Speculation on why the dump (and rebound) happened today, and what's to come.

This is purely speculation. Some of this will be talking about the world outside of cryptos - specifically other markets, equities, and a bigger picture. If that's not allowed on this subreddit, totally understood, but I thought I'd bring an outsiders perspective to this, since I am utterly unsurprised by the events of the day and have been expecting this (or something like it) for some time.

This is not meant as financial advice. Do your own research. Make your own decisions. If you think I’m right, great! Act on it. If you think I’m wrong, great! Act on it. Do your own thing. I'm just some guy on the internet, and my opinions are about as valuable as a guy spinning a sign on a street corner.

Finally, this is not intended as a FUD post - if you come to the same conclusions I have, there will certainly be fear involved, but hopefully no uncertainty or doubt, and you can make decisions that lead to healthy financial outcomes for yourselves and loved ones. I’d like to post a TLDR that everything is going to be okay at the end, but I don’t necessarily think that’s going to be the case. I think scary and volatile times lay in our immediate future. I have no crystal ball, and whether that's tomorrow or 3 months from now I don't know, but I think we're facing choppy seas.

I believe we're about to see a major market correction, and the volatility in cryptocurrencies is just the beginning. I believe this will hit every sector of the economy, from housing prices to the value of the USD. I believe cryptocurrencies in particular will see extreme volatility, both in a downward trajectory and later, an upward trajectory.

Here are some core premises this speculation will be based on.

1. Cryptocurrencies have not yet found a price equilibrium that reflects their ultimate value. Currently, they are a speculative asset.

2. Despite not having to file their positions on their 13F forms, hedge funds and investment banks are very much involved in cryptos.

3. Cryptos are a relatively unregulated market, which makes pump and dumps a much easier prospect.

4. In their current form, cryptos have not achieved any real detachment from the US dollar. Meaning, that when the market goes up, cryptos go up, and when the market goes down, so do cryptos. Their promise of breaking from the USD an becoming an intrinsically stable currency appears to not have matured for the moment.

Here are some ancillary premises.

1. In order to shore up the economy during covid, the government did a few things: it started loaning money at 0% interest like crazy, and it reduced collateral requirements to increase liquidity in the marketplace.

2. Collateral is heavily rehypothicated right now. An example of this goes as follows: company A has a 20 year treasury bond. It’s keeping it on its books as collateral to meet its margin requirements so that a lender will give it money to invest on margin. Company A then proceeds to lend that treasury bond to company B. Company A keeps it on its books though, because they can recall it as collateral any time they need to in order to meet their own collateral requirements. B now goes to a lender and says “hey, I have this treasury bond as collateral, will you lend me some money?” This process is repeated several times, until you eventually have an absolutely massive amount of margin being lent out on a single treasury bond serving as collateral. Go take a peak at the repo market. People are literally paying borrow US Treasuries to hold as collateral because collateral has been so overleveraged.

3. During Covid, the economy has suffered. unemployment is up, supply chains have been stressed, companies have been going out of business, and savings have actually gone up for the lucky people who have been able to hang on to their jobs, and they're not out spending money. This has lead to an abnormal situation in which the stock market, which is typically (at least loosely) tied to the economy and goes up or down in tandem with the economy as a whole disconnecting - meaning that while the economy is doing poorly, the stock market has boomed to a new ATH at an unprecedented rate.

4. Margin debt in the financial markets has seen an enormous spike in the last year. The market as a whole is extremely leveraged - which means that small events can have enormous impacts, and wider market implications.

And finally, here are some more speculative premises. These concern what I believe is, and will be the catalyst, and the hope for crypto in the future, but they're not essential for the argument that the market correction is imminent.

1. Naked short selling is an enormous problem facing the US financial markets. To understand why, it's important to understand the difference between short selling (locating and borrowing a share, selling it, and promising to buy it back later on the hopes of a lower price), and naked short selling (creating a synthetic share that was never issued by the original company and selling it).
2. Naked short selling has long seen lax oversight by the regulatory agencies. Through a series of revolving doors and allowing the markets to run their own regulatory agencies, this enormously profitable business gets a blind eye from the regulators tasked with stopping it, because those same regulators are ultimately also the ones who profit from it when they move back into the private industry.
3. Naked short selling is the financial equivalent of creating a counterfeit share, selling it for profit at the cost to the shareholders and company, and having 0 intention of paying it back. This tanks company value, and effectively steals value from actual shareholders. It has been used for decades to drive companies out of business. Occasionally, you get a company like Overstock that beats the odds and sees a short squeeze followed by a share price resurgence, but it frequently results in a company going out of business.
4. Naked short selling can be hidden in a variety of ways. While people frequently turn to the short interest as a way to examine how shorted a company is, there are a variety of methods that market makers can employ using options chains to create FTD's (shares that are a failure to deliver because they never had them in the first place, and never intended to find) and then recycling those FTD's ad-infinitum until the targeted company goes bust.
   
5. When Covid hit, several hedge funds, banks, and market makers decided which companies they were going to short into oblivion, and profit off of their demise. They picked companies that would in theory be particularly hard hit by a reduction in customers that were used to entering a physical location.
   
6. For many companies, those efforts failed. The companies did not go out of business, and these Hedge funds and market makers find themselves in a position where they cannot close their positions, they are losing money every day. The two most well known companies in this position are AMC and GME.
7. Shorting a company exposes the short position to infinite loss.
8. There has never been a perfect storm of a short squeeze as GME. AMC may squeeze to a lesser extent - but it has no where near the amount of shorts that GME does.
9. There are a variety of catalysts that can cause GME and AMC to squeeze. Contrary to common opinion, the surge in share price in January and February was due to what's called a gamma squeeze, not a short squeeze, and the shorts have not covered.
   

Which brings us up to today. I believe that multiple hedge funds and market makers are in very deep on their short positions, and that they are fighting on a day by day basis at this point to stay solvent. I believe that if the US financial market is the overloaded and unstable Jenga tower, these companies are the live hand grenade placed on top of the tower, and have had the pin pulled.

However, whether or not they're the catalyst is relatively unimportant in the overall picture - the markets are over leveraged on crazy high margin right now either way. There was a liquidity test last week, and the results were not published, but the markets have been...sketchy at best since then. Because of how over leveraged the market is, I believe that virtually any hedge fund that gets margin called is too big too fail, because it's walking on that much of a knifes edge. And when it comes down, it's going to take everything down with it, from the real estate market (both commercial and residential). I believe that speculative assets in tech and crypto are going to be particularly hard hit. The house of cards is staggering like a drunk man that just got hit in the head, and doesn't know that he's bleeding internally and about to die of an aneurysm.

So why did Crypto across the board see such a huge (and similar across different currencies) dip followed by a massive rebound? Because as a largely unregulated asset, it's extremely ripe for pump and dumps. Hedge funds can use it to inflate their assets on paper and get access to margin.

And I believe that yesterday they got margin called. GME has been sitting above what the speculated margin call price should be for a day or two now (although nobody is certain what the exact price is at the moment, the speculation is between 170-180) and their lenders were demanding better collateral than the crypto they had on their books. When you get margin called, you have some time to come up with the required collateral before it's considered a default and your broker starts liquidating your positions. I believe they met their margin requirements this morning, managed to hold off default for another day, and immediately started pumping crypto again. They simultaneously shorted GME down and dropped the price from $180 to $165, thus probably lowering their margin requirements as well.

Again, I can't stress this enough: while I believe that GME and the hedge funds and market makers massive short position is involved, the argument that a bunch of hedge funds got margin called yesterday is not dependent on that - the market has been dipping the past few days, and it could simply be a matter of being over leveraged and seeing a few red days in the market that caused a margin call. All of the people all over the world that have been buying GME at unprecedented rates for the past 4 months could be totally wrong. But even if they are, this crypto dump still has the looks of a margin call. Both BTC and ETH have dropped over 50% from their ATH this morning before the rebound. The timing of hitting their low points 3 minutes before OCC-007 (which raises collateral requirements for the month) came into effect seems telling to me that somebody was really close to going under.

And I believe that this is the first of many margin calls, and eventually, somebody is going to default, and the dominos will begin to fall, leading to a massive market correction (or collapse, depending on how you want to look at it) that leaves everybody hurting bad.

What happens next, and how I personally plan to respond is more up in the air. The Fed can respond to this in a variety of ways. They can opt to fire up the printer and start devaluing our currency to try and buy our way out of debt with a worthless USD, or they can opt to embrace the pain and raise interest rates and create a few decades of pain and stagnation while we dig our way out of a deep depression through long term austerity. Whether or not I (and everybody else betting on the GME thesis) are right will also play a big role in what happens next. If we are correct, it's going to create what is essentially a black hole for liquidity in the markets, as money flows out of the hands of the wealthy and leaves big reliable blue chip companies, and moves into the hands of GME holders. If that's the case, money is going to be flowing into the hands of people who have a deep, deep distrust of the US financial system and the regulatory agencies, and I anticipate a massive boom in crypto's as people look for places to store their money outside of US financial market control. If my speculation is correct, we'll see bitcoin hit the teens (or maybe even single digits) before they begin to climb back up, and we'll eventually see surging and setting new ATH's in the near future afterwards, and a similar story for ETH. I'm less certain about the less well known coins - my assumption is that they will not see nearly as much of a rebound as BTC and ETH, but who knows.

If the GME thesis is not correct, but the economy does crash and the fed Fed fires up the printer, I still anticipate a huge rebound in crypto - it is, afterall, still ripe for pump and dumps, and at the end of the day, it is in theory a pretty good place to store value in an inflation resistant location.

If the Fed opts to raise interest rates and embrace deflation over at the opposite end of the spectrum though, than cash will be king and crypto will be utterly screwed for the next 5-10 years I'd bet. If hyper inflation is a great way of turning a Weimar Republic into a Nazi Germany, deflation and austerity are a great way of turning into Greece. Neither are great options though. Hopefully some smarter people can come up with something better.

TLDR: If the market crashes, which is very likely, Crypto is set to take an enormous dip with it. Every hedge fund that's dipped its toes in is going to dump it like a hot potato, and if you thought it dipped fast this morning when it dropped over 20% in an hour, what comes next will make your head spin. But for now, they met their margin call and live to fight another day. Eventually though, somebody is going to trip and the economy is going down with them. And when that happens the Fed will be forced to embrace either inflation or deflation, and I expect Crypto to rebound if they choose inflation. Additionally, if the theory of GME turns out to be correct, there's going to be quite a few new millionaires with money burning a hole in their pocket to be spent, and they'll be looking for speculative inflation resistant assets that are not subject to corrupt US regulatory agencies. There's always the possibility that over the next few months, companies slowly manage to deleverage and increase their collateral without causing a market wide panic for the exits, and simultaneously the GME theory of everything is wrong, and the markets continue largely as they have been now.

Whatever the case, I believe it's going to be a bumpy ride with more volatility in the near future, and I wish all of you the best. Good luck to everybody.