Crypto crash: What contagious risks could Celsius, Three Arrows pose? This is what to see

The latest crisis started on Sunday with Celsius, one of the largest crypto lending platforms, halting all withdrawals, trades and transfers between accounts. The company has reportedly hired restructuring lawyers to advise on possible solutions to its mounting financial problems, according to a Tuesday report by the Wall Street Journal.

Meanwhile, rumors have spread of potential stress at influential hedge fund Three Arrows Capital, following a vague cheep Tuesday night from its founder Zhu Su, who wrote that “we are in the process of communicating with relevant parties and fully committed to resolving this.”

On Wednesday, Block reported that Three Arrows is “in the process of figuring out how to pay lenders and other counterparties after it was liquidated by top-tier loan firms in the space.”

As a major player and one of the highest-profile hedge funds in the crypto space, Three Arrows was estimated in March to manage around $10 billion in assets, according to Bloomberg, citing data from Nansen. The firm also owned over 6% of Grayscale Bitcoin Trust GBTC.,
the world’s largest bitcoin fund, as of December 2020, according to a regulatory filing.

Read: As the cryptocurrency crash deepens, here are 4 signs the worst could be yet to come

The unease has added to the pressure on bitcoin, the most popular cryptocurrency, which is trading almost 70% below its all-time high in November, although it saw a slight rebound on Wednesday after the Fed said it would raise its interest rate. benchmark at its biggest rate hike since 1994. Bitcoin BTCUSD
It was recently trading at around $22,487, up 1.2% in the last 24 hours.

And all of this comes a month after the collapse of the Terra blockchain, which shook some investors’ confidence in the nascent crypto industry.

Some market participants are now concerned about the contagious risks that Celsius and Three Arrows Capital may pose to the entire crypto market, if, in the worst case, the companies were to become insolvent.

Su and Celsius representatives did not respond to requests for comment.

Other lending platforms proven in risk management

Investors are closely watching Celsius pairs such as crypto lending platforms BlockFi and Nexo.

These platforms allow investors to deposit their cryptocurrencies and earn extremely high returns. At Celsius, consumers could reportedly get up to 18.6% APR, according to its website, while most “high-yield” U.S. dollar savings accounts offer annual percentage yields of close to 1% or less, according to its website. Bankrate.

Crypto-lending platforms have been “in a battle to get the best deals possible for retail clients to pick up quickly,” David Siemer, CEO of Wave Financial, said in an interview. As companies scrambled to offer higher returns to retail clients, “the only way to do it, unless you’re just walking away from venture capital money, was to make increasingly risky bets,” Siemer said.

“A lot of the people who have been deployed in these types of institutional lenders could now go and redeem,” Michael Safai, a founding partner at Dexterity Capital, said in an interview.

Crypto lending firms will be tested on their risk management ability, according to Bill Barhydt, CEO of crypto financial services platform Abra, a Celsius competitor.

“Usually when you make withdrawals, it’s because there’s a duration mismatch as a lender,” Barhydt said, referring to possible causes of Celsius’s situation. “A duration mismatch between your average loan duration and the time it takes to process a withdrawal for your clients. And if the two don’t match, you have to stop the withdrawals because you’ll end up with a problem,” she said.

After Celsius announced the freezing of his account on Sunday, Zac Prince, CEO of rival crypto lender BlockFi, tweeted to assure customers that “all @BlockFi products and services continue to function as normal.”

But on Monday, BlockFi said it would cut about 20% of its workforce as the ever-changing macroeconomic environment weighs on the company’s growth rate.

In response to market attention, BlockFi’s institutional business department tweeted on Wednesday that “We can confirm that we maintain a rigorous, prudent and proactive approach to risk management throughout our business. This includes managing the risks that may be posed by any individual client.”

“Our customer experience hasn’t changed and customer funds are protected,” added.

Another cryptocurrency lender, Nexo, tweeted on Wednesday that it “has $0 exposure to Three Arrows Capital. Nexo has always set itself apart from the rest by being a very conservative lender with strict risk management and strict overcollateralization requirements, regardless of the reputation of the borrowers.”

‘Systemic exposure’ drives market

If investors are swapping funds with crypto lenders, “then the lenders will have to pay back the loans to the people they lent the funds to,” said Dexterity’s Safai. “Longer term, this means less volume on trades, because there will be less credit, there will be less assets to trade. And that’s just bad news overall.”

Some retail exchanges that offer high-yield products could be at particular risk if they have lent their funds to companies like Three Arrows, according to Siemer.

Meanwhile, there could also be some crypto hedge funds “that are now intertwined with all of this because they lend their assets to Celsius or deposit assets there,” according to Siemer.

“It’s systemic exposure, and that’s what’s driving the market right now. It just seems like no one knows who a counterpart is anymore. So everyone is recovering assets,” Siemer said.

Bitcoin, ether liquidations

The panic has also weighed on the price of bitcoin and ether, according to Safai. “We have already seen a significant outflow from bitcoin and ether, because they are the most liquid. And when people try to run away from their position, they want to get into the most liquid market so they can get the best prices,” Safai said.

Bitcoin and ether ETHUSD
Wednesday underperformed several coins with a smaller market cap such as XRP XRPUSD,
and Polkadot DOTUSD.

Institutional interests

The collapse of Terra and recent speculation on Celsius and Three Arrows could affect institutional investor confidence in the crypto space, according to Wave Financial’s Siemer. “I definitely think it sets everything back at least a year,” he said.

David D. Tawil, Chairman and Co-Founder of ProChain Capital, has a different opinion. The collapse of cryptocurrencies could attract distressed investors from the traditional financial industry, he said.

For an institutional investor, “crypto is going through this terrible time, assuming it’s a much more technical sell-off, I could go ahead and invest at good prices,” Tawil said.

Also read: Bitcoin Bull Michael Saylor Says Recent Recession Is ‘Absolutely’ a Buying Opportunity

imminent regulation

Some participants in the crypto industry expect tighter regulations.

Lawmakers and regulators “already had their heads spinning about crypto in general,” Tawil said. “What should they do with depositors in Celsius? Should they wrongly console themselves in the same way that they deposit money in banks? Or what kind of disclosure should there be for those companies?” Tawil said.

Plus: SEC Chief Gensler Says Crypto Crash Has ‘Highlighted’ Need for Regulation

According to the Celsius website, it has 1.7 million customers. Although there is no further evidence to support such a number, with the platform stopping withdrawals for clients, that is”[Gary] Gensler’s dream, according to Siemer. Now the chairman of the US Securities and Exchange Commission “has this perfect case study of a million retail investors who were scammed by this quasi black box institution that was not strictly regulated and acted like a bank” Simer said.

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