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Do not invest more money than you can afford to lose.
The past several weeks have seemed to confirm all the cryptocurrency critics’ points and shatter many of the illusions and hopes of proponents of alternative financial assets. Not only is the value of digital currencies nose diving, but many investment schemes based on these digital assets are collapsing, creating the risk of investors being left empty-handed.
The flagship cryptocurrency, Bitcoin, lost more than half of its value in 2022, with a significant portion of the collapse concentrated in June. For other popular digital currencies, the depreciation was even greater, and ironically, some “stablecoins” took the hardest hit.
This is causing a chain reaction that is dragging many of the financial companies which just a few months ago were riding on the crest of a wave of cryptocurrency hype. Let us recap the most indicative cases illustrating the disillusionment with the cryptocurrency dream.
Three Arrows Capital (3AC)
There can hardly be a more illustrative case than a company that in the first quarter of the year was valued at 10 billion dollars and now its value is 0 dollars.
Singapore-based Three Arrows Capital, also known as 3AC, was one of the most prominent crypto hedge funds just a few short months ago. In early July 3AC requested protection from creditors in the United States under Chapter 15 of the U.S. Bankruptcy Code, which allows foreign debtors to shield U.S. assets.
3AC’s problems began in May with the collapse of the terraUSD (UST), which had been one of the most popular U.S. dollar-pegged stablecoin projects. According to some estimates, investors in terraUSD and its sister token Luna have lost $60 billion as a result of panic selling.
3AC told the media that its investment in Luna, which became worthless after the collapse, totaled $200 million. But according to some industry reports, the fund’s exposure to the ill-fated stablecoin project was significantly higher – around $560 million.
The bankruptcy of 3AC caused significant collateral damage to the sector. The hedge fund cannot repay a $270 million loan from the crypto exchange Blockchain.com. Another lender, digital asset brokerage Voyager Digital, had to take an even bigger loss of at least $650 million. This forced Voyager Digital in turn to file for Chapter 11 bankruptcy. Others suffering losses due to 3AC’s bankruptcy include the crypto lenders Genesis and BlockFi, crypto derivatives platform BitMEX and the crypto exchange FTX.
The latest twist in the story is that 3AC’s founders Zhu Su and Kyle Davies have disappeared and their creditors are trying to track them down. This will definitely give an argument to critics who see cryptocurrencies as a giant scam.
As pointed out, the US-based crypto broker Voyager Digital’s problems are directly related to the collapse of Three Arrows Capital. On July 1, Voyager Digital froze customer withdrawals, and a few days later filed for Chapter 11 bankruptcy protection.
On 11 July, the company tried to reassure its customers that it had prepared a recovery plan. “We are working to restore access to USD deposits, which belong to customers and will go back to those same customers,” the company wrote in a blog post. According to the announcement, the company has cryptocurrencies worth $1.3 billion and over $650 million in claims against Three Arrows Capital.
According to the announced plan, clients will receive pro-rata share of four different assets: cryptocurrency, proceeds from the 3AC recovery, common shares in the reorganized company, and existing Voyager tokens. Voyager Digital did not specify how much money customers will receive, which raises concerns that some or all customers will not be compensated in line with their full balance.
Suspicion is heightened because of Voyager Digital’s misleading claim that customers are insured for up to $250,000 under Federal Deposit Insurance Corporation insurance, because customer funds are in accounts in Metropolitan Commercial Bank. But the banking institution says this insurance applies only in the event of a default by the bank itself, not Voyager Digital
In 2021, the cryptocurrency lending platform Celsius was able to boast that it manages $26 billion worth of client assets. But as a result of the cryptocurrency crash, the value of those assets had more than halved when the platform announced on June 13 that it was pausing client withdrawals.
Celsius offers a service that seems very attractive to people who lack significant experience and a deep understanding of financial instruments. The company is a sort of crypto-equivalent of a bank – customers deposit cryptocurrency and receive interest, and a higher-than-average interest rate. But unlike traditional banks, Celsius is not subject to such strict regulatory and insurance requirements.
Celsius encouraged its clients to invest in its own crypto token, cel, which allowed them to participate in prize giveaways and enjoy discounts on lending rates. But this token lost over 97% of its value in 2022. Since Celsius is the largest holder of cel, this meant a huge hit to asset values and therefore to a liquidity crisis.
In July, former investment manager Jason Stone filed a lawsuit against Celsius, calling the platform a “scam” and a “Ponzi scheme.” He claims Celsius artificially inflated the value of its own digital coin.
Another crypto lending and savings platform, CoinFlex, was also forced to pause customer withdrawals in June, citing “extreme market conditions”. The co-founders of the platform, Mark Lamb and Sudhu Arumugam, initially promised that they would try to restore withdrawals by the beginning of July, but were unable to achieve this.
What is curious about CoinFlex’s case is that the platform’s problems are related to an individual whale investor who refuses to repay debts incurred as a result of the market crash. According to Lamb, this investor is Roger Ver, who has been dubbed “Bitcoin Jesus” for his evangelical views on cryptocurrency in the early days of the industry. But Ver denies to have such obligations to CoinFlex.
Initial reports said that the debt is $47 million, but it later turned out that the hole in CoinFlex’s balance sheet was almost double that – $84 million. The platform announced that they have commenced an arbitration procedure at the Hong Kong International Arbitration Center in an attempt to recover this money.
Arumugam and Lamb stated that they are actively pursuing multiple initiatives to raise money for the platform so customers can progressively withdraw their funds as needed. Currently the plans envisage to offer temporary liquidity for CoinFLEX depositors by first making accessible for withdrawal 10% of the depositors’ total account balances.
In June, CoinFLEX also outlined a plan to raise capital by issuing a synthetic token called rvUSD that would be collateralized by the debt of the defaulted counterparty.
The story is similar for Hong Kong-based crypto lender Babel Finance. The company ended 2021 with $3 billion of loan balances on its balance sheet, although it has only about 500 customers and focuses exclusively on Bitcoin, Ethereum and stablecoins. In May 2022, it raised $80 million through a funding round that valued it at $2 billion.
But in June it was among the companies freezing customer withdrawals. The main reason is the high exposures to other over-leveraged companies in the sector such as the aforementioned Three Arrows Capital and Celsius.
“Recently, the crypto market has seen major fluctuations, and some institutions in the industry have experienced conductive risk events. Due to the current situation, Babel Finance is facing unusual liquidity pressures,” the company said in a press release announcing the June 17 decision.
According to media reports, Babel Financeis trying to find a way out of the debt pit by hiring U.S. investment banking firm Houlihan Lokey, a specialist in restructuring and distressed mergers and acquisitions.
Back in June, Singapore-based Vauld was giving the appearance of being more stable than its rivals. In a June 16 blog post the CEO Darshan Bathija assured that the company “continues to operate as usual despite volatile market conditions” and withdrawals were being “processed as usual and this will continue to be the case in the future.”
But at the beginning of the next month, reality hit Vauld too. The company announced it was pausing all withdrawals, trading and deposits on its platform and is exploring potential restructuring options.
In a new blog post Bathija said that the company is facing “financial challenges” due to “volatile market conditions, the financial difficulties of our key business partners inevitably affecting us, and the current market climate” which has led to customers withdrawing more than $197.7 million from the platform since June 12.
Of course, where there are losers, there are winners. The very next day after the announcement, 5 July, another crypto lender, Nexo, offered to buy embattled rival Vauld. Nexo said it had signed a term sheet, with Vauld giving it 60 days of exclusive talks to explore an all-equity acquisition of the company. Nexo added it plans to restructure Vauld and pursue expansion in Southeast Asia and India, if successful.
There are also other signs that the crisis is already leading to market consolidation. While crypto exchange FTX is suffering losses of its own, the US-based wing of the company is taking advantage of the situation to acquire troubled crypto lender BlockFi.
On 1 July, the two companies announced that they had reached an agreement which gives FTX an option to buy BlockFifor “up to” $240 million, with the final price dependent on BlockFi’s performance.
Initial media reports claimed that the discussed value of the deal was only 25 to 50 million dollars. But even $240 million is an extremely lucrative price for the buyer, given that until recently BlockFi was valued at $2 billion, and a year ago – to $ 3 billion.. Alongside the potential for an acquisition, with the deal FTX US is giving BlockFi a $400 million revolving credit facility to shore up its finances.
This drastic drop in the company’s value has certainly made venture investors nervous, but the deal gives ordinary customers hope that they will be able to recoup at least some of their money.