Today is June 30, 2022, and there were hopes and expectations for the CoinFlex community, that they might see withdrawals open back up.
Over a month ago, I wrote my first positive review on the exchange, with doubts because of my knowledge and understanding about the real risks in gambling leveraged derivatives and the real downside, but in this rare, rare case, outweighed by the positives of an amazing team and site features that even the largest exchanges refuse to refine. I wrote an update on things just before Roger posted that he didn't owe anything, and in fact, was owed. With so much developing, I believe it best to unpublish both articles until we all see where things head. I don't want to encourage people to load new funds on a platform that might not survive, and I don't want to comment on things that could change in a heartbeat.
I do, however want to write this in case it helps the CF community understand a few things- again, if it helps.
I like Mark, I love the CF trading engine, but clearly, they are now getting the publicity they would love to have, but rather, for infamous and unfortunate reasons rather than what I'd hope for them.
A few of my own experiences, and a little bit of clarity from a 3rd party (I am not paid, endorsed, or hired by anyone involved with CF OR BCH or SBCH or SLP or anything), might be helpful to the speculations of the community.
There are so many wildly presumptive ponderings in Telegram, I felt it might serve the community to chop through a few possibilities and clarifications. This is all personal opinion and guess work, but I think it bears some logic.
First, some people are confused in believing that Flex's (currently at) $380M MarketCap (up 24%) should mean CF has plenty of value to simply release withdrawals and recover the $47M debt owed. MarketCap stands for market capitalization. This means how much of an asset exists, and going value of said asset. I haven't tracked that number for months, but it looks like over the past 24 hours, its low has been around $0.76, and it's high around $4.30. That dip has been in the time of doubt, where people not on CoinFlex, meaning BitMax, Uni and maybe a couple of others, have been liquidating with the assumption that CF is toast. The fact that the dip is over and it is near where it started, is an extremely positive sign that the recovery token is raising what they are hoping for. It could also mean, that Roger is moving towards them for a solution. I wish I could be there in arbitration or negotiation to make sure he doesn't trick the team, but that's another story.
Who knows where this goes from here? If the news is bad, Flex could tank lower and not recover, but right now, there are parties involved in buying back in, and that tends to be a sign towards resolution.
Regardless of the situation, MarketCap doesn't mean they can just cash out of their own held assets to cover a debt. It has a self-fulfilling prophecy, a much-used, perhaps over-used philosophy of mine in economics, where you end up in the same problematic place you are trying to avoid, if you liquidate one asset to cover another, which is part of DeFi that everyone needs to come to grips with. It's also a part of economics that Do Kwon clearly never understand to begin with.
If CF liquidated Flex to secure solvency, it wouldn't hold the price, which means they could easily go deeper than $150M trying to sell off assets to recover $47M. Because of the situation, they can't simply take out a separate loan to secure the value of Flex to protect customers' funds either, bc the second that withdrawals opened, people would be nuts not to liquidate what they can, which again, would devalue the asset and their own new loan would be called, rightfully.
Their value, must freeze assets in place to protect the collateral value of the platform to any prospects that might back it up.
The next thing to understand, is that part of the future transparency all of this will require, needs to be about what CF itself is actually worth at a given time, not in regards to volume, and not in regards to user funds. They could easily run an exchange like this for years and earn very little directly against it, but have investments backing it up, even to hundreds of millions of dollars, because of its potential.
99% of the trading taking place is derivs, and is highly leveraged, and that money is passing directly to and from other customers. Sells are resolving buys, and both sides are the users (unless the exchange includes it's own employers and staff or acting on the exchange's own trades). They can earn on taker fees, a % on loans, and maybe they collect on a % of liquidations. I believe there's an exchange fee in the AMM, possibly in betting on repo, even steady futures contracts as opposed to futures swaps. All of that can be relatively modest compared to what you might think. They aren't clogged down by hundreds of crap coins, and they have thousands, not hundreds of thousands, of users. Much of the volume comes from the fact that people can over-leverage their positions, so $100M of volume could easily come from $1M of assets actually backing all of that activity. I'm not judging, but that is a fact.
Here's my next thought regarding people's speculations: Roger Ver.
I don't know him, and I want to like him, but I think there are some signs of some shady behavior here and there.
I believe he saw the opportunity of CF to help boost profile of BCH, broaden its community, make use of Mark's small but positive reputation, to help bail out a troubled BCH. Don't get angry: the top profiles in BCH have all been very concerned about the coin's survival for 3 years, and 2022 has been the biggest concern. I am pro-BCH technology, but I don't close my eyes to their initial history and willingness to cause harm to the market in a battle against the notorious BI... nope notorious CSW/BSV. Clearly, Roger is cut from better cloth than Notoshi, but fact remains, the forks and hash wars were harmful to the market, and I studied the direct impact it had on -87% downturn in the market for over a year.
So, my personal view, is that Roger lent a heavy-hand in investing in CF to make it the back-end operations of Bitcoin.com and it boosted the overall volume and liquidity of BCH in a big way. But, I think part of Roger's motivation is a place to highly leverage positions to speculate on BCH. There are signs of someone who has a bit of a problem with gambling, and listen, this is not hearsay, libel, or anything other than a personal guess, which I'm fully allowed to do. If Mark is stating the truth, Roger, being a heavy in the BCH space, invested in the CF platform, wanted to make use of that for big-hands deriv gambling with BCH, Flex, USDC assets, he was in the situation multiple times, according to what I heard described in CF TG text and interview, where margins were called and he covered the call. Considering his public presence, large net worth, dedication to BCH, and investment into CF, he was given essentially offline recourse- not automatic liquidation, papers were signed, but its an exception that the community does not understand.
You have someone famously synonymous with the coin that is going to bring the biggest volume to your platform, and that guy is a direct investor, and now probably the highest profile person that can speak to the good quality of trading on your platform... CF is your baby. You're proud. It's an accomplishment. Their trading is also benefiting your Flex coin. Liquidity and volume, exposure and marketing, are all widening your presence in the community, ability to do more interviews etc. It's kind of hard to say "no" to someone who is very, very, very independently wealthy, has signed papers to promise their collateral in case of a bad call, and is hosting interviews to get the word out on your platform. It doesn't make it okay, but it certainly makes it understandable why one person would be given trust where it shouldn't have been given. This bad move was admitted by Mark right out, with a pledge never to do so again. This risk placed user's accounts at risk, and allowing withdrawals could easily cause Flex, FlexUSD, and BCH to all tank, and could even expose liquidity issues to USDC which would cause a much larger 'Circle' of panic in the industry. Not a good bet to take.
Here's the rub:
Nobody thought we were going from $180 BCH to $98. Clearly, there was not a deriv. short, or we wouldn't be having this discussion.
Going long at nearly -50% means any sized trade larger than the actual asset got crushed. The reason the market is sitting down here, is because a few % is all it takes for one big chunk of people to get liquidated, which in turn, brings it down a few more % lower when underlying assets are sold off to cover the position, widening the circle of people who got liquidated, etc. As longs get liquidated every few % down, people start taking risk on more shorts. The lower it goes, the bigger the risk for those shorting, that they will be wrong and it will pop back up just enough to liquidate their assets. Meanwhile, all of the fallout from Luna/Terra is selling off BTC which throws off the price of every single asset that trades against Bitcoin. This past week, $17K Bitcoin and $21K Bitcoin were both bad news for deriv traders. They got wiped out long on the way down, and wiped out on the way back up. Liquidity is leaving markets because money is drying up.
You have to assume, if Roger got hit bad on CF, that's just one of many places his value is directly tied to BCH, Kraken, and anywhere he either has major assets backing positions, or promissory agreements with exchanges to cover margins with other backed collateral, usually good on his reputation.
Even if someone is worth $2B, if $500M of that is in property, cars, investments, and $500M is directly in coins and exchange investments etc, and one is gambling heavily just on CF alone, you can imagine $2B can instantly drop to $1B in a week, and if $100M of that just happened to be leveraged 10X, even 20X, well, $47M could easily be more than you can access, without selling off things you had no intention of placing at risk.
Someone with $1M could easily have been doing $50M-100M of volume in trades in a single day, with zero expectation a week later the value in that would be 1/2. Sure, no one should risk what they can't lose, but that isn't how any of us really think. Sorry, it's just a way to blame the victim once they brought much of the risk on themselves. The systematic issue lies in borrowing and lending itself. Hopefully some of the hard lessons to follow...
So, maybe this helps people imagine how ownership of company assets isn't enough to simply make a tiny, minuscule $47M easy to swallow, because of MarketCap. Hopefully, this offers the possibility of why it would be so hard to say "no" to someone for something in hindsight, no one should ever have risked, no matter who someone is, or how big their bankroll, or deep their investment.
Hopefully, it can also help people understand how someone could have gone that deep in the hole. Owing $47M doesn't mean you had that in assets on the platform, and it doesn't mean anyone was selling it somewhere else, shorting it somewhere else, or had it immediately available as collateral.
How liquid you are, imo, is more important than how rich you are.
If the community speculates things like:
Mark and Roger are in on it together- this is all staged
CF or Ver sold their BCH on Binance to keep from losing it as an asset
Owing $47M has to mean they had that much on the exchange in assets
You can just sell $47M Flex and open withdrawals
Letting all customer funds take a haircut and open withdrawals
the list goes on. What it means, is, there is confusion about how any of this works, and it gets to the heart of economics, and the fact that derivative trading and leverage, are things people need to have a better understanding of.
At the end of the day, the idea of raising funds to back Roger's alleged debt in the form of a token, is a way to very quickly find a solution for the sake of customers. It is a way to prevent having to give up equity in CF. It is a way for Roger to have time to come up with funds, even though the risk is actually still high beyond 14 months repayment, since the market is very low, and people with an issue gambling are likely to start shorting in desperation, only to get caught by an upturn that is likely to follow, making repayment even less likely.
Investors in the recovery token are willing to risk loss at the gain of 20% interest. They are getting equity, I believe in Flex, if I'm not mistaken. They are getting something back in addition to Roger paying 20% over the $47M, if they can get him to do so in or out of court.
That dip in Flex I mentioned... If this works the way I am guessing, whatever funds have gone into the recovery token, are already feeding back into Flex, and that... THAT, is the reason this is a smart risk for investors. Merely investing in the coin while things are low and withdrawals are frozen, is going to make the value go up, in their own investment.
If that value keeps going up, more trading will happen from others. If that happens, a portion of trading liquidity is paying profit to those using Flex to reduce taker fees and do AMM and repo, which in turn, means more is burned, and the value keeps going up. It is the opposite of a death spiral. Investors are also confident in a potential upside, because of Roger's public reputation. He may have dug himself deep being too heavily invested in a coin that has dropped to 1/6th of its value in a short period of time, but he's been extremely busy trying to promote the little green "B" and most people think it is less likely he will want BCH to fail, than for him to win later in court, if it came to that.
The final note, is that buying debt in the form of a recovery token, is fast, efficient, and the best way Mark saw fit to make good on his promise, to reopen withdrawals.
It is possible all of this fails, and it goes down as another hit in a long line of DeFi demolitions. It is possible the TradFi world and governments simply use this as another cautionary tale in crypto. It is possible the only lesson to learn is 'not your keys, not your coins', an especially annoying mantra when people are hoping to score big on the next trade, only to find they aren't permitted access to their own funds.
In the end, the entire industry is better off with a phoenix-rising emergence of a better, stronger, more transparent CF that is unwilling to extend offline bets and favors to high profilers and investors, instead, allowing the entire thing to run as it is intended; trustless, reliant on algo's properly programmed and maintained, with zero TradFi hocus pocus happening in the analog of a hand shake.
Right or wrong, this should help clarify a few things here and there.
And on that note, a hopeful, routing for the good guys, Crypto Gordon Freeman, for now... out.