This week revealed to the average investor just how interconnected cryptocurrency companies are. Two companies have frozen withdrawals and a cryptocurrency hedge fund is in trouble. Celsius Network, Babel Finance and Three Arrows Capital are all floundering, and it’s still unclear how extensive the damage could be.
This week kicked off with a Sunday night announcement by Celsius Network, a giant cryptocurrency lending company, that it would pause withdrawals and transfers. After that, the value of Bitcoin and other cryptocurrencies, already weeks into a slump that some have called a “crypto winter,” dropped even further, and five days later, the news hasn’t gotten much better.
All three companies managed other people’s money. Celsius Network attracted retail investors. Babel Finance, which CNBC says has 500 clients, raised $80 million in a funding round a month ago. 3AC, which has invested in cryptocurrency startups, managed $10 billion in assets in March, according to Fortune. The ripple effects of the companies’ problems are likely to affect the broader cryptocurrency ecosystem.
The first is Celsius, which has issued a single statement in the week since its freeze: an FAQ that does not tell investors when or if they will have access to their funds. CEO Alex Mashinsky tweeted that the team is working “non-stop” and thanked unnamed people for their patience and support, without commenting on reports that the company has hired restructuring attorneys.
The company had $12 billion in assets under management in May. Mashinsky framed Celsius as a hybrid decentralized/centralized financing approach that could be equivalent to bond lending. But Celsius lost millions due to a mistake that missed refund payments after the BadgerDAO hack and another 35,000 ETH last summer, when the Ethereum staking service Stakehound apparently misplaced private keys and its tokens became useless as a result, according to a report on CoinDesk. He did not inform customers of the loss. CoinDesk likened Celsius’s collapse to that of Lehman Brothers in 2008, which spooked financial markets.
Research by blockchain analytics firm Nansen showed a shift in strategy that relied on DeFi protocols for higher throughput, CoinDesk noticed. While Mashinsky claimed Celsius had no exposure to the USTerra collapse, the report points to other data linking it to Staked Ether (stETH), which could cause problems if it has to sell that stake to pay investors.
Meanwhile, in Hong Kong, another cryptocurrency lender called Babel Finance has announced its own withdrawal and withdrawal freeze, claiming it is “facing unusual liquidity pressures.” Recently, on May 25, it had closed a funding round valuing the company at $2 billion. a report of decrypt collects allegations that Babel misused customer funds. Genesis Capital, Bitgo, Blockchain.com and Bitcoin.com are among its best-known clients.
Finally, cryptocurrency hedge fund Three Arrows Capital (3AC) confirmed Wall Street Journal who suffered heavy losses. (3AC invested about $200 million in the failure of the Luna protocol — an investment that ran to zero after Luna and its stablecoin Terra crashed last month.) 3AC’s founders say it is now working with legal and financial advisors. The company can sell its assets, although it is open to being bailed out by another company.
3AC “ghosts everybody” in response to margin calls, said Danny Yuan, the head of trading at 8Blocks Capital, on Twitter. This forced other companies to sell assets and further reduced cryptocurrency prices.
3AC closed its positions with exchange Bitfinex, but FTX, Deribit and BitMEX liquidated their positions after the company failed to meet margin calls, according to a report by The block. FinBlox, a crypto staking company, has capped withdrawals to $1,500 a month as it assesses the damage caused by 3AC; Finblox invested $3.6 million in 3AC in December, CoinDesk reports.
As 3AC demonstrates, a bad loss on a large investment can have huge ripple effects, and it can take time to see what they are. Luna collapsed a month ago, and the extent of her damage to 3AC wasn’t obvious until this week. Given the connections between 3AC, Celsius Network, Babel Finance and the rest of the market, it seems likely that the cryptocurrency is not gone.