🧘‍♂️STOP: Protect Your Crypto

Market Meditations | September 30, 2021

120 million stolen already.

Dear Meditators

Capital preservation is a key mantra of trading and investment. 

There are many active strategies to minimise capital loss on a day to day basis (e.g. stop losses, regular profit taking). 

But what happens if despite your proactive monitoring, your funds suddenly dramatically fall in value, or even worse, completely disappear? Is that even possible? Unfortunately it is.

Today’s Meditations: 

  • 5️⃣ Top 5 Crypto Events 

  • ? Everything you need to know about Crypto Insurance

  • ⚛️ Tax Loophole Crackdown 

  • ? Candlestick Puzzle

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Our Market Meditations are longer format educational segments. Each letter features a Market Meditation which will deep dive and analyse a relevant crypto event, theme or tool. 

? Protect At All Costs

The explosive growth of DeFi protocols has been accompanied by an equally significant growth in funds being lost or stolen via hacks, scam developers or just poorly written smart contracts. The total value locked in DeFi roughly tripled in 2020 to 24 billion, but 120 million of that was reportedly stolen in 15 hacks. This trend has continued into 2021 with a Yearn vault exploit and an infinite mint attack on PAID token.

1️⃣ Under Cover

There are three main types of coverage that crypto insurance protocols are starting to offer:

  1. Yield-bearing token or stablecoin depegging – e.g. if the value of 1 USDC can only purchase <0.9 USD

  2. Smart contract failure – e.g. if the contract permanently locks in funds or excessively mints due to an error in the code

  3. Exchange hacks – e.g. if your assets value drops significantly or withdrawals are frozen for an extended period 

? IMPORTANT! There are a number of events that are typically excluded from coverage! This includes rugpulls, phishing, malware, loss of keys and sometimes oracle failures. This also means the responsibility for auditing and checking contracts for malicious loopholes falls on others.

2️⃣ Mutual Trust

The traditional insurance world can also suffer cyber-attacks and human error, but the risk of this is accepted via a trusting relationship with the provider. In the decentralised world there is a debate as to whether the individuals should take out cover or whether the protocols should. 

If you see a protocol with the word ‘mutual’ in it, it means that it is entirely owned by its policyholders. The community deposits funds into a pool to cover for future events and community governance votes on whether to pay claims or not. The more tokens staked, the cheaper the coverage. And liquidity providers are rewarded with native tokens if they have voted ‘fairly’. For an idea of how they work, this link compares Nexus Mutual to Bridge Mutual. 

Conversely, Sherlock.xyz asks protocols to partner with them instead. The three main participants are:

  1. Protocols – that insure themselves for a certain value

  2. Stakers – that earn premium fees, interest from lending and native token rewards

  3. Security Team – that evaluate smart contracts and price the coverage (but is noticeably centralised)

3️⃣ Adoption and Optimisation

As with all sectors there is value to be gained in optimisation. There are now insurance protocols that either act as aggregators or offer a hybrid staking model to increase coverage and lower premiums. But mass adoption is the first key hurdle for the DeFi insurance space along with some proof points that the system works. Watch this space.


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? Do You Know Your Candles?

Can you name all of the parts of the above candles?

?️ Tax Loophole

We are starting to see an effort to close tax loopholes in the U.S. 

There is currently a proposal to apply a wash-rule to digital assets. A wash-rule “forces an investor to wait 30 days between the selling of a security and the repurchasing of it, when a tax deduction is involved.” 

Since this rule is currently not in place for crypto, many investors are willing to sell at a loss and buy back shortly after. “Accruing [losses] is how investors ultimately offset their future gains and lower the capital gains tax that would apply for other assets.” 

For example: 

  • If you bought 1 BTC at $10,000 and sold it for $50,000, then you would be paying capital gains taxes on $40,000.

  • Because of the current loophole: If the same person had previous losses of $40,000, then they would be able to offset their capital gains taxes. 

If the proposal passes, it would take effect on January 1.

1. Wick/Shadow, 2. Body, 3. High, 4. Low , 5. Open, 6. Close 

Did you manage to get them all right? If you’re interested in learning more about candles, check out our Candlestick 101 Guide. It covers all the basics you need to know including the puzzle you’ve just done!

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??‍♂️✍️ Stories in this newsletter were written by Isambard FA, Misael Calleja, Nick T., Max P., Kimia K., Ellen B. and Koroush AK. Graphics were produced by Gerasimos P.

Not financial or tax advice. The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision. See our important security disclaimers here.

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