In between, a burgeoning technocratic industry with grandiose ambitions to reinvent the financial system has been repeatedly rocked by echoes of past crises in the old system. It was a week of margin calls, foreclosures and key collateral deemed far too illiquid in times of crisis. There were rumors of hedge fund riots, stories of opportunistic predatory trading, job losses, and loud denials of major players’ problems that almost immediately proved false.
In the midst of all this, the myth was shattered once and for all that this new crypto-financial system was somehow immune to – or even able to benefit from – the economic fundamentals that currently penalize the old system.
It all started late on Sunday, when a crypto shadow bank of sorts called Celsius Network suspended withdrawals from depositors tempted by sky-high interest rates that, in hindsight, were probably too good to be true. By the end of the week, on the other side of the globe in Hong Kong, digital asset lender Babel Finance also froze withdrawals.
.@CelsiusNetwork pauses all withdrawals, swaps and transfers between accounts. Acting in the best interests of our community is our top priority. Our activities continue and we will continue to share information with the community.
— Celsius (@CelsiusNetwork) June 13, 2022
We’re working on it, both companies told customers, and no doubt they are. Still, there’s growing speculation that Celsius Network is at least drowning in what research firm Kaiko called a “Lehman-esque” position.
As Lehman Brothers did nearly 14 years ago, Celsius’s woes showed how major players in this financial system are interconnected and how quickly contagion can spread, making this week’s drama a sequel to last week’s and the prequel to next week’s.
Many analysts have pointed to issues Celsius has with an Ethereum-pegged token called staked ETH or stETH – a coin designed as a tradable proxy for Ether and widely used in decentralized finance. While each stETH is intended to be exchangeable for one Ether after long-awaited upgrades to the Ethereum blockchain take effect, recent market turmoil has caused the market value to fall below that level.
Research firm Nansen has also identified Celsius as one of the parties involved when the UST stablecoin lost its peg to the dollar in May. The episode involving that token, which was largely powered by algorithms, crypto-animal minds and unsustainable returns of 19.5% for depositors in the Anchor Protocol, caused the loss of tens of billions of dollars in the spectacular implosion of the Terra blockchain.
Nansen’s analysis confirmed that Terra’s Anchor program had been a major source of revenue for Celsius, according to commentary from crypto exchange Coinbase. “In our view, this probably raised the question of how Celsius could meet its obligations without that 19.5% return,” Coinbase’s institutional team wrote. By the way, that company said this week it will lay off 18% of its previously burgeoning workforce and join other crypto startups like Gemini and BlockFi that are struggling amid a relentless plunge in asset prices that has been on. called “crypto winter”.
The drama intensified on Wednesday with an alarming tweet that seemed to confirm speculation circulating around one of the most influential hedge funds in crypto, Three Arrows Capital. “We are in the process of communicating with relevant parties and are fully committed to working this out,” wrote one of the company’s co-founders, without revealing details of what exactly the “this” was that it was working out. used to be.
We are working on communication with relevant parties and are fully committed to working this out
— Zhu Su (@zhusu) June 15, 2022
By the end of the week, the multi-billion dollar fund founders had explained to the Wall Street Journal that they were exploring options, including a bailout by another company and an agreement with creditors that would give them time to work out a plan. Three Arrows was also a victim of both the stETH woes and Terra’s collapse. The fund had purchased approximately $200 million in the Luna currency used to back the value of Terra’s UST stablecoin, according to the Journal. Luna, which sold for over $119 in April, is now worth about $0.000059.
Just as Bear Stearns’ hedge funds were among the first to expose problems from the subprime mortgage crisis, Three Arrows probably isn’t alone. The “cockroach theory” comes to mind: If you see one of those pesky critters running across the floor, chances are there’s plenty more hiding behind the fridge or under the sink.
Crypto Shark Tank
In fact, the hot crypto trade is now no longer pumping coins “to the moon” with tweets full of rocketry emojis, but is trying to find where those cockroaches are hiding and make a meal out of them. Some shrewd traders have sent bots to scour blockchains looking for highly leveraged positions at risk of forced liquidation as the value of their collateral is no longer sufficient to back their loans. If successful, they’ll get a 10% to 15% discount on collateral sales — incentives paid out by automated protocols designed to protect them from insolvency.
When the dust settled at the end of the week, the damage was massive. Bitcoin has fallen for 11 consecutive days, its longest sustained slump ever. It is currently hovering above the $20,000 level, a loss of more than 70% from its November highs when it approached $70,000. Ether is struggling to keep above $1,000, having sold for a whopping $4,866 seven months ago. What was once an industry over $3 trillion is now an industry under $1 trillion.
And despite the similarity of past crises in the traditional financial sector, there is one big difference as the weekend approaches: players in the old-fashioned markets are allowed to turn off their machines on Saturday and Sunday at least to get some sleep and lick their wounds. With a three-day holiday weekend approaching in the US, with sunny skies forecasting in New York, those with heavy exposure to digital assets will be glued to their screens, where the deadly blizzard of the crypto winter shows little sign of letting go.