In the game of rehypothecation, the thing BlockFi, Celcius, Genesis, et al got wrong was the crucial underpinning of basic margin lending— the maintenance margin.

They all took a common TradFi function, margin lending, and made up a new fancy name — over-collateralized lending. They acted as if they were doing a new fancy Bitcoin/Crypto thing, but really it was just traditional margin lending.

Unfortunately, these new players failed to understand the importance of understanding margin basics: margin values vs. maintenance margin.

Especially when dealing with highly volatile assets like Bitcoin. When you set your maintenance too low it’s a guaranteed margin call on a security like Bitcoin w/ a 50-200 vol.

While this works in the favor of the house in the short-run, in the long run it’s disastrous. What started as an easy picking 4-12% appearance of a risk-free house always wins turned into a house of over levered & rehypothecated cards.

Leverage kills.