There are lessons to be drawn from the recent bankruptcy of

• 3AC (3ArrowsCapital)
• Terra $LUNA (or see here)
• Celsius Network
• ….

A lesson might have been the inter-connectivity of the entire cryptocurrency market.
An event on one chain may lead to a liquidation which can trigger a cascading effect impacting the entirety of the Crypto markets. Especially when it concerns stablecoins and the assets being dumped is Bitcoin.

But that is not the lesson that should be drawn.

The REAL lesson is that of over-leverage.
Of companies being blinded by greed and promising MORE than they can afford.
Much having to do with a shortsightedness and believing in continuous upward growth.
Of promising high returns.
HIGH APY.

What is an APY?

APY is shorthand for Annual Percentage Yield.
It means “the real rate of return earned on an investment, taking into account the effect of compounding interest.”

ALL aforementioned companies, both present and past, promised high APY.
They managed to do this based on new money entering the Crypto markets during Bitcoins latest bull run.

Anyone who knows about Bitcoin, and understands its cyclical nature, knows promising high APY is a red flag when it concerns blockchain projects. It implies over-leverage. The expectation that people will keep on investing in the project and that the market will keep on growing so that higher yield can be maintained.

Those who are attentive will notice that the fundamental to high APY is akin to the idea and structure of a pyramid scheme (renowned scamming strategy).

A high APY is unsustainable as there are limits to growth. Knowing about bitcoins cyclical nature allows you to understand that after EACH bullrun comes a correction (bear-market). That continuous upward grow does not occur. Yield NEEDS to be dynamic and adjusted. Otherwise will there be over-leverage and, as shown with 3AC, liquidation of assets as there is no liquidity available. The pyramid collapses.

Is the promise of high APY always impossible?

Impossible, no.
Unsustainable, yes.

Projects CAN promise and fulfill a high APY (but it still remains a red flag).
All depends in which “currency” the APY is being expressed.

Many projects whom failed and caused the heavy corrections (by dumping their digital assets back on the market) promised high APY in $USD. They were rooted in the fiat system. The promised APY was expressed in $USD. It is unsustainable (and impossible) to keep such promise during a bear market. The project will need to buy-in VERY aggressively additional assets for backing and to maintain the promise of high-value… so much to the extend they will go bankrupt as demand exceeds availability. Depeg occurs and all crashes. This is typical in the case of stablecoins and their underlying platforms and foundations.

Another type of project promises high APY expressed in their native currency.
This means that for any investment in a $CRYPTO (generic ticker) you have made you will earn an additional 20% of $CRYPTO on yearly basis. Sounds nice isn’t it? (It isn’t nice at all).
This type of promised APY underlines that you are dealing with a HYPERINFLATIONARY coin.
It implies that the total CIRCULATING SUPPLY of $CRYPTO grows annually with 20% and has no upper limit to the amount to be ever produced. This means that said $CRYPTO will very quickly decrease in purchasing power. This is akin to our “traditional” financial system.

FYI: In general is the inflation rate at 4% (meaning the $USD is losing at average 4% purchasing power a year). The last 2 years (2021-2022) we see recurring inflation rates of 8% and above which leads to current recession and everything getting MUCH more expensive. Some of these projects promise an APY of 10-30%… this is akin to super-charged hyperinflation and the project as a result will wreck itself in less than 2 years time unless heavily adjusted.

Conclusion?

A high APY is an indication for a failing project.

It is the result of management and developers being short-sighted. Wanting to “quickly” cash-in and failing to have an understanding of the fundamentals to blockchain and Cryptocurrency.

High APY either shows this managerial “greet” and shortsightedness (miss-management) or it shows a lack of understanding how finance works.

Therefor when the next cycle begins is it my advice to avoid platforms which promise high APY.
They WILL over-leverage, crash and burn. Inevitably will this be the result:

Thank you for reading.

Your friend,

Dimitri.