How NOT to Run a Business w/ Crypto (Part 1)

Up until now, if you are still trying to understand the general concept behind cryptocurrencies, they are essentially a digital currency “like” the Euro or the dollar that is strongly affected by demand led by discussions around its general nature through social media platforms as well as the level of investment an average person makes as a result from hearing this information.

The main incident that took place in this example, is the bankruptcy of Silicon Valley Bank, that reached its downfall alongside its clients due to an investment into management firms that organized the finances of people’s money for a potential rate of return through various cryptocurrencies also managed by them. When it comes monetary transactions that take place anywhere from a cup of coffee bought at a mall to a subscription plan for a streaming service, these are supported by an asset called ‘cash’, something that your average bank strongly includes into a balance sheet to ensure that abnormalities in spending by yourself can be noticed at any given point.

Generally speaking, cryptocurrencies are split between two categories, one is the average coin that is supported by a major increase or decrease in value depending on its reputation discussed through the media (ex. renowned tech billionaire Elon Musk promoting Dogecoin through platforms such as Twitter and the Tesla website), and the second which fits under ‘stablecoins’. Telling by the name, these are ‘stable’ cryptocurrencies that are supported by a linkage with cash held in a bank elsewhere. What this means is, you are making an investment into a cryptocurrency with the use of your own currency of the dollar (CAD or USD), hence the existence of such stablecoins being popular in Binance USD or Tether USD. An explanation of how Binance works regarding digital assets can be watched in this remote workshop on our YouTube channel.

If you’ve ever used social media for a prolonged use of time, you would notice almost in every instance that the general spread of word behind a particular person or product can instantly affect the opinion of each invididual within the sample census being informed, hence forth making it ‘contagious’. This supports the ‘contagion theory’, which is the sole culprit of the downfall of these financial institutions as well as their linked investment with technology startups.

Throughout the pandemic, both in Canada as well as the US, a major hike in inflation had taken place making it difficult for citizens to increase their spending. To combat this, the US Federal Reserve began to print more money, increasing interest rates and lowering the inflation so that consistent financial transactions became frequented. As this is typical in economic recessions, one specific element of the system that’s been outlined by this change is the investment of people’s monetary transactions towards cryptocurrencies through crypto hedge funds.

When you are depositing money into a bank, your personal finances are not precisely held in one place, it may be partially shared with other companies or placed into investments for people looking to start one, and firms that promise to manage such resources such as hedge funds tend to fall into the same category. As ‘trust’ is the word to keep in mind in this situation, there is a spectrum of the term that ranges between a solid understanding of knowing that you’ll be able to withdraw and deposit your money at any time within a bank with limited knowledge of where it goes, versus lending your personal finances to a startup that gives a “promise” in making a return on your investment into one of their organized cryptocurrencies with a return relied on word of mouth.

As this spectrum is applied to these tech startups, the financial institutions that bought and sold bonds from these companies are what were ultimately disrupting the cycle of asset management. Back to the topic of ‘contagion theory’, due to a sudden rise in inflation once more by the Federal Reserve to reduce spending and decrease interest rates, technology startups such as BlockFi, Circle, Avalanche, Ripple, Proof, and Yuga Labs were the sole proprietors that were affected by the sudden shift in the economy as well as the value of their managed cryptocurrencies, since it failed to meet expectations in making a strong return in investments towards clients. The Silicon Valley Bank was amongst one of the major financial institutions involved in this bankruptcy, and the major reason why the economic turmoil had a far more grandiose effect than otherwise expected.

Generally speaking, next to stablecoins, a company that is not able to print money or does not have assets to back up its bankruptcy, is generally likely to be held liable for excessive debts and therefore be unable to last for a longer time period in the economy. This applies specifically to bond ratings, as buying and sellings bonds from organizations with a (B, BB, BBB) rating are to generally give somewhat promising returns on their buyers, whereas as (A, AA, AAA) rated bonds may guarantee an instant and fully guaranteed return on investment. Amongst organizations that are less likely to go bankrupt, the major one is the Federal Reserve with a bond rating of AAA, meaning that any point they can print money to increase spending and supply of cash to drop inflation and influence spending. Due to the recent bankruptcies, citizens of the US have been struggling to regain their losses, hence why the Federal Reserve acts on repaying citizens that have lost significant finances due to their investments in tech startups.

Various professionals who continue to speak about this industry, generally tend to understand the situation with how politicians and financiers understand the system, with podcast host Brad Nickel from ‘Mission: DeFi’ explaining “A lot of us believe that cryptocurrency and blockchain are superior technology for running the financial system”, at which the response is that the risk associated with this interconnection between blockchain networks and major financial management is not carefully interpreted during the age of Web 3.0 and will take a careful streamlining of valid information and education by the media to be sought into more stable conditions.

Altogether, the major derivation to take from these events, is that each individual must consider staying informed about where their finances are being placed, especially when it comes to terminology that is evolving to reach people’s ears without a direct explanation. To see our recent workshop regarding this topic, please visit our homepage! If you have any questions or concerns, please free to contact us @blockchaintmu on Instagram, or email us at blockchaintmu@gmail.com