The domino effect in the crypto market is expanding, threatening to claim more victims

The upheavals in the digital assets industry have worsened in recent weeks. Cryptocurrency losses left gaps in profit and loss statements, bringing some companies to the brink of bankruptcy.

After two cryptocurrencies Crashed, and wiped out billions of dollars in value, the British Virgin Islands loan house this week ordered a hedge fund that survived several declines in crypto to realize the assets. Another platform that this hedge fund is one of the investors in, has limited the amount of attraction, while trying to figure out how much the hedge fund’s problems will affect its liquidity.

Several crypto players have established financial ties all over the market, adding to the risk of borrowing and lending digital assets between them, and at least one lending company, Celsius, has relied on a pledge to lend itself.

“Everything is very much related to each other; that was not the case in 2018,” said Chris Bendiskan, research director at asset management firm London CoinShares, referring to a previous decline in the crypto market.

While in crypto these problems are new, in the traditional financial world they are known and recognized. During the 2007-2008 financial crisis, banks’ lending practices included mortgaging assets – using collateral to borrow more money – leaving banks liquidity. In the post-crisis period, regulators tightened supervision.

Digital asset prices have dropped dramatically alongside other speculative bets in response to the Federal Reserve’s move to raise interest rates. The crypto domain’s headache grew in May, when the stable currency TerraUSD cut off from its peg to the dollar and dragged the value of a linked currency, the Luna, into the abyss. On the way down, $ 40 billion was written off.

Investors got a taste of the effects of the crypto investment involvement on each other when the quick sale of the assets that supported the stable currency caused a drop of almost $ 10,000 in the price of a bitcoin unit, to about $ 30,000.

The problems facing Three Arrows Capital, the hedge fund that was instructed to materialize after being heavily invested in Luna, also slipped into the Voyager Digital crypto exchange last week. On Friday, Voyager announced that it was temporarily suspending trading, deposits, withdrawals and benefits to loyal customers.

The stock exchange issued an insolvency notice to the Three Arrows fund earlier, because the fund allegedly failed to repay a loan of 15,250 bitcoin units and $ 350 million in USD Coin, one of the stable currencies (stablecoin). The loan is worth about $ 646 million based on the current price of Bitcoin, $ 19,400. Shares of Voyager, traded on the Toronto Stock Exchange, fell more than 96% this year. On Friday, the arrays of Three Arrows asked a bankruptcy court in New York to deal with a case from the British Virgin Islands to allow them to manage the assets within the US.

Three Arrows’ financial problems affected the smaller companies in its circle. Hong Kong-based trading company 8 Blocks Capital said Three Arrows stopped communicating with it after allegedly improperly allocating $ 1 million in the company’s capital from Hong Kong. Kyber Network, a financial decentralization project, announced that “a small portion of its capital” was with the hedge fund, adding that it was not responding to its attempts to contact it.

The Three Arrows did not respond to requests for comment.

Re-calls to Congress to pass laws

The field of crypto still exists for the most part without regulation, and there are few federal laws that directly relate to crypto. The Securities and Exchange Commission (SEC) also chooses to deal with cases against individual companies on an ad hoc basis. Growth in the industry – which was worth more than $ 3 trillion at its peak last year – has surpassed regulators’ ability to catch up, analysts say. The crash of the Tara currency has led to renewed calls for Congress to pass laws pertaining to the field of crypto.

Without a central bank that would swallow illiquid assets and curb adhesion from firm to firm, the crypto field follows the rulebook of traditional assets. The crypto exchange FTX, led by Sam Bankman-Fried, has reached an agreement with the crypto loan house BlockFi Inc, which includes a credit of $ 400 million, and an option for FTX to acquire BlockFi for $ 240 million. BlockFi CEO Zack Prince wrote on Twitter on Friday that market events related to Celsius and Three Arrows had a negative impact on the company.

BlockFi said it had experienced losses of about $ 80 million due to exposure (through a loan) to the hedge fund.

In June, Bankman-Fried’s second company, Alameda Research, gave two credit lines, one worth $ 200 million and another $ 15,000 in bitcoin, to Voyager. Alameda acquired a $ 35 million stake in Voyager in May.

The troubles of the crypto market are reminiscent of the actions of two financial institutions in earlier times of unrest. JP Morgan intervened twice to prevent an economic collapse, before the Federal Reserve was formed in 1913. More recently, in 2008, Warren Buffett helped keep the Goldman Sachs Group and General Electric alive.

The rise in leverage exploded with the collapse of TerraUSD

The problems of the crypto market may be just the tip of the iceberg. Three Arrows, a major borrower in the system, saw its leveraged positions realized by stock exchanges, including BotMEX and Deribit, after failing to meet capital requirements. These are demands from lenders for further leverage on the part of borrowers to back up the loans, and they have swept the crypto trading industry in parallel as the value of major cryptocurrencies has plummeted along with the big sales in the market in general.

Crypto investor Mike Novogratz, who gambled heavily on Luna before the currency collapsed, found parallels between the currently-leveraged cryptocurrency collapse and the 1998 explosion of Long-Term Capital Management, a highly leveraged hedge fund whose collapse has raised concerns. The whole financial system.

The rise in crypto leverage has been growing for years and has exploded with the collapse of TerraUSD and one imaginary bank linked to it, offering this stable currency holders almost 20% interest if they deposit their money in it, said Caitlin Long, CEO of Custodia Bank, which aims to provide custody and services Other digital banking for institutional investors.

Crypto companies began to take more leverage after the approval of the Grayscale Bitcoin Trust in 2013. This trust for years has been one of the few individual investments in Bitcoin that average investors could turn to in the stock market or through pension accounts. Because of this, its value is often traded much higher than the value of Bitcoin in the spot market, thus allowing investors to profit from the gap. Three Arrows held about 6.1% of the trust’s shares at the end of 2020, according to a report to the SEC.

This trade was so successful that investors saw it as risk-free, Long said. As it became less profitable, as competing products entered the market, investors began trading in future Bitcoin markets, estimating that the price would rise even more. And when it has dried up, turn to yielding platforms.

“All this leverage flowed from what was safe to the less secure things,” Long said. “With each of these big trends, the risks to leveraged traders are getting bigger.”

Accounts were frozen, withdrawals stopped

Crypto investors are preparing for further trouble. Celsius froze customer accounts in June, and the crypto loan house Babel Finance and the CoinFLEX futures exchange stopped all customer withdrawals. Babel Finance said it had reached preliminary agreements on the repayment period of some of the debts, but did not resume withdrawals. CoinFLEX is spending $ 47 million on another currency, hoping to resume customer withdrawals after one of its major customers switched to “negative assets”.

Faced with uncertainty, some crypto lenders began to repay large lenders in order to check their financial health, while others tightened access to their lending products.

“There is a shortage of supply when companies like Celsius have stopped withdrawing, and have a smaller amount of assets to lend,” said Adam Reeds, CEO of crypto lending firm Ledn. “Many marketers who used to borrow money from such platforms are now looking for an alternative.”

For now, senior executives in the industry are hoping the current crisis is a repeat of the 2018 “Crypto Winter,” during which the bad players that caused inflating and exploding currency offerings were washed out of the market, resulting in the entire system getting stronger.

“Just as we washed out of the industry all the foam of coin issues in the last bull market, in this round all the leverage was washed out,” Long said.

By Editor

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