The crisis in cryptocurrencies sheds light on the weakness of the industry

The crisis in cryptocurrencies sheds light on the weakness of the industry – Mail Bonus

The cryptocurrency market has reached a bearish stage as the price of major cryptocurrencies has fallen to a four-year low. The current downturn in the cryptocurrency market has led some cryptocurrency companies to cease operations, while many have significantly reduced their jobs to stay afloat.

The cryptocurrency market crisis began with the Terra problem, which saw $ 40 billion of investors’ money disappear from the market. At that time, the cryptocurrency market showed good resistance to such a collapse. However, the aftermath of the collapse had a greater impact on the cryptocurrency market, especially cryptocurrencies, which many believe are responsible for the current boom.

The credit crunch began in the second week of June when major lending companies began to move their money to prevent bankruptcy in places with exchange rate obligations, but strong sales that put significant pressure on prices led to a further fall.

Ryan Shea, a cryptocurrency economist at digital asset service provider Trekx, said the lending model makes it vulnerable to volatile markets such as cryptocurrency. He told the Cointelegraph:

“Asset price structures are particularly demanding for cryptocurrency lenders because their business model is very similar to an ordinary bank, namely it is based on the transformation of liquidity and indebtedness, which makes them vulnerable to bank raids.

“In such cases, customers were afraid to think they could not get their money back, they hurried to the bank and tried to withdraw their deposits. However, banks do not keep their customers’ money in bulk, they lend a large part of these deposits to borrowers (illiquid) instead of higher returns – the difference is their source of income, “he added.

He said that only those customers who react quickly can withdraw their money, which is what makes the liquidity crisis such a dramatic issue, “as the collapse of Lehman Brothers and more recently Terra – the cryptocurrency equivalent – shows.

Disadvantages of unrestricted indebtedness

Celsius Network, a cryptocurrency lending company that has been overseeing its cryptocurrency interest-bearing accounts, became the first major victim of the market crisis as it froze withdrawals on the platform on June 12 in an effort to recover.

The liquidity crisis for Celsius began with a huge drop in Ether (ETH) prices, and in the first week of June, the platform had only 27% of its ETH liquid. Reports from various media last week also indicated that Celsius Network had lost key backers and brought in new lawyers amid the volatile cryptocurrency market.

Securities regulators from five US states have reportedly launched an investigation into Celsius’s cryptocurrency lending due to a decision to postpone user withdrawals.

Similarly, Babel Finance, a leading Asian credit platform that had recently completed a $ 2 billion financing round, said it was facing liquidity pressures and suspended withdrawals.

Later, Babel Finance eased some of its acute liquidity problems by reaching debt repayment agreements with some of its counterparties.

Three Arrow Capital, also known as 3AC, one of the leading cryptocurrency hedge funds founded in 2012 with over $ 18 billion worth of assets under management, is also facing a bankruptcy crisis.

An online chat about 3AC not being able to meet its margin call began after it began transferring assets to replenish funds on distributed financing systems (DeFi) such as Aave to avoid possible bankruptcy within the price of Ether. There are unconfirmed reports that 3AC has faced hundreds of millions of bankruptcies from many places. 3AC reportedly failed to meet margin calls from its lenders, which raises the specter of bankruptcy.

Related: Celsius crisis reveals problems due to low liquidity in bear markets

In addition to the top lending companies, several other smaller lending platforms have also been adversely affected by a series of liquidations. For example, Vauld – a start-up company with cryptocurrencies – recently reduced its staff by 30% and laid off almost 36 employees in the process.

BlockFi admitted that they had exposure to 3AC and that it could not have come at a worse time, as it has been struggling to raise new traffic even when it is at 80% off the previous round. BlockFi recently managed to get a $ 250 million credit line from FTX.

David Smooke, founder and CEO of Hackernoon, told Cointelegraph:

“In order for a cryptocurrency to reach billions, it was necessary and expected that traditional institutions would buy and store it. The young industry often follows old business models, and in the case of cryptocurrencies, it too often meant that companies became credit crunchers. Companies that promise unsustainable returns for simply maintaining reserves will do just that – not sustain.

Is the market situation to blame?

Although from a distance it may seem that market conditions were the main cause of the crisis for most of these credit companies, if you look closely, the issues seem to revolve more around the company’s daily operations and its spiraling effects. bad decision making.

The bankruptcy crisis for Celsius led to some of its crimes from the past, with people like Swan Bitcoin founder Cory Klippsten and Bitcoin influencer Dan Held warning of shady lending business practices. They were held on a Twitter thread on June 18 and listed a series of problems with Celsius’ actions from the beginning that had gone unnoticed until now.

Held pointed out that Celsius had misleading marketing methods and argued that it was guaranteed while the founders who supported the project had a dubious background. The company also hid the arrest of its CFO, Yaron Shalem. Held said: “They were over-indebted, marginalized, bankrupt, leading to some losses for lenders.

Similarly, 3AC invested heavily in the Terra ecosystem – the company had raised $ 559.6 million from the property now known as the Luna Classic (LUNC) – the now forked Terra (LUNA) – before it collapsed. The value of half a billion dollars in investment 3AC now amounts to several hundred dollars.

Dan Endelbeck, founder of the song-1 blockchain platform Sei Network, told the Cointelegraph about the major problems with 3AC and why it is facing bankruptcy:

“Three Arrows Capital is a trading company that is very opaque with its balance sheet and where they are borrowing and using capital. We believe that the lack of transparency has affected the risk assessment of their lenders and led to this market collapse. These conditions can create significant risks, especially in times of market volatility. What happened here is a strong sign that DeFi will continue to grow and establish more transparency and accountability in this space.

Market rumors suggest that 3AC used heavy debt to make up for the LUNC loss, which did not go as planned.

Dion Guillaume, Head of Communications at Gate.io’s cryptocurrency trading platform, told Cointelegraph:

“Celsius and 3AC both suffered from irresponsibility. Celsius escaped the LUNA crash, but they were badly burned by stETH depeg. They seemed to use the ETH money of their users in stETH pools to generate their returns. This led to bankruptcy. In the case of 3AC, they lost about nine numbers due to the LUNA failure. To make up for their losses, they traded heavily in debt. Unfortunately, the bear market made their mortgage worthless and they were unable to answer many margin calls.

Simon Jones, CEO of Voltz Labs’ diversified financial rules, believes that the current crisis caused by cryptocurrency lending is quite similar to the 2008 recession. Because lenders had very risky assets in their balance sheet in the form of collateral and these risky assets were overvalued or at risk of sudden (large) price changes.

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An overvaluation of these assets meant that lenders considered themselves to have sufficiently capitalized loan books. When asset prices were adjusted, lenders were suddenly at risk of having mortgaged positions. To try to maintain solvency, insurance had to be sold. However, due to the large volume of sales at the same time, this contributed to a downturn in the value of the assets – meaning that lenders could only sell for pennies per dollar. Jones told the Cointelegraph:

“We should build an open source, trustworthy and anti-fragile financial services sector. Not one that is a closed source and takes heavily indebted bets on retail deposits. This is not the future of finance and we should be ashamed to have allowed this to happen to retailers at Celsius. Three Arrows Capital is a hedge fund – so they will never be an open source – but better risk management, especially attention to systemic risk, should have been applied to credit companies. “

Yves Longchamp, Head of Research at SEBA Bank, believes that regulation is the key to redemption for the cryptocurrency market. He told the Cointelegraph:

“Recent operational decisions by unregulated cryptocurrency service providers in the industry reflect the need for more transparency and regulation in the industry. By doing so, we can ensure that companies and users can work with confidence in the industry. Although regulations cover more jurisdictions, where both the United States and the EU are at an advanced stage in developing a digital asset framework, regulators should consider this an urgent matter.