We at BitOoda have always been leery of the crypto borrow/lend market. While we know this is a critical activity in any well-functioning market, we have been alarmed at the rate of growth and the incredibly quick deterioration of standards and margin requirements. In our view, there is just too much capital chasing too few borrowers. Earlier in my career, I brokered through the energy credit crisis during the fall of Enron and the financial crisis of 2008–2009…and I learned just how ugly it can get. Markets can and will seize, and no model can account for that. I am afraid to say that it’s looking like Deja Vu all over again.
What I have learned in my career is when you owe the bank $1 mm, it’s your problem; when you owe them $1 billion, it’s their problem. This is a classic example of the Three ‘I’s that Buffet often talks about: Innovators, Imitators, and Idiots. He talks about the natural progression of how good ideas go bad quickly. First, in any unique opportunity you have the Innovators who simply see an opportunity that others don’t. Then you have the Imitators who try to copy and build upon the original thesis. Then come the Idiots who are driven by greed and usually can’t build anything new and get involved simply because they have FOMO; they think they are late to the party, so they reactively buy assets and businesses from the Innovators.
Typically, at that point, a top is imminent. When it finally comes — as it always does — the Idiots sell the assets for pennies on the dollar to the very same Innovators from whom they bought the assets in the first place. The CEO of a major U.S. bank once said about sub-prime loans, “We know the music will stop at some point, but we plan to keep dancing until it does.”
I am not a very good dancer, but I do play poker and know that sometimes the best hands are the ones you lay down. Be careful out there… these markets are treacherous. Stay healthy and be safe.