Crypto Collapse in 2022 | Meet Kevin

[Music] We gotta talk about the collapse of Voyager Digital this morning. Even after FTX Access, Sam Bankman-Fried came in and bailed them out with an over $450 million loan, they're still filing for bankruptcy. And now individual investors on the platform, and retail investors can't get their money out. Folks, Kevin O'Leary, I want to start with you. What's happening here? And then I want to hear from Wonderful and maybe how things are different with you.

You know, this is nothing new in the story of leverage. So in every cycle, what happens is various actors—companies take on more and more aggressive positions using leverage to goose returns, which is age-old. It works; it definitely works. Now what you're going to find in this situation is many crypto operators, particularly lending platforms, have never operated with such volatility before.

So they were in the slow growth from Bitcoin, you know, almost a decade ago—from eight hundred dollars all the way to sixty thousand, and all along the way, some of them became really aggressive in using leverage, which is the traditional hedge fund model. Now, what happens—and this happens in equities, it happens in bonds, it happens in real estate, it happens in crypto—is the 'Johnnys-come-lately' new asset class with a whole lot of newbies in it.

You're going to see a whole series of these actors get crushed to zero over the next few months in the contagion of leverage being caught offside with the lack of liquidity. Voyager is not that big a deal. It's kind of irrelevant in terms of, you know, this is a diversified shareholder base; it's not FDIC insured in any way, so it's not putting any stress on the government systems in any way.

All the shareholders should consider themselves educated; it's no different than when you go to Las Vegas, put it all on black and it's red, you lose. That's exactly what's happened here. But the great news about this, and why this is so good for the market and how this helps the crypto market, is it educates the business models that aren't going to work, so it's like taking a big spatula from the sky and scraping all the crap out of the market, and it's going to happen very, very quickly.

So anything that was built on, you know, a business model that isn't, is not going to work or can't sustain volatility is going to be gone. And it's a good thing; it's a wonderful thing. It's going to leave the industry much stronger. Yes, we must mourn the investors that got wiped out to zero, but even they are better off in the sense that they've been educated.

So how do you know what's safe, Kevin O'Leary? What do you look for in a company to know? Because we, Voyager, was a public company; we could look at their statements and their filings from March 31st, and we see, well, they had money, and the CEO in interviews told us, "Hey, we only lend to qualified institutions, or we lend the bulk of our money to large institutions." One of them ended up being Three Arrows Capital, where they lent 33 cents out of every dollar they lent to, who got completely wiped out. So how do we protect ourselves?

Even with public financials, you own crypto without leverage, and you understand your counterparty risk. Don't worry; by the time all the litigation is over from all these bankruptcies, you'll know everything about everybody. Lawyers are really good at doing that, and there’ll be tons of class action, if not just straight-on litigation, to go after any assets they can get.

And that is sort of, you know, when a fish dies in the ocean, it goes to the bottom, and that protein is reprocessed by slugs. And I'm not saying lawyers are slugs; they have more than single-cell proteins, but they know how to get the last drop of any value there, and they’re going to get it. It's going to take five to seven years, but all of this is good.

So, when I hold crypto, and I know it's very volatile, I have zero, zero leverage in any of my positions because I know tomorrow morning I can wake up down 38 in any token, any coin, any project, and really that's exactly what's happened. So, you know, but if you put on leverage, you learn the very, very important lesson: you go to zero.

I want to ask you how you are different at Wonderful. How are you not lending to hedge funds like Three Arrows Capital, or if you are, how do you vet them differently? What’s different about you? Why are you not going to be a BlockFi or a Voyager?

And this ties back into the question you just asked, Kevin, which is how does he decide what's safe to invest in? One of the things that he has been talking about for many years, before I even got involved with crypto, was just about compliance and regulation. And obviously, coming from the world that he does, that is the difference with Wonderful and Bitbuy and Coinberry, which are a couple of the brands that we have under the Wonderful banner.

All of our platforms are regulated by securities regulators in Canada, and what that means is when we offer products, we have to vet them with the regulators. And so we have to go to the regulators with a plan around how we're going to actually implement something like staking, for example, you know, be able to assess the different risk profiles, have a bunch of processes and backstops in place before we can actually bring that product to market. Now, when you look at a platform, not to single out Voyager, but just as it's in the news, that is something that did have some, you know, some state licenses in the U.S. but really didn't have the oversight of a regulator like the SEC or the Ontario Securities Commission in Canada.

And so products that they're offering, like that, that offer yield to customers, and that's what we're seeing implode right now—nobody, no regulator had been looking at that or had vetted that to see what types of risks exist for the business and for the customers. And so the regulation piece becomes extremely important.

And I think these events with Voyager, with Celsius, and with BlockFi, which are all happening around the same time, this crypto liquidity crisis—that, you know, going back to what Kevin said, it's an education for users and for shareholders. It's also part of the growth of the industry. So we will see regulators focus on this particular issue going forward. And we can look back at the evolution of crypto over the last 10 years; there have been significant events like this before.

I see this as sort of the second wave of crashes in crypto that lead to specific types of regulation. The first was in 2016-2017, where you had crypto exchanges that were run by individuals who would basically have control over all customer funds. So this is not even talking about lending or anything like that; you just—you would deposit funds and then it would go into the CEO’s pocket, basically.

And so that led to a bunch of these debacles with Quadriga and, you know, other things that led to CCAA and people losing tons of—if not, you know, insolvency and people losing all their funds. And what came out of that was regulators now saying crypto exchanges that are regulated need to have a third-party custodian that holds customer funds; it can't be in the CEO's pocket.

And so that, obviously, in hindsight, it makes a ton of sense, but we needed to have that—those incidents happen. And so this is, I think, the second wave of that.

Yeah, that's really interesting because you do get companies that, like Voyager Digital, put it up on a screen here. They have these disclaimers at the bottom that say, "Hey, you know, they're a FinCEN registered company; they file public disclosures because they're a public company." And so it's certainly challenging at best, and at worst, just outright discouraging and confusing for the retail consumer to know, "Hey, like, who's regulated the right way? Like, which license am I looking for?"

And so I guess the question now is: what's safe in this kind of environment? And I'm going to start Kevin O'Leary. I want to hear your take. Are stablecoins safe right now, or do we need to be worried that if Bitcoin drops to 10K, we're going to see the Gemini token go under because of all this over-rehypothecation? Or worse, USDC goes under, and then any company that's offering staking risks some form of stablecoin meltdown? What's your take on that?

Well, let's talk about that specifically because I think it's a great topic for several reasons. Reason number one is people think that crypto, the entire sector, is going to get regulated all at once. That's not going to happen. The most likely scenario—and this is a personal opinion, but one I've been working on in Washington along with others—is that we would like to get policy on just stablecoins first because stablecoins represent a very powerful and efficient payment system.

And we think we can get bipartisan support between both parties supporting the American dollar as a default currency for a global payment system. It's not going to be the Chinese one; it's not going to be Swiss franc; it's not going to be the euro; it's not going to be the British pound. And the reason it would fall and default to the US dollar would be that that is the currency used to denominate most commodities.

And so the challenge you have right now and why there's so much pressure to solve this is it's very inefficient to transfer US dollars over to Geneva, then put it into Swiss francs, and then buy Swiss Nestle stock or whatever it is you want to do over there. It's really slow, very inefficient, very costly, not transparent, and not easy to audit. And so all of that problem goes away with a stablecoin.

Now the proposed policy that you'll find in great, in granular form, in both the Hagerty and Toomey bills—and I met with both of them, as many others have—this is very simple policy: what it looks like is it says, "Okay, for any stablecoin, an audit every 30 days, and any asset underlying holding up the value of the coin or token cannot have a duration of more than 12 months."

Now, you've seen that policy before; it's called a money market fund, and you'll find it at Fidelity and Putnam and many other financial services entities that are FDIC insured. Circle, if it wished, that issues USDC, could become a bank; they could be FDIC insured if they wanted to, but they are sort of leading the pack with crypto in terms of payment systems under a stablecoin that has not broken a buck.

So you can— you've seen even Tether trades below a dollar; it's 0.999 right now. And so when you break a buck, you lose a lot of confidence. So what I'd like to see happen here is that we regulate stablecoins first because of their utilitarian value within the crypto universe, and that get done in this calendar year.

And the reason that might happen is Toomey is retiring, and he is a driving force—, as you know, on the Hill—and is really behind this momentum and this bill and has lots of support from both sides of the aisle. So, I think that's good now.

Obviously, what happened to Luna is an example of what not to do, so again, a sad situation, billions lost, but a great education to the market. Algorithmic-based stablecoins, nah, I don't think we're going to do that again. I'd rather see something back by US dollar or assets that are very liquid that can have duration less than 12 months, so that makes sense to me.

So at the end of the day, the bad ideas get, you know, removed by the big spatula, and again, it's unfortunate for those investors that didn't think it through. But not all stablecoins are alike; USDC being the leader currently.

Now, having said that, if you go look at current yields across the spectrum of duration from one month to 12 months, it's only 50 basis points right now. So right now, USDC, while it hasn't broken a dollar, is not a great place to park cash because you can do 1.2 percent in commercial money market accounts in U.S. dollars.

So at any one time, you have to manage assets, as you always have to. I think USDC, when things stabilize and there's more demand for it, we'll probably have rates 300 basis points higher than one percent, but you just don't know. And when you were putting out loans on the USDC platform, it would have been best to ladder them from one month to 12 so you'd still be accruing three to four percent. But everybody's learning; that's my whole point.

That was a long dissertation about what I think is going to happen in stablecoins. But if you're going to be in a stablecoin, it's only a personal opinion: USDC is the one that has not broken a buck recently.

Yeah, and so I want to ask a follow-up to that and then go to Ben. The follow-up is a lot of folks—I don't believe realize that when they do stake a USDC stablecoin, even though that coin is backed by a dollar, if it's then lent out, that person no longer has the right to the claim of that dollar. The person whom the coin is lent to has that right.

And I wonder, is there a risk that companies are leading a lot of retail consumers to believe that, "Oh no, you can always redeem it for a dollar," without mentioning that, "Oh, but it's leveraged out 10, 20, 30 times?" And Ben, I'm going to end up asking you after Kevin O'Leary here: how many times are these stablecoins lent out? Do we have any idea about that?

But Kevin O'Leary, for you, isn't that a risk? If you take yield, that you're actually becoming a lender, and if we have systemic shocks—or at least certainly going through a bear market— that you could even see a USDC break a buck? And even though it's backed by the dollar, the people who lent out or staked lose, and the last person who's not staking it? They get the dollar—what's your take on that?

So that’s where you need management, compliance, and total transparency. And so those who have opened accounts with Circle itself manage it under corporate accounts understand exactly what you just disclosed. But also the company is constantly monitoring its margin requirements and exactly what it's got and what it's holding.

You can’t—if you have an account with Circle, you're getting a constant stream of information answering exactly those types of questions because they have their brand to protect. They also have that dollar strike value to protect, and they have their corporate account and count holders to protect. And they want to do that; they want to emerge from this successful, even though it's been tested with volatility.

And I will remind you that recently it was disclosed that both Fidelity and BlackRock each invested 200 million dollars in the Series F of Circle. That is a huge vote of confidence in the middle of all of this volatility we're talking about—the equity of the company. And so they're the most conservative money managers on Earth putting a bet forward on Circle becoming at least one of the regulated cryptocurrencies that are stable.

And so, at the end of the day, you know, they have the risk too. We all have risk. But if I have to bet, I'll invest beside Fidelity and BlackRock, and that's exactly what I did. Ben, your take on stablecoins, and what do you all do at Wonderful? How was that sort of, you know, when individual stake? How do you handle the disclosures for that?

But also, more interestingly, can you give us some insight into how often are these stablecoins circulated through the system? Is it, you know, somebody deposits a hundred thousand dollars, and then that gets cycled through five times? Is it a hundred times? How many times does that lent stablecoin sort of move around?

So, yeah, a couple of questions in there, and I think they're—I love the, you know, the root of all your questions comes back to: there’s a lot of retail confusion about products and licenses and what's regulated and what's not and what the risks are. That’s what it comes down to.

And even for sophisticated people like you pulled up Voyager's website, okay? It’s a public company; it’s licensed by FinCEN. There should be some comfort level with that; and as much as I, you know, compliance and regulation can be a boring thing to talk about—and I'm actually a lawyer in a previous life, you know, one of those bottom-feeding fish that Kevin mentioned or whatever the phrase was—but, you know, as much as I try to get away from that, that's really, you know, the DNA of what we're doing is really around regulation and compliance.

And so much of that comes back to disclosure and really helping customers understand what the risks are. So just to kind of cycle through a few of the topics and questions: I think, you know, for users, because this is just going to become more and more important, especially in light of some of these incidents now.

So, you know, with FinCEN and FINTRAC, those registrations—they're not actually protecting the customer; they're really focused around anti-money laundering rules, and there's not a customer protection that lies in there. It’s really the licenses with the SEC or the OSC, the securities commissions, that have these mandates of protecting investors and users now, uh, in the crypto space, now that they've asserted jurisdiction over that.

So those are the regulators that are making sure that customer funds are held by a third-party custodian, that if platforms like Wonderfi or Bitbuy or Coinberry are doing staking, that they vetted the process, as in the regulators have vetted the process, and they're comfortable with it.

And so, you know, tying that back into what we do: we actually don't offer staking through our platforms yet, but we are—we've been in discussions with the regulators for quite some time, and there's always pressure to bring new products to market. And obviously, we—you know, I face that in my role, and we face that as a company.

But at the end of the day, in situations like this, it's better to be a bit slower moving and make sure that the products that you're offering are safe and secure for customers because at the end of the day, this is no longer just an early adopter crowd that we’re dealing with in crypto. You're now really getting into closer to some mainstream adoption, so you're getting people that don't have necessarily the sophistication or background of crypto trading for years.

And so, there's a lot of additional risks that come in for those users. So I think it just becomes more and more important for companies to be clear about what the risks are with the platforms, and I know a big topic with some of the liquidity crisis with some of these companies we're seeing is that there weren't really proper disclosures around what's being done with customer deposits, and that's crucial.

And so I think that—I mean that’s going to get weeded out with this, and it’s going to become something that I hope retail users can, you know, will be able to address easier. And I think it's great that, you know, you're talking about this and bringing it, you know, to the top of your agenda because at the end of the day, this is also a place where people go to learn about crypto and how to access it and what the risks are.

It's not just, you know— not everybody goes and downloads financial statements and reads them and understands them. I think people are really looking to voices, you know, in traditional finance and crypto to learn and understand. So, what risks would customers face if they wanted to go to Wonderful, or would they face any? What kind of confidence would they have that they're not going to get Voyager, and we're not going to see this sort of Celsius limitation of withdrawals?

And then maybe second, if you could speak to how have signups been lately? Are you noticing at the business a little bit of a slowdown in the last few months?

Yeah, so definitely. So, the second part first, which is generally, I think, the whole crypto industry, all platforms have seen, you know, a general decline this year just with, you know, macroeconomic conditions and what's been happening in the crypto market as a result. So I think, you know, generally there's, you know, a bit of a softer market right now, but nothing that we haven't seen before.

And in terms of confidence for customers, we— we don't lend out any customer assets; we've never done that, you know, nor will we do that unless we find a way that is, you know, is vetted and approved by regulators that has, you know, doesn’t have the risk profile of some of these incidences. But, you know, it's not part of the—it's not part of the plan right now.

I think our business really focuses on providing a simple, compliant way for people to trade crypto and just making it as dead simple as possible. And so I think some of the strategies, the high-risk strategies that you've seen with some of the names in the news recently, those are people that, you know, companies that were chasing, you know, higher revenue, higher returns, and offering things that were unsustainable for customers, like 20, you know, yields on their crypto assets.

So that's something that right now we're not even allowed to do that because we're regulated, and we would need to, you know, we need to get through a process with the regulator to be able to do that. And now with, in light of these incidents, for us to get through a process with a regulator to be able to offer a lending yield product through Bitbuy or through Coinberry, the regulators are going to now have to get comfortable with all of, you know, all the risks that we're seeing come out of, of these situations.

So it’s going to be a, you know, it’s going to be a long process before we would be able to do that. Got it. I want to talk now broadly about the crypto market. Kevin O'Leary, your thoughts on how low can Bitcoin go? Are we going to 13k? You know, Kathy Wood says, 22,000 should have been the 200-week moving average floor, and that would have been tough to go through. We blew right through that; we’re going to 13. When do we go bullish here, or do we buy the dip, or do we wait?

It's impossible to know how—where the bottom is, but I would say this: I don't believe we've seen the bottom yet. And I have a different view of it. I go back again to other asset classes that I've invested in for decades. In every case, you know, traditional bonds, traditional equities, real estate, alternative asset classes—the bottoms are reached with an event—a panic event, as I call it.

And you can find it in every asset class. You know, back in the hedge fund days when they started gating these large multi-billion dollar hedge funds that gated, shut down their liquidity, caused panic, and you saw bottoms in equities as they were being liquidated.

Long-term was one of the classics in the last couple of decades, and it was a fund that was over-levered and blew up; we haven't seen that yet in crypto land. There's no big guy has gone to zero yet, and I think that's still to come. Hard to say who it is because it's going to be because of leverage and some kind of relationship in a counterparty holding that they have not disclosed.

And I'm just speculating right now, but that would be very healthy for the market to have that happen. Voyager is too small; it doesn't matter. The rest of these guys were kind of irrelevant in terms of total market cap. Bitcoin and the crypto market itself has almost been cut in half in total market cap, and so you would think we're on our way to the bottom.

But I like a big, big panic event. That's always been a great way to bottom. It's towel throwing; it's capitulation; it's massive volume; it's total panic in the streets and always a great buying opportunity. I have no idea who’s next; it could be tomorrow morning; it could be a month from now, but it's coming to a theater near you, and it will definitely be a very good thing for this industry. It'll be a great thing because it'll take out all of the bad broken business models, the heavy leverage, the speculation that was too risky, and push everybody—and this kind of circles back to the conversation you were having with Ben at Wonderful.

The reason I'm an investor in Wonderful is I need a place to store my crypto assets that fit into my compliance and accounting departments. So, you know, when Wonderfi was able to offer me a centralized wallet, Bitbuy was able to say to my auditors, "Look, you can audit this thing daily, weekly, quarterly, monthly," and I can mark to market each position for you at four o'clock, even though it's irrelevant in crypto land; it trades 24/7.

But the old infrastructure of compliance that exists for all financial markets has not yet provided systems yet for anybody that wants to be compliant, like I have to be. I don’t have an option; I have to go through an audit. I'm an investor in many other financial services companies that are issuers under regulations in many countries. We have to have our audit statements signed.

Then your take: what's it going to take to get to a bottom? I think these are definitely good signs that we're getting close to the bottom, and we'll have to see how Voyager, BlockFi, Celsius play out. I think there is a potential that, you know, some of those firms are going to have to liquidate large amounts of crypto, which, you know, would likely send the market down further.

And to Kevin's point, we'll—you know, we'll see what else comes up over the coming weeks. You know, I know there's a lot of other firms that have been lending and using high-risk strategies, and so it's also good as this, you know, more news about these firms comes out because you do get more good analysis and information about the different strategies that they were using and the different risk profiles.

So, you know, I think we'll learn a little bit more as we go forward and sort of see how big this issue really is. And, you know, and then, obviously, the other part is the, you know, macroeconomic conditions and, you know, my—I won’t throw my guesses in on that; I feel like they're as good as anybody else's guess.

Got it, got it. Kevin, do we have you back? I think you do. We do; yeah, go ahead and finish your thought there. And it sounds to me—and maybe you can also address this—the follow-up question I had for you, which was, would you, after you finish your thought, say that you're looking for a big spike in the VIX and the stock market to find a bottom there as well?

Well, let’s stay on crypto for a second. The point I was trying to make when I lost audio was that it's taken me a long time to convince my existing compliance and accounting infrastructure that supports my operating company’s investments across a wide range of financial services to get on board with my positions in crypto.

Because remember, I own Wonderfi, because I want to own infrastructure equity—the same for FTX, the same for Circle. I'm a shareholder of those companies and Immutable Holdings in the NFT space; that's my basket of equities that are all compliant operations. They're all compliant; they all work under very strict compliance. That's the test that starts the equity investment.

But the more interesting challenge that I solved recently with Wonderful again, with Bitbuy, was to actually open an account, transfer all of my projects, whether it was a Polygon or Helium or whatever—I mean all this stuff to me. These are not coins; it’s just software. That's all it is.

And moved it into—and slowly I'm doing this; I'm not finished yet—into Bitbuy, where I can get a statement each month that my auditor gets before I do, and my compliance department marks to market every day at four o'clock. And I don’t, you know, I find it so humorous that the whole compliance world still marks to market crypto at 401 PM as if that means anything.

It's because it's trading 24/7, but they mark to market it because they have this giant infrastructure that reports back up: is there over-leveraged positions? Is the position more than five percent, depending on the mandate that it's held in? But this is what Wonderful is doing: it's working under the regulator, under an order, completely compliant; it actually has a public auditor looking at it now signing my statements. That's a big deal; that did not happen for years.

And that's why I'd rather invest there because that's going to become more and more and more important as regulation comes. The large institutions that don't own any crypto need the Wonderfis of the world—totally compliant, whether it's decentralized or centralized, and auditors that can actually use the infrastructure they're building to make sure they can mark to market according to the traditional rules of compliance.

There’s a commenter here asking if your stance on NFTs has changed at all from the utility of NFTs related to cars or watches. I'm still a huge fan of NFTs for authentication, not for trading. I have never, ever traded one until the regulator tells me if it's a commodity or a security because I don't want to get caught in that debate.

But I have used them. Last week, there was an art exhibit on in New York, and I bought a piece, and I asked the dealer and the artist, "I will not take delivery without an authentication NFT." And they said, "Well, wait a second, we don’t have one." I said, "Then you don’t have a sale." I want that so I can send it to my insurance company.

That's the way things are moving. I'm not trading that NFT. It's attached physically, if you want to think of it that way, to the piece of art I bought. It will trade when the physical art trades, but now I'm able to actually send the NFT to my insurance company and say, "This is what I bought; this is when I bought it; here are the attributes of it; here's its physical location; it's on transportation now down to Florida to my home." And all of that is covered in this NFT.

So that's the future of NFTs for me. You know, if you—I don't know about an ape or any of that stuff because I, you know, to me, where's the intrinsic value there? Somebody tried to sell me an ape for 362 thousand dollars, and it's now worth 60. That's not good. [Laughter]

All right, last question, and then I'll open up just final comments from both of you. Maybe 60 seconds each, final thoughts on the crypto market. Are you waiting for that big panic, or, you know, what's the future? Do we still have a future in crypto utility, crypto investing? Kevin O'Leary, we'll start with you. Final comments or pitches that you want to make, and then Ben, and then we will wrap it up.

I think crypto has a very bright future. I'll be bold enough to say in this very volatile market for crypto that within a decade, it'll be the 12th sector of the S&P. And the reason is there’s just too much productivity, too much transparency, really strong vehicles for solving financial services problems that exist today, like transferring capital, as I talked about earlier.

It's just too good and too efficient, and so it'll remain. The key is we need to get some policy; I think it'll happen first with stablecoins. And, you know, you asked the question, but the stock market is no different than the crypto market. The stock market is still a little expensive if you believe we're having a recession; probably fairly valued if we think we're having a soft landing.

The trouble is nobody knows; so you're going to see this flibulation going back and forth until we've resolved that question. We know where the Fed stands in further rate hikes, but there are some great companies that have lost 20, 30, 40 percent of their value, and I have to admit I'm nibbling in equities as well, just as I am in crypto.

And so I can't call the bottom, but I don't use leverage; that's the secret sauce! Everybody's calling me up, wanting to lend me money, and I just say, "No, no, Nanette, not interested."

Awesome! Ben, final comments from you?

So definitely, crypto's not dead; Bitcoin's not dead. I think we've, whenever we have situations like this or markets like this, we've heard that question come up time and time again over the last 10 years.

And I think the way to look at it is you have these aggressive growth cycles and then these downturns where a lot of issues are resolved. Previously, it was with the technology, in some cases. And then, in more recent years, including this year, it'll be with regulation and sort of, like, really weeding out sort of, you know, bad actors or people that are not operating in a way that's safe for customers.

So that is what we're seeing now, which is basically regulation is going to make things more stable and secure for users and investors in the space. And then, once we get through this cycle, we'll see continued growth.

So I think it's part of the natural growth of the asset class, and just with any type of newer technology, we tend to see these types of cycles.