The newest issue began on Sunday, when Celsius, one of the largest crypto lending platforms, halted all withdrawals, swaps, and account transfers. According to a Wall Street Journal report published Tuesday, the corporation has hired restructuring attorneys to advise on potential remedies to its escalating financial woes.
Meanwhile, suspicions arose about potential tension at Three Arrows Capital, following a vague tweet late Tuesday from its founder Zhu Su, who wrote that “we are in the process of communicating with relevant parties and are committed to working this out.”
Three Arrows is “in the process of figuring out how to repay lenders and other counterparties after it was liquidated by top tier lending institutions in the area,”
Three Arrows, a key player and one of the most visible hedge funds in the crypto market, was projected to manage around $10 billion in assets in March, according to Bloomberg, citing Nansen statistics. According to a regulatory filing, the firm also held more than 6% of the Grayscale Bitcoin Trust GBTC, -2.09%, the world’s largest bitcoin fund, as of December 2020.
The concern has added to the pressure on bitcoin, the most popular cryptocurrency, which is trading over 70% down than its all-time high in November, though it enjoyed a tiny rebound Wednesday after the Fed announced the highest rate hike since 1994. Bitcoin BTC/USD, +3.35% was recently trading at roughly $22,487, up 1.2% in the previous 24 hours.
All of this comes just a month after the collapse of blockchain Terra, which rattled some investors’ faith in the fledgling crypto market.
Some market participants are increasingly concerned about the contagion dangers Celsius and Three Arrows Capital may represent to the whole crypto market if the firms fail in the worst-case scenario.
Other lending platforms tested on risk management
Investors are keeping a careful eye on the conditions of Celsius’s competitors, such as crypto lending platforms BlockFi and Nexo.
Investors can deposit their cryptocurrency on such services and receive extraordinarily high rewards. According to Celsius’s website, users can obtain up to 18.6 percent APR, although most “high yield” savings accounts in US dollars give annual percentage rates of 1% or less, according to Bankrate.
According to David Siemer, chief executive of Wave Financial, the crypto lending platforms have been “in a battle to get the best deals possible for retail clients to onboard them fast.” “The only way to accomplish that, unless you’re just getting away from venture-capital money,” Siemer said, as companies rushed to give larger yields for retail clients.
Michael Safai, founding partner at Dexterity Capital, said in an interview.:
“A lot of the people who have deployed to these types of institutional lenders could be now going and redeeming,”
According to Bill Barhydt, CEO of crypto financial-service platform Abra, a competitor of Celsius, crypto lending firms will be examined on their risk-management abilities.
“Usually when you’re holding withdrawals, it’s because there’s a duration mismatch as a lender,” Barhydt said, referring to the potential causes of Celsius’s situation. “A duration mismatch between what’s the average duration of your loan versus how long it takes to process a withdrawal for your customers. And if the two don’t match, you’ve got to stop withdrawals because you’re gonna end up with a problem,” he said.
Following Celsius’s account suspension announcement on Sunday, Zac Prince, CEO of competitor crypto lender BlockFi, tweeted to reassure consumers that “all products and services @BlockFi continue to operate normally.”
However, BlockFi said on Monday that it would lay off approximately 20% of its personnel as the rapidly changing macroeconomic climate weighs on the company’s growth rate.
BlockFi’s institutional business department responded to the market’s attention on Wednesday by tweeting, “We can confirm that we maintain a rigorous, prudent, and proactive approach to risk management across our business.” This involves controlling any risks posed by any individual client.”
“Our client experience is unchanged, and client funds are safe,” the company noted.
Nexo, another cryptocurrency lender, tweeted on Wednesday that it “has no exposure to Three Arrows Capital.” Nexo has always distinguished itself as a very cautious lender with severe risk management and strict over-collateralization requirements, regardless of the reputation of the borrower.”
‘Systemic exposure’ driving the market
If investors redeem funds from crypto lenders, “the lenders will have to call back loans to the people they lent the funds to,” according to Dexterity’s Safai. “Longer term, this means less volume on exchanges because there will be less ‘Systemic exposure’ driving the marketand less assets to trade. And that’s just generally bad news.”
According to Siemer, some retail exchanges that provide high-yield products may be especially vulnerable if they have borrowed funds to organizations like Three Arrows.
Meanwhile, according to Siemer, certain crypto hedge funds “are now entwined with all of this because they lend their assets to Celsius or deposit assets there.”
“It’s systemic exposure, and that’s what’s driving the market right now. It just feels like that no one knows who’s a counterparty anymore. So everybody’s taking assets back,”
According to Safai, the panic has also weighed on the prices of bitcoin and ether. “Because bitcoin and ether are most liquid, we’ve already seen a significant outflow.” And when people are trying to move out of a bad situation, they want to get into the most liquid market so they can obtain the best pricing,” Safai explained.
According to Wave Financial’s Siemer, Terra’s demise, as well as recent concerns surrounding Celsius and Three Arrows, might erode institutional investors’ trust in the crypto market. “I definitely believe it delays everything by at least a year,” he remarked.
David D. Tawil, president and co-founder of ProChain Capital, disagrees. According to him, the crypto crisis may draw distressed investors from the traditional finance business.
“Crypto is going through this terrible time, and assuming it’s much more of a technical selloff going on, I could go ahead and invest at good pricing,” Tawil added.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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