27. Crypto Insights: Expert Analysis and Actionable Tips for Navigating this Current Market

When we say volumes for exchanges, that means the amount of swaps and trading that is going on and that is how exchanges get paid. So if that's down, the amount of revenue for exchanges is going down, which puts more pressure on them. As a business radio.

Welcome back to the Ben and Bergs episode. Today we are talking about what our analysts are telling us about crypto and the action you need to take right now because Bergs it is an absolute shitstorm once again in crypto. 2022 has been complete, another disaster. And our analyst Nick has put out a big caution warning the other day for our members. And I want to walk through some of this stuff because this is pretty fascinating. First of all, are you okay?

Doing great, man. It is very early in the morning, as you can tell by the bags under my eyes. But this is, this has to go out as a public service announcement. I went to EO the other day and they're just like, mate, are you okay? Because I've been hearing about everything that's going on in crypto and you just need to hear what our analysts say.

About everyone in crypto needs a therapist right now. So let's get into it. So FTX has collapsed. Obviously if you've been living under a rock, FTX is done. Spf, the CEO has gone to jail. He's been locked up. Well, he's not in jail just yet, he's under custody but he will be able to jail and we could see more exchanges go down. So again we're sort of saying this is not to intend any cause of panic but more of a reminder that we need to start using exchanges as like services. I get in and get out. Our analyst Nick has caught is adding caution around Binance and there's been a little bit of FUD going around Binance recently. So we need to remain very wary. Now I was onboarding a mate of mine into crypto the other night and it's an interesting conversation when you have with a newbie coming into cryptos that you don't really want to recommend to hold your crypto anywhere. So what I said to him was get a ledger first, get that set up, get verified with other Coinbase or Coin Spot and then we're going to just use that exchange as a merely an onboarding ramp to buy crypto. Now the key takeaways here is we need to know is 90 of exchange volume. Sorry, we're down 90 on exchange volume from this time last year. Huge down period. Also seeing massive industry wide layoffs. Many exchanges and lenders have collapsed and we could see more in 2023 and we have some orange flags burgs. These aren't red flags, they are orange flags. The or flags look out relate around binance, Nexo and crypto.com among some others. They may have especially extended themselves over the last year. And one of the other things who we we have seen adopt more is the proof of reserves. Some more exchanges are adopting proof of reserves but there are a little caution that not all of them are doing this equally. So let's get into it. Low volume. So what Exchanges aren't out of the woods yet. So Kraken has laid off 30 of its workforce by bit is cut 30 and Australia exchange SwiftX has also cut 40%. We've seen this because the plummeting exchange volumes and I'm looking at this chart here bergs at the daily exchange volume, the 7 day moving average and it is a disaster. I mean it looks like my crypto portfolio like down, down and to the right.

Down, down, prices are down. Oh and this is the thing. So when we say volumes for exchanges that means the amount of swaps and trading that is going on and that is how exchanges get paid. So if that's down, the amount of revenue for exchanges is going down which puts more pressure on them as a business.

And we need to be careful about this because in no other businesses in anywhere in the world do you really survive. 90% drop offs in, in sales revenue. Right. And a lot of these exchanges sign massive stadium deals. You know we saw crypto.com they were sponsoring every single sporting event I watched, you know, this year insane.

Oh it was over the AFL and everything. It was so crazy.

And these are usually multi year deals. We have then moved into the loss of trust. Like there is like I, I've lost trust in everybody this year, especially all the exchanges. It's unfortunate but a lot of that trust has been lost. And it's painfully clear that so many actors in this space, so many people building this space cannot be trusted due to the shady operations and lack of oversight. Especially in any exchange that is looking to set themselves offshore. Now the only reason regulated exchange we have right now that is under similar rules to banks and like stock exchanges is Coinbase. Everyone else, especially Binance is finding holes in the rules to be in unregulated areas which is something we need to be cautious about. I'm not saying it's going down, I'm not saying you know, ruling out the exchange. But you know, and Nick our analyst is saying this is sort of a sub 1% chance and we all hope we're wrong. But.

Binance is in the area of like that, you know, too big to fail. Right. And we saw that with ftx. A lot of the.

Money over Binance recently has been pulled out. I think there's over $3 billion pulled out of Binance over the last few days. And we're seeing this because of there's a few different areas. One is the proof of reserves have left much to be decided. So they did do an audit. Bergs some of the bitcoin reserves were over collateralized and many people were actually pushing back on its legitimacy. The audit wasn't official, it wasn't extensive, and it relied on Binance's management's good faith and it only included bitcoin. No other assets, no customer funds, no general liabilities.

So that's an orange flag, right? There's a few other things Nick goes on to talk about, which is you can go a little bit deep if you can check out Collective Shift if you want to go a bit deeper. But there has been a net outflows of $5 billion.

Of.

Finance over the last few days, suggesting Binance has a fair amount of assets backed one on one that's easily accessible. But when you have that amount of outflows, you can never be certain. And after putting our blind faith in ftx, now looking at a centralized offshore exchange without proper regulated audits or oversight, we are warning to our members and everyone listening to this podcast to stay cautious. And I would not be having any significant amount of money on any exchange because the other problem we have here, right, and let's say we hit this sub 1% chance that, let's say Binance goes up, not saying it will, if it does. A lot of the Australian exchanges get their liquidity from Binance.

So this would be the almighty shit hit the fan scenario if that went down. And I know that I would much rather have my crypto on a ledger and advise all my friends, all our collective listeners, Bennetberg's listeners and members to have their money on exchange as well. Because who knows?

That's it. So you need to decide what level of risk that you want. You could, if you let someone hold your money, they can steal it. If you let someone hold your coins, they can steal it. So with everything that's going on in the crypto space, Binance being the largest exchange, people weren't too happy with their proof of reserves. They also had a lot of assets in their own token BNB that they control, they burn has gone up a lot in value.

We think in general terms that things will be okay, but there is a risk there, there is a risk of ruin that if you hold the majority of your crypto on an exchange, you can possibly suffer the risk of ruin.

Yeah.

And to most people that is an unacceptable risk. And the way to remove that is to self custody. Obviously there are risks with self custody, but at least you know it will not get stolen.

Now, going to talk about crypto.com after crypto.com I'm going to give us, give the listeners a proof of reserves ladder. So we've got Nick Carter, an industry VC who's put together the proof of reserves wall of fame, which lists exchanges from gold standard right down to informal acetations, I. E. No cryptographic proof. So I'm going to get to that in a second. Bugs. But first of all, crypto.com. so crypto.com is a funny one. I don't know anybody that has crypto money on crypto.com.

Oh seriously. This was a while ago, like years ago. And I think you saw an ad for crypto.com you're like, what the hell is crypto.com? because people in crypto just don't use it and have never heard about it. This is before the Matt Damon ads and everything came out.

Yeah. And look, it might just be just due to. Because we are in Australia, you know, there's a lot of other people around the world.

Yeah.

But you know, we have potentially been a little bit skeptical of crypto.com however, in saying that I've held up pretty well so far and Chris the founder has come out and continually sort of listed that things are okay, but the orange slash red flags we're seeing here is a couple of things. Now we saw this a couple of months ago, the.

ETH reserves, the $400 million in ETH that was sent to a wrong address and luckily it was another exchange. Like, come on. The other one was when they accidentally sent $10.5 million to a user that was an Australian person instead of a hundred dollar refund. And it took them a year to find out that that's.

Is this the person that bought, that bought the house?

Right. Like how do you accidentally send 10.5? Now that could be a lack of professionalism or it could be a showcase though. They've got absolute, you know, fuck you money and they don't care. So that could be another way to look at it.

And the other one is the massive advertising spend that They've had this year, which we saw that books have spent nearly a billion dollars in advertising in 2021. They were everywhere. They spent $100 million on the ad campaign with Matt Damon, 700 million on a 20 year deal in LA. They are the official sponsor of the 2022 World Cup. They had advertising deals with the Formula 1, 100 million, UFC, 175 million, the NHL's Montreal Canadiens, Italy's Series A soccer league and a five year deal with the AFL. That is insane. Plus that is so they're forced to cut remains where their financial stable crypto.com online ad spend has plummeted from about 16.2 million Q1 to 1.6 million in Q3. So they've cut it by like 80%. They're scaling back sponsorship deals. They dissolve the deals with Angel City FC, Twitch Rivals and the $500 million UEFA Champions League deal and trading volume for crypto.com is down 91% plus the last thing I want to answer here is the token Crypto.com's native crypto token CRO raises a lot of red flags. There doesn't seem to be a lot of utility and they lock users into the platform by staking their CRO for added rewards.

Oh man, it is, you know, caution at all intervals here.

Really be careful.

That is so crazy.

Now the last thing I want to mention, unless you got something out on that book, is the proof of reserves. I'll go through the. The hall of fame. Yeah. Yeah.

I'm keen to get through the letter, but it's. Yeah. So if these crypto companies are spending so much money, they're not getting that much money in. You have to start to wonder what's behind the curtain. And what we're starting to see now is the tide has gone out and you're starting to see who is swimming naked. And if you can see these are the visible things. They're spending so much money firing a lot of stuff and revenue is right down. They are three areas you need to look at in any business and say hang on a minute, how sustainable is this business? And if you are a customer of theirs, you need to consider what action you need to take.

Yeah, I agree. Great points.

The last thing, just quickly before I get to the wall of fame is the Australian exchanges. I thoroughly believe and Nick's I've also got this point I'm not sure about your thoughts Bergs is that there is so many Australian crypto exchanges. Like what the hell? How can there be so many crypto Exchanges, you know, swiftex, Coin Spot, BTC markets, Independent reserve Coin Jar.

What else is there? L Bait or digital surge was one like, that's seven off the top of my head. I think there's more. I can't remember now. There's a lot. And when exchange volumes down 90%, you've got to start to think like, how sustainable are some of these?

That's exactly right. And you've had things like Stripe come out in the last couple of weeks where you can have a hardware wallet, you could just go to Stripe, put in your payment details and straight away it'll just ping crypto to your address. So that is actually taking quite a lot of the function out of these exchanges. And the wildest thing is, and the most ironic thing is that we are using crypto in the way it is not meant to be used. It is supposed to be self, sovereign self custody and we're using these intermediaries. And there's a reason for that, because it is difficult to do self custody. It's. It's a lot easier these days, but it's still challenging for the average person. But if you follow the steps, you'll be absolutely fine. And if you're already listening to this, you're way ahead of everyone in this space, just, just put it that way. I'm talking about the average Joe on the street, your mum or dad. So they'll go into exchange because everyone can download an app and so using it the way it's not meant to be used. But those exchanges exist because they are solving a problem that crypto is just one or two steps too difficult for the majority of people. And then exchanges were making heaps of money, so VCs were investing in them. Then they created their own tokens, which the VCS could have and then they could dump on the public. So they get their money back early. Instead of growing a company for seven to 10 years, in six months they can dump those tokens and get 2x, 3x 4x. So everyone was doing that. So people in the crypto space started creating all these exchanges because it was easier to raise funds, easier to get money, easier to run a business. Now the tide has gone out, all that has changed. And I agree, we have way too many exchanges, especially even in Australia. I was surprised. I've never heard of 90 of these exchanges. I'm like, what? Yeah, I've never heard of you. How do you survive? How many customers do you have? Yeah, how are you still alive?

Yeah, I agree, that's it. So last of all let's wrap up with the proof of reserves wall of fame. Nick Carter's VC Wall of fame. So this is entities which have conducted a recent proof of reserve attestation update. This is Updated as of 26th November so it is as of data recording a couple weeks out of date the gold standard. These are the exchanges that have used the gold standard. So this is proof of reserves included. Full proof of pol. I'm sure what POL stands for Pol Merkle Tree all done with an auditor Oversight.

Auditor Is this oh user validation with Merkel approach to me. Okay cool. So these are the top five Kraken, BitMEX, OKX, Gate, IO and Coin Floor. They have all done either an auditor assisted or self assessment user validation with the Merkle approach Semi annual mini assets. I've got no idea what the Merkle approach is Bergs don't get me to explain.

Okay, so like Merkel's like Merkle Tree. So it's like all the addresses how they aggregate up and go down so you can kind of track it. Right. It's really a nerdy cryptographic thing. There's many aspects to it but it's just a another way of proof looking at things on a blockchain.

Brilliant. Then moving down the list other proof of reserve attestations no order to oversight or other drawbacks is Binance and hbtc. This is Bitcoin only please know that's Bitcoin only Announced plans is to do more there for finance. Now partial validation is Luno Revix bit by shake paid but I'm going to go I've never heard of any of those. And then informal asset assess station. So no cryptographic proof of assets held and no corresponding liabilities provided Binance, Bitfinex, Crypto.com, okx, Kucoin, Deribit, Horby, some big names there. Now you'll notice that doesn't include any of the Australian exchanges because the reality is in America no one cares. But we all need to understand that a lot of the Australian exchanges get their liquidity from those exchanges. Doesn't mean they hold their assets on those exchanges. Swiftex for example have recently said that they hold their each assets one to one with fireblocks. That's one of the big institutional self custody players for the exchanges. But you know we, we never can be too careful. So that's a bit of a snapshot burgs of who's doing the proof Reserves. I like the way this is going. I think Blockchain Australia have also implemented A proof of reserves policy for those that sign up to it. I think most exchanges have signed up to it. A, apart from Coin Spot insane that Coinspot have done their own audit and published that. So yeah, I, I mean I don't have enough data or information to, to say whether or not any of these exchanges are, you know, are going down the path of, you know, ftx. I don't, I wouldn't think so. I would hope so. But yeah, the key takeaway here is to get that self custody set up, get your ledger set up, use the exchanges as a service.

We had a good analogy where Leon was saying he likes a public toilet analogy. You have to use a public toilet, get in there, do business and get out as quick as you can.

I love it, love it.

And, and just, just to, to, to wrap this up in terms of audits.

The level of waters these people are going to the binance one, they're just, they're looking at their assets, they're not looking at their liabilities. That's a real challenge because on your balance sheet you could have $10 billion worth of assets, but you got four $40 billion worth of liabilities. There's another side to that equation. And when you're going in and you're looking at Bitcoin only, you're not looking at the other coins. All the other assets, all the other assets will be much more than Bitcoin itself. So you need to look at all of the assets, make sure you actually custody them. But then you need to look at the customer calls on those assets. Are they one to one? Then you need to look at your business liabilities as well because they might just be looking at. Do you have proof of assets? Yes, I've got Aaron and Ben's money. There's one Bitcoin in there. Here's your one Bitcoin done. But they're not looking at, hey, Our business owns 10 Bitcoin, so how are they actually surviving as a business? So proof of assets is very different to the health of your business and your balance sheet. I don't think many people will go to that level to prove that. Listed companies will like Coinbase, but no one would willingly put that out there, how much they have if you're a private business. So just be aware of that. And yeah, the, the way to go here is to definitely, you know, self custody because it's the, the assured way that no one else can steal your money. Brilliant.

Okay, that is the first of our new trialing shorter episode. If you love that, if you have a friend that needs to hear this, and it's got money on the Crypto exchange. Please send them this episode. Tell them Bennett Berg sent him. Tell them to get their money. Get that GTFO out of the exchange. If you like these episodes, please give us a subscribe or a little review. That does help. We're on all podcast platforms. Burke's got a Cracker episode coming up next. We'll see you then.

Bye. I can't wait.