It was one of the most dramatic weeks in the short history of the cryptocurrency market, marked by the kind of announcement investors fear most from a counterparty: We’re sorry, we can’t give your money back right now.
In the meantime, a nascent technocratic industry with high ambitions to reinvent the financial system has been repeatedly shaken by echoes of past crises in the old system.
It was a week of margin calls, forced sales and key guarantees being exposed as very illiquid in times of crisis. There were rumors of hedge fund explosions, stories of opportunistic predatory deals, job cuts, and noisy denials of trouble from key players that were proven wrong almost immediately.
Amidst all this, the myth was shattered once and for all that this new cryptographic financial system was somehow immune to – or even able to benefit from – the economic fundamentals that currently punish the old system.
It all started late Sunday, when a sort of shadow cryptocurrency bank called Celsius Network suspended withdrawals from depositors who were lured by sky-high interest rates that, in retrospect, were probably too good to be true.
At the end of the week, on the other side of the world, in Hong Kong, digital asset lender Babel Finance also froze withdrawals.
.@CelsiusNetwork is pausing all withdrawals, swaps and transfers between accounts. Acting in the interests 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 they certainly are. However, speculation is growing that the Celsius Network, at least, is drowning in what research firm Kaiko has called a “Lehman-esque” position.
As Lehman Brothers did nearly 14 years ago, Celsius’ troubles showed how interconnected the big players in this financial system are and how quickly the contagion can spread, making this week’s drama the sequel to last week’s and the prequel to next week.
Many analysts have pointed out issues Celsius is having with an Ethereum-linked token called Stake ETH, or stETH – a coin designed to be a tradable proxy for Ether that is widely used in decentralized finance.
While each stETH must be redeemable for one Ether after the long-awaited Ethereum blockchain upgrades take effect, recent market turmoil has caused its market cap to drop below this level.
Research firm Nansen also identified Celsius as one of the parties involved when the US stablecoin lost its peg to the dollar in May.
The episode with that token, which was largely driven by algorithms, cryptographic animal spirits and unsustainable 19.5% yields for depositors on the Anchor Protocol, triggered the loss of tens of billions of dollars in the spectacular implosion of the Terra blockchain.
Nansen’s analysis confirmed that Earth’s Anchor program was a major source of income for Celsius, according to comments from cryptocurrency exchange Coinbase.
“In our opinion, this likely raised the question of how Celsius could meet its obligations without this 19.5% yield,” Coinbase’s institutional team wrote. That company, by the way, said this week that it will lay off 18% of its previously fast-growing workforce, joining other cryptocurrency startups like Gemini and BlockFi that are struggling amid a relentless fall in asset prices. dubbed the “cryptographic winter”.
The drama escalated Wednesday with an alarming tweet that appeared to confirm speculation that was swirling around one of the most influential cryptocurrency hedge funds, Three Arrows Capital.
“We are in the process of communicating with the relevant parties and fully committed to resolving this,” wrote one of the company’s co-founders, without revealing details on what exactly “it” was working.
We are in the process of communicating with the relevant parties and are fully committed to resolving this.
— Zhu Su (@zhusu) June 15, 2022
Later in the week, the founders of the multibillion-dollar fund explained to the Wall Street Journal that they were exploring options that included a bailout by another company and a deal with creditors that would give them time to come up with a plan.
Three Arrows, too, was a victim of the stETH problems and Earth’s collapse. The fund purchased about $200 million worth of Luna coin used to back up the value of Earth’s UST stablecoin, according to the Journal. Luna, which sold for over $119 in April, is now worth around $0.000059.
Just as Bear Stearns hedge funds were the first to reveal problems from the subprime mortgage crisis, Three Arrows is likely not alone. The “cockroach theory” comes to mind: if you see one of these nasty bugs running around on the floor, chances are there’s a lot more lurking behind the fridge or under the sink.
crypto shark tank
In fact, cryptocurrency trading is now no longer pumping coins “to the moon” with tweets filled with rocket emojis, but trying to figure out where these cockroaches are hiding and have a meal out of them.
Some shrewd traders have sent bots to prowl blockchains looking for highly leveraged positions in danger of forced liquidation because the value of their collateral is no longer enough to back up their loans. If successful, they receive a 10% to 15% cut from collateral sales – incentives paid for by automated protocols designed to protect them from insolvency.
When the dust settled later in the week, the damage was staggering. Bitcoin recorded 12 straight days of losses, its longest sustained decline, and surpassed $20,000 early Saturday for the first time since 2020.
Against a backdrop of monetary tightening, the world’s largest cryptocurrency is down more than 70% from its November highs as it neared $70,000. Ether has dropped below $1,000, having sold as low as $4,866 seven months ago.
What was once a more than $3 trillion industry is now valued at less than $1 trillion.
And despite the similarity of past crises in traditional finance, there is one big difference as the weekend approaches: Players in old-fashioned markets at least get to turn off their machines on Saturday and Sunday to get some sleep and lick their wounds.
As a three-day US holiday weekend approaches, with forecasts of sunny skies over New York, those with heavy exposure to digital assets will remain glued to their screens, where the deadly blizzard of crypto winter shows little sign of decrease.
–With the help of Olga Kharif, Emily Nicolle and Muyao Shen.
(Except for the headline, this story was not edited by the NDTV staff and is published from a syndicated feed.)