Singapore-based cryptocurrency firm Three Arrows Capital (3AC) failed to meet its financial obligations on June 15, causing severe cuts among central lenders such as Babel Finance and risk lenders such as Celsius.
On June 22, Voyager Digital, a New York-listed digital mortgage and return company, saw its shares fall nearly 60 percent after offering $ 655 million in risk to Three Arrows Capital.
Voyager offers cryptocurrencies and mortgages and owned about $ 5.8 billion in assets in March, according to Bloomberg. Voyager’s website mentions that the company offers Mastercard debit cards with cash and reportedly pays up to 12% annual remuneration for cryptocurrencies without lock.
Recently, on June 23, Voyager Digital lowered its daily withdrawal limit to $ 10,000, as reported by Reuters.
The risk of infection was spread in derivative contracts
It is not yet known how Voyager shouldered so much responsibility towards one counterparty, but the company is prepared to sue to recover its funds from 3AC. To go bankrupt, Voyager borrowed 15,000 Bitcoin (BTC) from Alameda Research, the cryptocurrency company led by Sam Bankman-Fried.
Voyager has also secured $ 200 million in cash loans and another $ 350 million in USDC Coin (USDC) revolver credit to protect customers’ redemption requests. Analysts at Compass Point Research & Trading LLC stated that the event “raises questions about viability” for Voyager, so crypto investors are asking if further market participants could face a similar conclusion.
– Unsecured derivatives and options trading on Deribit
– $ 650 million in unsecured debt with Voyager
– Offer protocols / portfolio companies 8-10% APY in cash
– Dylan LeClair (@DylanLeClair_) June 22, 2022
Even though there is no way to know how central cryptocurrencies and investment firms work, it is important to understand that one counterparty to a derivative contract cannot create a contagion risk.
Cryptocurrency derivatives could go bankrupt and users would only notice it when they try to quit. This risk is not only in the markets for cryptocurrencies, but is also increasing significantly due to the lack of regulations and weak reporting.
How do cryptocurrency futures contracts work?
A typical futures contract offered by the Chicago Mercantile Exchange (CME) and most cryptocurrency derivatives trades, including FTX, OKX and Deribit, allow the trader to take advantage of his position by depositing a margin. This means trading with a larger position against the original deposit, which is fishing.
Instead of trading in Bitcoin or Ether (ETH), these exchanges offer derivative contracts, which tend to track underlying asset prices but are far from being the same asset. So, for example, there is no way to withdraw your futures contracts, let alone transfer them between different exchanges.
In addition, there is a risk that this derivative contract will be redeemed from the actual price of the cryptocurrency on regular local purchases such as Coinbase, Bitstamp or Kraken. In short, derivatives are financial bets between two parties, so if the buyer lacks the scope (deposits) to cover it, the seller will not take the profit home.
How do stock exchanges deal with derivative risk?
There are two ways in which exchanges can handle the risk of inadequate margins. “Clawback” means taking the profit from the winning side to cover the loss. That was the standard until BitMEX introduced the guarantee fund, which releases all forced winding-up to deal with those unexpected events.
However, it must be borne in mind that the stock exchange acts as an intermediary because every futures market transaction requires a buyer and a seller of the same size and price. Regardless of whether it is a monthly contract or a perpetual future (reverse), both the buyer and the seller have to pay a margin.
Cryptocurrency investors are now asking themselves whether or not a cryptocurrency exchange could go bankrupt and the answer is yes.
If a stock exchange treats forced liquidation incorrectly, it could affect all the traders and companies involved. There is a similar risk of instant swaps when the actual cryptocurrencies in their wallets are shorter than the number of coins reported to their customers.
Cointelegraph has no knowledge of any abnormalities regarding Deribit’s liquidity or solvency. Deribit, along with other cryptocurrency derivatives exchanges, is a centralized entity. Thus, the information available to the public is not available.
History shows that the central cryptocurrency industry lacks reporting and auditing practices. This practice may be detrimental to each individual and company involved, but as far as future contracts are concerned, the risk of infection is limited to the risk of participants in each derivative change.
The views and opinions expressed herein are theirs alone author and do not necessarily reflect the views of Cointelegraph. Every investment and business involves risk. You should do your own research when making a decision.
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