It’s been one of the most dramatic weeks in the cryptocurrency market’s short history, framed by the kind of announcements investors fear most from a counterparty: We’re sorry, but we just can’t return your money right now.
In between, a burgeoning technocratic industry with big ambitions to reinvent the financial system was repeatedly rocked by echoes of past crises in the old system.
It’s been a week of margin calls, forced sales and key collateral that has been exposed as far too illiquid in times of crisis. There were rumors of hedge fund explosions, stories of opportunistic predatory trading, job cuts, and vocal denials of problems from key players that were almost immediately proven wrong.
In the midst of all this, the myth has been shattered once and for all that this new crypto-financial system was somehow immune to – or could even benefit from – the economic fundamentals that are currently punishing the old system.
It all started late Sunday when a crypto shadow bank of sorts called Celsius Network suspended payouts from depositors lured by sky-high interest rates that, in hindsight, were probably too good to be true.
Across the world, in Hong Kong, digital asset lender Babel Finance also froze withdrawals late in the week.
.@CelsiusNetwork pauses all withdrawals, swaps and transfers between accounts. Acting in the interest of our community is our top priority. Our operations continue and we will continue to share information with the community. More here: https://t.co/CvjORUICs2
— Celsius (@CelsiusNetwork) June 13, 2022
We’re working on it, both companies told customers, and no doubt they are doing it. Still, speculation is mounting that at least Celsius Network is drowning in what research firm Kaiko has dubbed “Lehman-esque.”
Like Lehman Brothers nearly 14 years ago, Celsius’s troubles demonstrated how interconnected major players are in this financial system and how quickly contagion can spread, making this week’s drama a continuation of last week’s drama and a precursor to next week’s drama .
Many analysts have pointed to problems Celsius has with an Ethereum-linked token called Stacked ETH, or stETH — a coin intended to serve as a tradable proxy for Ether and widely used in decentralized finance.
While every stETH is said to be redeemable for an ether once long-awaited upgrades to the Ethereum blockchain take effect, recent market turmoil has caused its market value to fall below this level.
Research firm Nansen also identified Celsius as one of the parties involved when the UST stablecoin lost its peg to the dollar in May.
The episode involving this token, largely driven by algorithms, crypto animal spirits and unsustainable returns of 19.5% for depositors in the Anchor Protocol, sparked the loss of tens of billions of dollars in the spectacular Terra blockchain implosion.
Nansen’s analysis confirmed that Terra’s anchor program was a key source of revenue for Celsius, according to crypto exchange Coinbase.
“In our view, this likely raises the question of how Celsius could meet its commitments without that 19.5% yield,” Coinbase’s institutional team wrote. Incidentally, this firm said this week that it will lay off 18% of its previously rapidly expanding workforce and join other crypto startups like Gemini and BlockFi that are grappling with an unrelenting plunge in asset prices, dubbed “crypto winter.”
The drama escalated on Wednesday with an alarming tweet that seemed to confirm speculation buzzing around one of the most influential hedge funds in crypto, Three Arrows Capital.
“We are in the process of communicating with the relevant parties and are fully committed to working this out,” one of the company’s co-founders wrote, without giving details of exactly what the “this” that was being worked out was.
We are in the process of communicating with the relevant parties and are fully committed to working this out
— Zhu Su (@zhusu) June 15, 2022
By the end of the week, the founders of the billionaire fund had told the Wall Street Journal that they were exploring options that would include a bailout by another company and a deal with creditors that would buy them time to come up with a plan.
Three Arrows also fell victim to both stETH’s problems and the collapse of Terra. According to the Journal, the fund had bought about $200 million in Luna currency, which was used to underpin the value of Terra’s UST stablecoin. Luna, which sold for more than $119 in April, is now worth around $0.000059.
Just as Bear Stearns hedge funds were among the first to uncover problems arising from the subprime mortgage crisis, Three Arrows is likely not alone. The “roach theory” springs to mind: if you see one of these nasty bugs scurrying across the floor, chances are there are many more hiding behind the fridge or under the sink.
Crypto Shark Tank
In fact, the crypto hot trade is now not pumping coins “to the moon” with tweets full of rocket emojis, but is trying to figure out where those roaches are hiding and make a meal out of it.
Some savvy traders have dispatched bots to scan blockchains in search of heavily leveraged positions that are at risk of forced liquidation because the value of their collateral is no longer sufficient to support their loans. If successful, they get a 10% to 15% share of the collateral sale — incentives paid out through automated protocols designed to protect them from bankruptcy.
By the end of the week, when the dust settled, the damage was appalling. Bitcoin has posted 12 straight days of losses, its longest sustained plunge, and broke through $20,000 for the first time since 2020 early Saturday.
Amid monetary tightening, the world’s largest cryptocurrency is now down more than 70% from its November highs as it neared $70,000. Ether fell below $1,000 after selling as low as $4,866 seven months ago.
What was once a $3 trillion+ industry is now valued at less than $1 trillion.
And despite the similarity of past crises in traditional finance, there’s one big difference as the weekend approaches: Players in the old-fashioned markets can turn off their machines on Saturday and Sunday at least to get some sleep and lick their wounds.
As a three-day bank holiday weekend approaches in the US, with forecasts for sunny skies in New York, those heavily exposed to digital assets will be glued to their screens, where the crypto winter’s deadly blizzard shows little sign of abating.
–Assisted by Olga Kharif, Emily Nicolle and Muyao Shen.
(Except for the headline, this story was not edited by NDTV staff and was published by a syndicated feed.)