himself into this whole thing. What do you make about what SBF had to say?
ASH BENNINGTON: Well, first of all, it's really interesting. When Morgan Stanley's earnings come out, Jamie Dimon doesn't jump on to Twitter and start live tweeting his thoughts about it. But look, it's interesting to see Sam Bankman-Fried's analysis. Obviously, the SBF analysis is that they're losing significant amounts of money. I think his estimate was about $3 billion a year.
Obviously, you should point out it makes sense to say Sam Bankman-Fried's company, FTX, obviously a direct competitor of Coinbase. So, he has a perspective in this but it is intriguing because clearly if there's someone who understands the way that this business works and understands the costs as well as the revenue side of the equation, it's Sam Bankman-Fried. So, it is an interesting input into people's thoughts about it. Obviously, not the only thing you want to look at, do your own research, of course, as always applies, but it is an interesting take on what's happening at Coinbase.
NICO BRUGGE: All right, Ash, I got a couple more questions for you. First up, how does Blackrock fit into all of this?
ASH BENNINGTON: Well, it's fascinating, I think on its face to see Coinbase doing a deal with the largest asset manager in the world, obviously the largest traditional asset manager in the world. It begins to look something like an imprimatur of the Coinbase's model when you see an asset manager the size of Blackrock weighing in and actually doing a joint venture with Coinbase, really interesting to see how those worlds are going to come together.
As always, devils in the details, we're going to have to see what the deal looks like when we get closer to it and we see more information about it. But on its face, it's hard to see this as anything other than a bullish indicator for the space in general.
NICO BRUGGE: Thank you for that, Ash. Now, last question. And I think this is what everybody is most concerned about. How worried should people be who have their crypto on Coinbase?
ASH BENNINGTON: Well, this is really an incredibly important question. It's not for us to say whether people should be worried or not about any particular custody solution. But let's talk a couple of these points through. It's reasonable to say that right now, the market is not pricing an imminent default, or an imminent insolvency on Coinbase even if you look at the stock price.
With that said, obviously, risks do apply. Coinbase obviously a well-capitalized cryptocurrency exchange, they spend a lot of money on security. But the purists in the space will tell you, as always, Nico, not your keys, not your coins.
NICO BRUGGE: Not your keys, not your coins. Definitely.
ASH BENNINGTON: Yeah, and by the way, sorry to interrupt. Obviously, self-custody comes with its own set of risks. We read these stories obviously about the guy digging up the landfill to try and find his hard drive that contain the only known copy of his private keys. So, there are challenges in every possible permutation. The important thing is to understand your own risks, your own needs and your own objectives.
NICO BRUGGE: Very well said, Ash. So, onto today's other stories. One of the world's biggest crypto exchanges is teaming up with a community forum best known for WallStreetBets. That's right. FTX and Reddit have announced an upgrade to read its blockchain based community points, users will now be able to buy Ethereum directly on Reddit, and they'll be able to use it to pay gas fees associated with the community points. Ash, please explain what this collaboration means for Reddit and for crypto adoption more widely?
ASH BENNINGTON: Well, the short answer is it remains to be seen. I think it's certainly interesting to see this pairing. As you said precisely, the idea of building a new form of community points where you can pay gas fees on FTX using these community points that you earn on Reddit, that's interesting. Is there a huge groundswell for people who are dying to buy Ethereum on Reddit, in the app? I don't know, that remains to be seen. We'll have to see.
But it is interesting to see how these ecosystems are beginning to come together, it may grow into something larger. This may be just the beginning of it, something definitely to keep an eye on. I would also say that it very much seems as though Sam Bankman-Fried and Raoul are on the same page. Real Vision, obviously, like FTX, thinks very seriously about all the implications of community how to bring people who are participants in the community in so that they can become more active, so that they can become more collaborative. So, the dialogue can run in both directions. In that sense, I think it's very exciting.
NICO BRUGGE: Absolutely. And onto a slightly less optimistic story, one of the biggest decentralized finance platforms says it has now resolved an exploit that led to an attack. Curve Finance says it was the victim of a front-end exploit caused by a domain glitch. It appears around 570,000 was stolen in the process. Ash, tell us what Curve Finance is and what happened here.
ASH BENNINGTON: So, Curve is a DEX. Similar to Uniswap, it focuses on trading pairs of similar assets, which means similar volatility. In theory, that should cause lower levels of risk I say in Ethereum because that's always the case and that disclosure needs to be made. A couple of important points here I think need to be made. First, even in true defi, there are security exploits that are clearly risks.
I know that people have been talking a lot about the challenges that we've seen in cefi, we're going to be talking about that a little bit more later in this show. But the reality is that software flaws in defi itself can cause absolute havoc, chaos and losses. I was trying to parse this statement about how they were the victim of a front-end exploit caused by a domain glitch. For me, this is a little bit like if you own a jewelry store, and someone breaks in and crawls up through the sewer, you can say, well, our front door was perfectly secured, but we just had a sewer glitch.
The reality is there was a problem with the interface, a problem with the API. We don't really know the details. But clearly, there was a flaw in the underlying software that caused the interaction between the domain software and the DEX itself to cause this loss, a relatively small loss. I think the numbers I've seen have been about $600,000, give or take, depending on the estimate you read. In defi terms, this is relatively small, but the principle here is large, which is that of course software flaws can cause losses in defi.
NICO BRUGGE: Another day, another exploit or a hack. It seems like we're getting there daily now, Ash. So, speaking of Curve as an example of a defi platform, that's a label used by some companies that are unfortunately defi in name only. Our co-founder Damian Horner spoke with Robert Sharratt about exactly this. Robert is the CEO of the digital bank Fluid Finance. He makes the argument that the current washout is healthy for the crypto market, because the bad actors are actually not working under the crypto ethos. Let's take a listen to what he has to say.
ROBERT SHARRATT: Warren Buffett isn't a great fan of crypto, but he has a great quote, which is, you don't know who's swimming naked until the tide goes out. And that's basically what we're seeing here in the crypto space. I think it comes down fundamentally to the business model that they're pursuing. And for me, the companies that have failed are pursuing the old business model. They're wolves in sheep's clothing, they are not respecting the fundamentals of crypto at all.
Crypto is about verifying. You should verify, not trust. When you think of Terra, or you think of Celsius, or a bunch of others will fail I think as well. I think everybody in that class will probably fail. So, for that, I would include crypto.com, I would include BlockFi, there's lots of them. And you've had failures in the past, people just forget. They forget that Cred had exactly the same business model that also failed, they were essentially naked.
It's just you didn't see it in good times. But in bad times, basically what it means is when there's a liquidity crunch, if the business model doesn't stand up, then the company is going to fail. It doesn't matter whether it's dealing with crypto type products, or FX type products, or traditional savings products, if you're pursuing that model where you'd basically have to trust that the company is doing the right thing, rather than being able to verify it on chain, then you're taking that risk.
DAMIAN HORNER: Robert talks about crypto companies working to an old business model, one that brings with it inherent risk for the investor. And I wanted him to explain this in more detail so that we can all fully understand the implications of what he's talking about.
ROBERT SHARRATT: The old business model is basically based on your giving your money to whether you would call a bank, or a hedge fund or Celsius, or whatever, and they are taking your money and they are investing your money. That's what people don't understand. One of the biggest lies about banking is that you deposit your money in a bank, and it's your money. And legally, it's not your money at all, it becomes an asset of the bank, they have a liability to pay you back, it's an IOU, they dress it up and call it a bank account. And then they do whatever they want with it.
Some of it, a fraction of it, they keep on hand in case people show up tomorrow and want their money out, or they go to the cash distributor, and they want to withdraw money, but most of it, typically 90% of it, they invest, and they invest it at their own discretion. The difference between the traditional system and what Celsius or some others do and there's lots of them in the space that act like this is it's totally unregulated. They can do whatever they want with your money.
At least with banks, they have to go to the regulator and say, here's what our exposure is, here's what we've essentially participated in. But what you're getting when you put your money into something like Celsius is they act like a hedge fund. So, you're putting in your money into a hedge fund, they can do whatever they want with it. Legally, it becomes their money, you are an unsecured creditor of somebody like Celsius, and there's lots of others out there. The only difference is that some of them are more competent than others. And for some of them, the tide has gone out not quite as far as for others.
So, the tide's only gone out a little bit that people that are, whatever, that are exposed like that, you can see it quite clearly. When the tide goes out further, you'll see that lots of other people who are dressed up as crypto companies are swimming naked. You can follow what they've done, you can see some of their things on chain, like our guys have analyzed their wallets on chain, but just in their announcements. To think that somebody like Celsius, and there's lots of others I bet as well were putting their money into Anchor is incredibly risky.
They also lost a ton of money in like BadgerDAO, and the thing is it is a fractional reserve system. So, they only need to have enough available to allow withdrawals. Their test is like, who else has had problems withdrawing their money? Well, at the point in time where people have trouble withdrawing their money, it's over. You're not going to get your money back. You're allowing the funding of their hedge fund for whatever percent they propose to pay you and you have all of the downside risk, and you have limited upside possibility.
And you actually think you're making a deposit, which is insane. If you actually read the fine print with Celsius, you're an unsecured creditor of Celsius. And it's their money, they can do whatever they want with it. When you look at every single one of them, they're a black box. You have to trust, not verify. You don't know what's going on behind the scenes. When you read the legal documentation, they call it as if you're depositing your crypto there, but what you're really doing is you're giving it to them, you're lending it to them, they have an obligation to pay it back to you, but you're an unsecured creditor of the firm.
You might as well be lending to any other hedge fund on Wall Street or even better, you might as well just go to a casino and put it all on black because you just don't have any control of what's happening and what is really the difference with on-chain is you can really verify what's happening.
DAMIAN HORNER: I have to admit it's a bit confusing when Robert explains these pretty terrifying business practices. Because many people think that crypto companies are literally built on cryptography and on the blockchain. Consequently, we all assume that not only are they secure, but that it's also easy to track what they're doing.
ROBERT SHARRATT: One of the things I think that really confuses people is you think it's crypto, but it's actually not on chain. And if it's not on chain, you're basically just dealing with the black box. In my view, most people are missold this idea, you're told that crypto is supposed to be trusted, verifiable, that's what the crypto message is about. And so, for me, the worst thing about some of these entities that have blown up and many more are to come for sure, is that they've really misrepresented the whole aspect of crypto.
And so, they use that as a sales pitch to get people interested in it. But people don't realize the risk that they're taking. It's like I said about finance is about risk and return. And if the two don't make sense, then there's something wrong. Like, if you think you can get a risk-free rate of return, and then they're going to pay you 20% for that, it's insane. It's an outright lie, and you need to look more into it.
And so, many in the crypto community quite rightly don't want regulation to quash the amazing innovation that is going on on chain. And I really agree with that. I don't think things that are on chain should be regulated. But these things that are off chain, that are misselling essentially misrepresenting what crypto is about, you give this idea that it's verifiable, that it's trusted, that needs to be regulated like anything else in the traditional space, and why not?
NICO BRUGGE: So, Ash, obviously, lots to unpack there any general thoughts to get us started?
ASH BENNINGTON: Well, great analysis, let me begin by stating the obvious. Robert, of course, is the CEO of his own shop Fluid Finance. Like anyone else running a business, he certainly sees the world through that lens. But he makes some very interesting points here about the nature of cefi versus defi. We talked about this earlier, defi obviously not a panacea. There can be software flaws, there can be other issues that cause people to lose money.
But what we've just found out in Celsius, and some of the others that he mentioned, is this idea that effectively when you have centralized finance, you have the same risks that you see in traditional finance. Some of the stories that we could have brought back from the 1930s for example, about what caused insolvencies back then. Excessive leverage, excessive risk taking, speculation, all of these things, improper