Notorious Threadooor Adam Cochran Explains Crypto Shopping and Shorting List

We kick off our conversation by asking Adam if he expected to turn into a meme in the crypto community for his long-winded tweets.

The primary driver behind crypto this year has been traditional macro markets. Crypto markets have been at the mercy of inflation and rising interest rates and the FED recently raised interest rates by half a point. Adam talks about where he thinks rates and inflation are headed and how will that impact crypto.

The coins mentioned on Adam’s shopping list from December 2021 have approximately lost 80% of their value this year. For comparison, Bitcoin has dropped 60%. We talk about the thesis behind the list and whether he’s changing it for next year. Adam says that he adjusted to the market conditions and had been shorting throughout the year, compensating for some of his long positions.

Finally, Adam shares some trade ideas for 2023.

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FTX Collapse

It’s not about margin, it’s not about mislabeled accounts or bad risk management, it’s just knowing theft.

I think the focus on the final straw that led to FTX’s collapse is misplaced. What’s important is how the company’s fraudulent behavior developed and grew over time. FTX may have had financial issues from the start, and it seems to have engaged in fraudulent activities in order to cover them up.

I’m not sure if the people behind FTX were motivated by greed or if they truly believed in their own rhetoric about making big bets. Ultimately, what led to the company’s collapse was that it took too many risks and lost too much money.

The data suggest that FTX may have been insolvent during the Covid crash. There was a delay in withdrawals during this time, and this behavior is similar to what happened at the end of the company’s operations. I believe that Luna may have played a role in the company’s problems and that FTX may have tried to set up hostile takeovers of lenders in order to acquire their users and licenses.

I suspect that this started a chain reaction of events, including other risks like the collapse of Three Arrows Capital and bad trades, which ultimately led to the company’s downfall. I also think that FTX has been losing money for years and was not as skilled at trading as it thought it was.

It appears that the issue with Alameda and FTX involved Alameda being permitted to take on margin positions without any mechanism in place to force liquidations in the event of losses. As a result, when losses occurred, it appears that FTX began using user funds to cover these losses.

I think it might even be worse than that. It might even be more explicit than that. The evidence seems to point to not just Alameda being allowed to take these margin positions on FTX, but actually being able to withdraw user funds and use those funds in their trades as collateral elsewhere without posting any collateral.

Just directly you go into your account, it says zero, and you say, I wanna withdraw a hundred Bitcoin, and they still let you withdraw it. It is just blatant at that point. It’s not about margin, it’s not about mislabeled accounts or bad risk management, it’s just knowing theft.

And to you, the question was were they doing this to enrich themselves or was it about we are making all these risky bets and hoping that they’ll be successful with one of them and make it back.

I guess they were trying to enrich themselves either way. But it’s two different versions. One is I’m gonna make risky bets and keep the profit and hope I can return the money without you noticing. And the other is, I’m gonna buy luxury penthouses and hope I can keep this scam going long enough that I can just live happily ever after in my luxury penthouse. Either way it’s out of their own greed and or stupidity.

Either way it’s out of their own greed and or stupidity.

CFTC Research

From the recent hearings and documents that have surfaced by the SEC by the CFTC, what has been the most surprising to you? Or what has helped just to further clarify what’s going on?

I believe that from the start, I thought that this had to be intentional and that the people involved knew about it and that the story about mislabeling was not true. However, what really convinced me that this was the case was the document from the Commodity Futures Trading Commission (CFTC).

The CFTC conducted thorough research and found chat logs from private messages at Alameda discussing the code name they used to refer to an account where they had all the Alameda money on the back door. They referred to this account as “that one weird Korean account” or “our Korean friends account,” indicating that they were aware of what was happening. This is the “smoking gun” that takes this from a situation of simply making mistakes while growing a business too quickly, to a criminal action.

I don’t believe there is any chance that he didn’t know even if he didn’t orchestrate it himself.

We spent years in this industry seeing Sam know every detail about everything. Knowing how acutely of all involved he was in every process of both Alameda and FTX. He knew everything that was going on. He would respond to every user on Twitter. He’s a smart, detail-oriented guy. We know that. And for him to suddenly say, “Oh, I didn’t know that my business was 10 billion in the whole, in lending all that money to my other business”. There’s no way. Not at that scale. That’s nonsense.

What needs to change? What are the steps that you think crypto should take to prevent this from happening again?

I think it’s our job to use this situation as a case study for why we need the blockchain.

I have two initial thoughts on this situation. The first is that this was a crime, and not really related to crypto. It was just a traditional fraud, similar to the first documented Ponzi scheme in America which involved railroad bonds. However, we didn’t say that railroads were bad because of that fraud. Similarly, crypto is just the means through which this fraud was carried out.

My second thought is that unfortunately, regulators may use this as an excuse to impose strict and nonsensical regulations on the crypto industry. For example, Elizabeth Warren has suggested that minors and wallets should have to do KYC and AML checks. She also wants minors to have to KYC the person sending a transaction to them, which is practically impossible. It seems like regulators may be using this situation as a weapon to bring down regulation on an industry that they don’t understand or like.

As an industry, I think it’s our job to use this situation as a case study for why we need the blockchain. If we utilized the blockchain in the way it was intended, exchanges could be hybrid exchanges that are transparent and show their balances and solvency. We have technology available, such as Merkel trees and proof of reserves, that can show where cold wallets are and prevent fraud like this from happening.

It’s difficult to fully replicate centralized experiences on the blockchain, but if they do exist, they should be well-regulated and as transparent as possible, using the technology we have to display that transparency rather than just saying “trust us, everything is fine.”

Do crypto exchanges need capital requirements? Do they need to have some money exchange licenses so that they fall into the same regulations that all other exchanges fall under?

I understand that the intent of many regulations is to protect consumers. However, sometimes these regulations don’t actually address the problems that they are meant to solve. For example, even if FTX had money transmitter licenses, they still could have caused harm to investors. Therefore, I think it’s important to focus on things like customer demands and market structures, rather than just relying on regulations.

We should also push exchanges to be more transparent, as this can help ensure that consumers are protected, even if the exchange is not fully regulated. In the case of FTX, if their cold wallet had maintained all of the consumer funds as it was supposed to, then no one would have lost money, even though the exchange was not properly regulated and had a risky setup.

Binance

So you’re getting what you expect and you’re getting what you pay for. I don’t expect Binance to be spotless.

How likely do you see, or what probability do you assign to Binance having an FTX level collapse?

I believe that it is not likely that Binance is at risk, but it is still important to take precautions to protect yourself against any potential risks. If Binance is financially stable, it should be fine to transfer your money to a self-custody wallet for a short period of time to ensure safety. In the past, this was a common practice in the cryptocurrency industry, where people would withdraw their funds from an exchange to verify that it had the assets it claimed to have.

I think that Binance is not perfect, but it is good enough and its services are worth the price. I do not expect Binance to be completely flawless, as it is an offshore exchange. However, I do believe that it is reliable enough to keep my assets secure and sufficiently backed. If there was a collapse, I believe that my assets would not be completely lost and I am willing to accept the risk of losing a small percentage due to crypto volatility.

In comparison to FTX, Binance is much more trustworthy as it has well-funded cold wallets and is more transparent about its assets. FTX, on the other hand, did not have any cold wallets and was not transparent about its assets, with only 750 million visible out of potentially billions. Therefore, the risk level of FTX is significantly higher.

Big question mark. Large cold wallets but also potentially having unknown liabilities.

I think that the question is about whether or not a company has any in-house trading or venture or its own chain and whether they are borrowing or lending assets. If they are, it can lead to complicated situations due to the differing bankruptcy laws in different jurisdictions and who has the primary claim to those assets.

If a company has pledged a lot of collateral against a loan and can’t repay it, many countries do not currently have a provision in their bankruptcy laws stating that crypto funds deposited by users must be returned to the user. In contrast, if you deposit money into a stock brokerage app, the cash and stocks you have there must be protected from bankruptcy proceedings. However, most countries do not have this protection for crypto yet, leading to a messy legal situation where it is unclear which assets can be taken by the bankruptcy court. So, I think the concern is about liabilities and it is hard for us to confirm whether or not it is likely in this specific case.

Is it possible to transparently show on-chain records of liabilities while also accounting for off-chain agreements?

I think it is not possible to do it with the liabilities that the company has. However, it is possible to do it with user deposits of liabilities. I suggest creating a Merkel tree proof of all of the liabilities on the exchange and allowing the user to punch in their balance to see if it is represented on one of the nodes on the tree and that it sums up to the correct amount. This would allow them to more or less prove that it is the total amount of liabilities in user deposits and compare it to a cold wallet. It will not be a one-to-one match due to different cold wallets, hot wallets, sub-accounts, and chains. But if it is in the right order of magnitude, it should make the user feel comfortable.

It is not possible to do a proof like this for a situation where a company, like Binance, takes on a loan of $600 million from another party and pledges its equity against it. If they go bankrupt, that party may try to claw back user assets. We cannot prove that.

Ideal direction

We start to move all money markets on chain and the way that they’re taking these loans is through transparent on-chain DeFi. That means we have to continue to scale up the uncollateralized lending component. But I think maybe we will get there in the next, five, ten years where we could have that on chain and we could know this business is borrowing and has these liabilities.

Rates and Inflation

The primary driver behind crypto this year has been traditional macro markets. Crypto markets have been at the mercy of inflation and rising interest rates, and the Fed recently raised rates by half a point. Where does Adam think rates and inflation are headed and how will that impact crypto?

The expected and future curve was moved up.

Some people were shocked because they expected pivot and rate cuts in the future.

Inflation is complicated and certain components (such as wage and rent inflation) are sticky and take time to adjust.

Inflation has already hit and eroded purchasing power.

The Fed has responded too slowly to inflation, which is affecting certain parts of the economy more severely.

What does that mean for the future direction of rates and then how that will affect risk assets including crypto?

Inflation needs to be controlled and rates need to be held steady for a while.

The market still has too much “froth” (unrealistic optimism).

The current economic environment is not sustainable in the long term.

Upper-class and middle-class people with income from the stock market and corporate earnings are unaffected by the recession.

Low-income wage earners are being impacted by rising costs of necessities like food, housing, and energy.

This puts pressure on the consumer to spend more, but they are relying on debt and credit cards rather than income.

This leads to household debt growing and purchasing power eroding

A tight labor market with strong demand for jobs leads to wage-price spirals and puts pressure on inflation.

This scenario would be Jerome Powell’s worst nightmare.

Household Debt

We are in a difficult situation where everything needs to go well for things not to get worse at least.

I am seeing an increase in credit card spending and a decrease in the savings that people had during the COVID pandemic. Some people still have a lot of savings from that time, but many are back to almost pre-pandemic levels. Unless there are major improvements in the economy in the next 12 months, we will see transient costs for things like food and energy stabilize, and employment will become stable again.

If we don’t have these improvements and we have any more supply shocks to the system, I believe that many people in the US market will be spending on debt. In August, we saw that one in six American households were already at least one month behind on paying their energy bills. This is a high number, and this was in the summer.

I am concerned about what will happen in the winter when people need to more reliably heat their homes and energy costs and demand go up. We are in a difficult situation where everything needs to go well for things not to get worse at least.

I understand your point that the job market will remain tight because people need to pay their bills. However, if they are taking on a lot of debt and are in a precarious financial situation, it could potentially push wages down. Employers may find that they are able to do this, and this could lead to a decrease in the inflation rate.

The more divided our economy is in terms of income, class earning and demand, the harder it is to balance the labor market with inflation because right now we see one part of the economy driving inflation and one part of the economy driving labor demand, and they are entirely out of sync.

I understand that as prices rise, there is usually a demand for higher wages. However, in America, particularly in some states, the minimum wage has not been raised for decades, causing a gap between purchasing power and minimum wage. Wages can be difficult to change as it is rare for employers to lower the wages of current employees, but they may hire new employees at a lower wage if there is a high demand for labor.

During the pandemic, we saw companies, such as McDonald’s, offering high bonuses for certain jobs due to high demand for labor. However, this demand has moderated recently. On the other hand, highly technical and skilled jobs that are still in demand are still experiencing premium wages due to a lack of available labor.

Some companies are holding onto their current employees, even if they do not need them at the moment, to avoid having to go through the process of finding and hiring new employees again. Inflation is expected to decrease in the coming months, but certain industries, such as housing and service industries, may take longer to experience turnover and see changes in wages.

Jerome Powell’s quote about the “long and variable lag” refers to the slower process of change in these industries. Energy and food prices may fluctuate more quickly and help mitigate inflation, but it takes longer for changes to occur in industries such as housing and services.

You said we will continue to see interest rates on an upward trend. Do you think we will ever see a rate cut next year or will it be slowly moving up?

I believe that we can reach a pause point in the rate hikes. I think the terminal rate will be around five to five and a quarter on the high end. I also think that the rate hikes moving forward will be smaller and we will gradually reach the terminal rate before having a pause. I believe that inflation needs to come down to the 2% level and remain there before the Federal Reserve will consider cuts.

I understand that the credibility of the Federal Reserve is important in order to maintain trust and influence purchasing behavior. If the market and bonds do not believe that the Federal Reserve will be able to control inflation, it can cause problems for their credibility and may require them to over hike and hold the rate longer, potentially damaging the economy.

I was wondering if you think that crypto will be able to stop the downward trend in prices and potentially see a new bull market in the next year.

I believe that once we gain clarity on the endpoint of the FTX collapse and any other hidden bankruptcies that may still be present, we will reach a point of stabilization. In a high-rate environment, value stocks that have a profitable business model and real recurring revenue will outperform growth stocks that are not yet profitable. This will also apply to cryptocurrency, as we will see a return to assets that have real value, real users, and real monetary flow.

I had originally thought that this is where we would be heading this year, but due to several chaotic events such as Jerome Powell’s response to inflation, the war in Russia, and the collapse of FTX and Three Arrows Capital, we have not yet reached this point. However, I believe we will eventually get there in a high-rate environment because when money is no longer freely available to borrow or invest, investors will only consider investing in assets that offer a return greater than a 5% annual return.

Time Value of Money

If I invest my money today, I need to consider how much money I will need to earn to offset the fact that it is not immediately accessible. I also have to consider the tax implications and potential opportunities for earning elsewhere. The inflation rate also plays a role in determining the cost of borrowing money in the economy.

In recent years, borrowing money has been relatively easy and cheap, leading to situations where unprofitable tech companies can be valued at high amounts. However, in a market where the interest rate is higher, this may not be sustainable. It will take time for the market to adjust to a new terminal rate of the economy.

Shopping List Thesis

Looking for long-term investments with real value, users, and cash flow.

Adam put out a 200 plus I think tweet thread in December of last year with his personal shopping list of tokens of protocols that were making revenue. The coins mentioned on Adam’s shopping list from December 2021 have lost approximately 80% of their value to this day. In comparison, Bitcoin lost 60% in that time.

We talk about the thesis behind the list and whether he’s changing it for next year. Separately, Adam mentioned that he had adjusted to market conditions and had been shorting throughout this year, compensating for some of his long positions. So what were the items on his shorting list?

I was short on some macro trades and the major cryptocurrencies, Bitcoin and Ethereum when the market became oversaturated. I wanted to protect myself from potential losses by purchasing downside protection on a contract basis and gradually buying spot assets during dips in the market.

The idea behind creating a shopping list is that during market crashes, there is often overselling and prices will eventually reach an equilibrium that is higher than the initial drop. However, people tend to react emotionally during these times and it is not the best moment to do research.

Instead, it is better to have a list of assets with catalysts that you want to own and take advantage of buying opportunities during large dips or when there is a chance to rebalance.

Here’s what I believe I wanna buy, here’s why. Here it is by tier of how much I want to allocate to it, and now I can seize that opportunity better.

This way, you can quickly purchase the assets on your list without wasting time researching. I cannot legally recommend specific assets, but I recommend taking the time to create a shopping list based on your own thesis and allocating assets according to their importance. This will allow you to seize buying opportunities more efficiently.

Rules for when buying opportunities happen

Practice dollar cost averaging and automated purchasing of assets unless the market is considered “frothy” or overextended.

Pause automated purchasing during periods of high market frothiness, but will resume after a drop.

Analyze average annual down days and expected big down days in the market to determine the appropriate level of volatility.

Prepare for a potential 80% drawdown or holding assets for a long period of time.

Look for opportunities to buy assets during outsized market downturns and rebalance your portfolio with downside protection.

ETH, YFI, Convex, and Keep3r

I believe that Ethereum is still in the ‘goat’ tier. Convex is also.

Yearn is still exactly where it’s going and what they are implementing. They took longer to get there, but they are stronger in a bull market. They are one of the few services in this space that drive real value and real revenue at a tremendous scale. Long term, I still think they are there.

Keep3r had fantastic potential, but Andre rugged and disappeared from the space, which caused it to be handed over to new management and a new direction. It took many months for this to happen. I am still excited about Keep3r because I think the automation of execution logic is one of the few business-to-business services that exist in crypto. This means that businesses can create recurring value, actual cost value, and bring in real revenue by automating logic execution. I think this is so critical.

If we want to be truly decentralized, we need to stop having things run by DAO multisig and waiting for people to execute transactions. We need to automate that infrastructure, and no one is doing that with the level of clarity and automation that Keep3r has been. So, I think there is still a lot of potential there, but I don’t know if it would quite make that same tier for me right now.

What other sectors or themes are you excited about, and which are you less excited about than this time last year?

I am more excited about privacy execution than before.

I am excited about the discussions in the Zcash community about supporting assets other than Zcash and being able to privately transfer Ethereum tokens on Zcash.

I believe that privacy is important and is currently missing from the cryptocurrency space.

While I believe in the potential of other Layer 1 blockchain networks, I am not as excited about them at the moment due to their reliance on centralization and the lack of irrefutable proof for bridges between them.

I am more interested in the technology of Layer 2 networks, but not necessarily their economics yet.

I want to see projects that are focused on creating tangible value and have real users with profitable external revenue, such as Yearn and Synthetix.

It seems like Ethereum-based DeFi is where you think a lot of the value will be built. Is that right?

I am interested in Ethereum-based DeFi and I am excited to see new models emerge. One project that I find particularly interesting, not because of potential financial gain, but because of its use case, is POAP. I also enjoy collectibles and hope to see them continue to expand and mature in their use cases.

I believe that the DeFi space has developed significantly in the past five to six years, but it is still not quite ready for mainstream adoption. I find the idea of GameFi interesting, but I think it may only be successful for one or two businesses rather than being a widespread hit.

I also believe that Ethereum, with its EVM and Solidity, has reached a critical mass and is the leader in volume and user base, leading to a lot of core innovation. Many other chains simply have forks of Ethereum projects and do not have the same level of originality. The value-driven origin of Ethereum also attracts a spark of ingenuity that is difficult to replicate or replace.

I think there was a lot of disappointment with the promise of a multi-chain ecosystem this year due to the exploits on the bridges. I believe this made the alternative Layer 1 thesis less appealing, though I don’t know if it killed it entirely.

I believe that in order to achieve a true multi-chain future, we need to focus on sending data across bridges rather than just sending money. I think that being able to read and write data from contracts on other EVM-compatible chains on Ethereum in smart contract calls is important.

I am aware that Chainlink is exploring this with their upcoming releases and I am excited to see how that goes. I think that if we can send data reliably between chains, just like we can send it back and forth between Ethereum and Layer 2, but faster than the seven-day timeline, it will be very powerful. This will allow us to use other chains that are optimized for data storage or execution speed and still be able to relay that information back to Ethereum in an affordable way. This will also open up more design space in Solidity.

Long-term Bullish

I’m as bullish as ever, and as confident as ever on the long time horizon. Short term, I don’t know that we have the catalyst to start another bull market anytime soon.

I do not want to experience another frothy growth market because they lead to a lot of problems such as spam, hurt users, and bad regulation. Instead, I would prefer to focus on creating value and growing slowly but steadily. I still believe that blockchain will become as widespread as the internet in the next 5-10 years, even though the current situation may seem bleak. While I am optimistic about the long-term future of blockchain, I am unsure if we will see a catalyst for a new bull market in the short term.

I think that traditional markets may bottom out in Q1 of this year, but it is possible that regulators could set us back a few years with bad decisions. It is important to be cautious and prepare for potential storms, but there are still great opportunities in the crypto market.

Many people, including myself, fell into the trap of thinking that a company with millions of users earning money by walking had real external revenue. However, upon further examination, it becomes clear that this revenue is not sustainable and does not come from a legitimate source.

We should avoid overhyped, fluffy play-to-earn companies that will inevitably collapse within a short period of time.

It is important to focus on building companies with real users who have real revenue, rather than just internal Ponzi schemes. This not only benefits us economically but also improves our relationship with regulators. We should avoid overhyped, fluffy play-to-earn companies that will inevitably collapse within a short period of time.

Adam, do you consider yourself defiant? And if you do why?

I guess in the sense that, I didn’t land in a traditional job and I think that this space is counter to the mainstream approach. I started actually working in crypto full-time in 2013 when people didn’t know what Bitcoin was.

I believe that traditional monetary systems are broken and exploitative, and the only way to solve society’s problems is to have better transparency, access, and sovereignty in our financial systems. I think the counterculture origins of the cryptocurrency industry are important for its future, and we should not forget these values.