gm friends —

If you want to understand why crypto markets tanking, you’re in the right place.

We’ve got a jam-packed newsletter for you - today’s topics:

• ❓Markets: WTF Happened?

• 🤨 Jump Crypto & Controversy

• 💹 Japanese Yen Carry Trade

• ☢️ Ionic: Superchain Lending & Borrowing

Check out this week’s YouTube show for a deeper dive!

Want to be a better crypto investor? Subscribe, follow us on X, and check out our YouTube Channel to never miss an update - thanks for reading!

Markets: WTF Happened?

Another new markets graphic is coming next week. If you have any suggestions for what you want to see (year-to-date returns, trading volumes, etc.) let me know in the comments! But let’s get to it:

• BTC is DOWN ~0.02% on the week to ~$58,300

• ETH is DOWN ~8.62% on the week to ~$2,630

• Solana is UP ~7.37% on the week to ~$151

So why did crypto markets tank last Sunday (August 4). While it would be nice to pinpoint a single reason for the drop, we have multiple potential culprits:

• Jump Crypto Liquidating Assets

• Japanese Yen Carry Trade Unwinding

• Geopolitical Tensions, Poor Economic Data, & Recession Fears

We’ll take a look at Jump Crypto & the Yen Carry Trade later in today’s newsletter, so here’s some resources about geopolitics and the economy to fill you in there:

• JP Morgan Increases Odds for US Recession to 35% [Watcher Guru]

• Job growth totals 114,000 in July, much less than expected, as unemployment rises to 4.3% [CNBC]

• Global Market Meltdown Adds to Geopolitical Chaos [Foreign Policy]

Let’s also check in on some crypto market takes:

• Market Byte: Late Summer Storms [Grayscale]

• Could a recession be back on the table?: Strategists weigh in [Yahoo Finance]

• Bitcoin could act as a 'safe haven asset' while altcoins might suffer amid '40% probability' of recession: analysts [The Block]

• VanEck Crypto Monthly Recap July 2024 [VanEck]

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Jump Crypto & Controversy

Jump Trading is a proprietary trading firm and market maker active in equity, crypto, and derivative markets.

Its crypto arm (Jump Crypto) was introduced in September 2021 and has been embroiled in controversy ever since. Most recently, the firm was identified as a key contributor to the crypto selloff, dumping hundreds of millions in ETH and other tokens.

Today we’re exploring Jump Crypto’s dubious history and its role in the recent crypto crash. Let’s dive in!

Terra Luna

Jump Crypto had an exclusive market-making agreement with the creators of Terra Luna when the project imploded in early 2022.

Terra Luna was an algorithmic stablecoin project that aimed to create a dollar-pegged stablecoin (UST) backed by the project’s other token (LUNA) and an algorithm.

Without getting into details, it worked like this: the algorithm incentivized arbitrageurs to mint and burn LUNA to keep UST pegged to its $1 price target. For a detailed explanation, check out this article.

Jump was tasked with aiding this process and defending UST’s $1 peg. As part of this agreement, they were permitted to buy LUNA well below market prices.

Jump profited massively from this arrangement, raking in ~$1.28 Billion dollars over the project’s lifetime. They were also deeply involved with other infrastructure projects in the Terra Luna ecosystem.

Eventually, Terra Luna exploded and its creators were charged with fraud. While Jump was not ultimately charged with a crime, they were mentioned in the proceedings.

Massively profiting from a ponzi that burned thousands of retail investors is not a good look…

FTX

But being involved in last cycle’s second-biggest scam wasn’t enough for Jump. They were also one of the key firms implicated in FTX’s infamous collapse.

Jump lost nearly $300 million when FTX collapsed in November 2022. While this alone doesn’t reflect poorly on Jump, there’s more to the story.

A Jump Trading subsidiary, Tai Mo Shan, was involved with FTX’s unscrupulous hedge fund, Alameda Research. Tai Mo Shan gave Alameda a ~$250 million loan in Sereum (a Solana-based DeFi project) tokens and sued the company for failing to deliver the funds upon FTX’s collapse.

FTX’s bankruptcy lawyers disputed the claim, arguing that the loan was void and that Tai Mo Shan was also involved in fraudulent activities… again, not a great look.

Wormhole (November 2023)

Jump Crypto helped develop popular crypto bridge project called Wormhole. Prior to being spun out of Jump in November 2023, Wormhole suffered the second largest crypto hack of all time.

Over $300 million of user funds were were lost in the hack. Jump had some redemption this time though.

Jump ended up reapid the $300 million themselves, and counter-exploited the hacker for $140 million a year later.

CFTC Probe & Liquidating Assets

After all that, we’re finally back to the present, and Jump is once again in the midst of crypto drama.

Last month, the CFTC reportedly opened a probe into Jump’s crypto activities. The company’s CEO Kanav Kariya resigned four days later, sparking speculation that Jump was shutting down its crypto business.

The rumors intensified during last week’s crypto selloff, as wallets controlled by the firm began moving hundreds of millions of dollars in crypto to exchanges (presumably to sell).

Jump is a trading firm after all, so selling assets isn’t necessarily suspicious. However, the timing was very suspicious.

They started dumping millions of tokens late last Sunday afternoon. Weekend afternoons are probably when markets are the most illiquid, so it doesn’t make much sense to sell all of your assets then. Unless…

Unless you’re being forced by the government to shutdown your business OR you desperately need cash to meet a margin call.

Either way, it looks like this might be the end of the road for Jump Crypto. And of course they’re engulfed in controversy and losing everyone money as they do it - can’t say I’m surprised.

Japanese Yen Carry Trade

So why is everyone blaming Japan for the selloff in equities & crypto? Because of a widespread “carry trade” involving Japan’s currency, the Yen.

At the most basic level, a carry trade is borrowing in a currency with low interest rates to buy high-yielding assets denominated in a different currency. In our case:

• Borrow Yen at ~0% interest

• Convert to Dollars

• Invest in US Treasuries, Equities, Crypto, or other Dollar-Denominated Assets

The risks with Yen carry trades are:

1. Yen Interest Rates Increase - if the Bank of Japan decides to raise interest rates, the cost of borrowing Yen increases, reducing the profitability of the trade

2. YEN : DOLLAR Exchange Rate Increases - if the Yen appreciates against the Dollar, it takes more Dollars to repay the same amount of Yen, eating into profits or even causing losses.

3. Returns from Dollar-Denominated Assets Decline - this one is pretty intuitive. If the returns from your investment fall below the borrowing cost, the trade becomes unprofitable.

Reportedly, hundreds of BILLIONS of dollars wrapped up in the Yen carry trade began unwinding over the past month. This involves selling dollar-denominated assets, trading Dollars for Yen, and repaying Yen debts.

The process is self-reinforcing in that selling dollar-denominated assets puts downward pressure on returns (risk #3 above) and trading Dollars for Yen puts upward pressure on the YEN : Dollar exchange rate (risk #2 above).

So when a few large players started to unwind their trades, it decreased the profitability for others, leading to more trades unwinding, and so on in a self-reinforcing cycle…

Some believe that crypto and stock market volatility was caused by Japan’s central bank raising its overnight interest rate from ~0.1% to 25% (risk #1 above), sparking a large unwinding cycle and a selloff in assets.

Others say that a tiny 0.15% increase in rates isn’t enough to cause carry traders to unwind. They believe that the market volatility came first, prompting large traders to sell assets to keep their risk profiles in check, ultimately forcing the closing of billions of dollars of carry trades.

Whatever the case, carry trades unwinding definitely contributed to the crypto and stock market selloffs. Unfortunately, it probably isn’t over yet, and is something to keep your eye on in the coming weeks.

Ionic: Superchain Lending & Borrowing

Other News

• Senator Warren Urges CFTC to Ban Political Betting Contracts Amid $500M Polymarket Bets

• BlackRock, Nasdaq make the push for options on spot Ethereum ETF

• Eric Trump Creating a Crypto Product to “take on the banks”

• Judge Fines Ripple $125M, Bans Future Securities Law Violations in Long-Running SEC Case

• US Federal Reserve Hits Crypto-Friendly Customers Bank with Enforcement Action

• US government transfers 300 ETH — Arkham Intelligence

Thanks for reading!

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