In the middle, an incipient technocratic industry with great 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 significant guarantees exposed as too illiquid in a time of crisis. There have been rumors of hedge fund explosions, stories of opportunistic predatory trade, job cuts and strong denials of problems by major players that went wrong almost immediately.
In the midst of it all, the myth has been shattered once and for all that this new cryptographic financial system was somehow immune to the economic fundamentals that currently punished the old system, or could even benefit.
It all started in the late hours of Sunday, when a kind of shadow banking bank called Celsius Network suspended withdrawals of depositors who had been lured by very 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 paused on all withdrawals, exchanges, 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.
– Celsius (@CelsiusNetwork) June 13, 2022
We’re working on that, both firms have told customers, and they certainly are. However, there is growing speculation that the Celsius network is at least drowning in what research firm Kaiko has called a “Lehman-style” position.
As Lehman Brothers did almost 14 years ago, the problems of Celsius have shown 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 and the prequel to next.
Many analysts have pointed to the problems Celsius is having with an Ethereum-linked token called staked ETH or stETH, a currency designed to be a negotiable proxy for Ether that is widely used in decentralized finance. Although each stETH is destined to be redeemable by an Ether after the expected Ethereum blockchain updates take effect, recent market turmoil has caused its market value to fall below that level.
Research firm Nansen also identified Celsius as one of the parties involved when the UST stablecoin lost its link to the dollar in May. The episode with that token, which was largely driven by algorithms, cryptographic animal spirits, and unsustainable 19.5% returns for Anchor Protocol depositors, resulted in the loss of tens of millions of dollars in the spectacular implosion of the Earth blockchain. .
Nansen’s analysis confirmed that the Earth Anchor program had been a major source of performance for Celsius, according to comments from cryptocurrency exchange Coinbase. “In our view, this probably raised the question of how Celsius could meet its obligations without that 19.5% return,” the Coinbase 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 new pink crypto companies, such as Gemini and BlockFi, which are struggling amid a relentless downturn. of asset prices. called “cryptographic winter.”
The drama escalated on Wednesday with an alarming tweet that seemed to confirm speculation about one of cryptocurrency’s most influential hedge funds, Three Arrows Capital. “We are in the process of communicating with the relevant parties and we are fully committed to resolving this,” wrote one of the firm’s co-founders, without revealing any details about exactly what “this” was being resolved.
We are in the process of communicating with relevant parties and are fully committed to this
– Zhu Su (@zhusu) June 15, 2022
At the end of the week, the founders of the multimillion-dollar fund told the Wall Street Journal that they were exploring options that include a bailout by another company and an agreement with creditors that would allow them to gain time to work out a plan. Three Arrows has also been the victim of stETH problems and the collapse of Earth. The fund bought about $ 200 million in the Luna currency used to back up the value of Earth’s UST stablecoin, according to the Journal. Luna, which sold for more than $ 119 in April, is now worth about $ 0.000059.
Just as Bear Stearns hedge funds were among the first to reveal the problems of the subprime mortgage crisis, Three Arrows is likely not alone. The “cockroach theory” comes to mind: if you see one of those nasty critters running across the floor, there are likely to be many more hiding behind the refrigerator or under the sink.
Crypto Shark tank
In fact, the hot crypto trade is no longer pumping coins “to the moon” with tweets full of rocket emojis, but trying to find where those cockroaches are hiding and make a meal with them. Some astute marketers have sent bots to roam blockchains in search of highly leveraged positions in danger of forced liquidation because the value of their collateral is no longer enough to back up their loans. If they succeed, they get a 10% to 15% cut in the sale of collateral, incentives paid by automated protocols that are meant to protect them from insolvency.
When the dust settled over the weekend, the damage was staggering. Bitcoin fell for 11 days in a row, its longest fall ever. It is currently above the $ 20,000 level, a loss of more than 70% from its November highs as it approached $ 70,000. Ether is struggling to stay above $ 1,000 as it sold for up to $ 4,866 seven months ago. What was once a $ 3 trillion industry is now a $ 1 trillion industry.
And despite the similarity of past crises in traditional finance, there is a big difference as the weekend approaches: outdated market players can at least turn off their machines on Saturday and Sunday to get some sleep and lick their wounds. . As a three-day holiday weekend approaches in the United States, with sunny skies forecasting in New York, those with high exposure to digital assets will remain glued to their screens, where the deadly winter storm of cryptographic winter shows few signs of yielding.