We’re sorry, but we can’t return your money at this time : Crypto Market Talk

Cryptos Atrocious Week Forces Traders to Prepare for the Next Crisis

It was one of the most dramatic weeks in the short history of the cryptocurrency market, marked by the kind of announcements that investors fear most from a counterparty: We’re sorry, but we just can’t. not give you your money back yet.

In between, a nascent technocratic industry with grand ambitions to reinvent the financial system has been repeatedly rattled by echoes of the old system’s past crises.

It was a week of margin calls, forced selling and large collateral exposed as far too illiquid in times of crisis. There were rumors of hedge fund blow-ups, stories of opportunistic predatory trading, job cuts and loud denials of problems from key players that were proven wrong almost immediately.

Amid all of this, the myth has been 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 are currently punishing the old system.

It all started late Sunday, when some kind of crypto shadow bank called Celsius Network suspended withdrawals from depositors who had been lured by exorbitant interest rates that, in retrospect, were probably too good to be true.

Over the weekend, halfway around the world in Hong Kong, digital asset lender Babel Finance also froze withdrawals.

.@CelsiusNetwork suspends 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. More here: https://t.co/CvjORUICs2

— Celsius (@CelsiusNetwork) June 13, 2022

We’re working on it, both companies told their customers, and they definitely are. Still, speculation is growing that Celsius Network, at least, is drowning in what research firm Kaiko has called a “Lehman-esque” stance.

As Lehman Brothers did nearly 14 years ago, Celsius’ woes have shown just how interconnected the big players in this financial system are and how quickly contagion can spread, making this week’s drama the sequel from last week and the prequel from next week.

Many analysts have pointed to problems Celsius is having with an Ethereum-linked token called staked ETH, or stETH — a coin designed to be a tradable proxy for Ether that is widely used in decentralized finance.

While every stETH is supposed to be exchangeable for one Ether after the long-awaited upgrades to the Ethereum blockchain take effect, recent market turmoil has caused its market value to drop below that level.

Terra Login

Research firm Nansen also identified Celsius as one of the parties involved when the UST stablecoin lost its peg to the dollar in May.

The episode with this token, which was largely driven by algorithms, crypto animal spirits and unsustainable 19.5% returns for depositors in the peg protocol, triggered the loss of tens of billions dollars in the spectacular implosion of the Terra blockchain.

Nansen’s analysis confirmed that Terra’s Anchor program had been a significant source of return for Celsius, according to comments from crypto exchange Coinbase.

“In our view, this likely raised the question of how Celsius could meet its obligations without this 19.5% return,” Coinbase’s institutional team wrote. Incidentally, this company said this week that it would lay off 18% of its rapidly growing workforce, joining other pink-leaf-issuing crypto startups such as Gemini and BlockFi that are struggling amid a relentless drop in revenue. asset prices which has been dubbed “crypto winter”.

The drama escalated on Wednesday with an alarming tweet that appeared to confirm speculation swirling around one of crypto’s most influential hedge funds, Three Arrows Capital.

“We are in the process of communicating with affected parties and are fully committed to resolving this issue,” one of the company’s co-founders wrote, without revealing any details about what exactly “this” was. was working.

We are communicating with the affected parties and are fully committed to resolving this issue.

— ZhuSu (@zhusu) June 15, 2022

By the end of the week, the founders of the multibillion-dollar fund told the Wall Street Journal that they were exploring options that include a rescue by another company and a deal with creditors that would buy them time to work out a map.

Three Arrows also fell victim to the misfortunes of stETH and the collapse of Terra. The fund had purchased about $200 million in 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 around $0.000059.

Just as hedge funds Bear Stearns were among the first to reveal the problems of the subprime mortgage crisis, Three Arrows is probably not alone. The “cockroach theory” comes to mind: if you see one of these nasty bugs scurrying across the floor, chances are there are plenty more lurking behind the fridge or under leverage.

Crypto shark tank

In fact, the hot crypto business no longer sends coins “to the moon” with tweets full of rocket ship emojis, but rather tries to find where those cockroaches are hiding and make a meal out of them.

Some shrewd traders have sent bots to prowl blockchains looking for high-leverage positions in danger of forced liquidation because the value of their collateral is no longer sufficient to back up their loans. If successful, they get a 10-15% reduction in the sale of collateral – incentives paid by automated protocols designed to protect them from insolvency.

As the dust settled at the end of the week, the damage was frightening. Bitcoin posted 12 straight days of losses, its longest sustained decline, and it topped $20,000 early Saturday for the first time since 2020.

Amid monetary tightening, the world’s largest cryptocurrency is now down more than 70% from its November highs when it approached $70,000. Ether fell below $1,000, after selling as low as $4,866 seven months ago.

What was once a $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 can at least turn off their machines on Saturday and Sunday to sleep and bandage their wounds.

As a three-day US holiday weekend approaches, with forecasts of sunny skies in New York, those with high exposure to digital assets will remain glued to their screens, where the deadly blizzard of the crypto winter shows few signs of letting up.

–With the help of Olga Kharif, Emily Nicolle and Muyao Shen.

(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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