Leading crypto ventures struggle to survive crypto winter, facing major liquidity issues and bankruptcies
On May 9, the decentralized, algorithmic stablecoin TerraUSD (UST), which was supposed to be pegged to the US dollar, plunged below its intended $1 peg to 35 cents, and sister token Terra (LUNA), which was meant to stabilize UST’s price, fell from $80 to a few cents by May 12.
The Terra price drops imploded $60 billion of value, causing short-term and long-term ripple effects in the crypto market. With 58% of crypto traders, who placed future bets on higher LUNA, millions of users on the decentralized finance (DeFi) network lost billions of dollars.
After the UST/Luna collapse, Terraform Labs’ founder, Do Kwon, got accused of price manipulation, and cashing out $80 million a month for an extended period of 33 months up to $2.64 billion in the months leading up to the Luna UST collapse, yet fully denied both claims.
Shortly after, on the 18th of June, Bitcoin fell under $20.000 for the very first time since the end of 2020, and also Ethereum dropped under $1000, two critical psychological numbers, which increased selling pressure in the spot market and liquidation of leverage in the system.
With the value of Bitcoin and Ethereum (among others), dropping over 70% from their peaks, the total market capitalization of the crypto market crashed from $3 trillion industry to well under $1 trillion, wiping more than $2 trillion worth of value from the combined crypto market.
Due to such extreme market conditions and unusual liquidity pressures with a prolonged downturn, crypto ventures had to make rapid strategic decisions to counter insolvency risks, most of them, focusing on short-term cutbacks in operational expenses and trying to buy time.
To decrease costs, the crypto industry saw some major layoffs across different organizations. Coinbase cut staff by 1180 people, BlockFi laid off 20% of its workforce, Crypto.com let go of 260 workers, Gemini downsized by 10%, and OpenSea announced 20% of staff layoffs.
Celsius and Babel Finance temporarily froze withdrawals, swaps, transfers, and/or redemption of crypto assets when prices started to go down. CoinFlex, CoinDCX, Voyager, Vauld, and Zipmex followed, by suspending withdrawals, trading, deposits, and/or loyalty rewards.
The first venture to liquidate, which bet on prices going up (including Terra), was Crypto hedge fund Three Arrows Capital, collapsing from a $10 billion Business to zero after failing to meet lender margin calls, dragging many parties down within a Chapter 15 liquidation.
After providing false information, exceeding assets under management, and getting called out for using borrowed funds to repay interest on loans issued by lenders, showing massive ROI with manipulated books, the founders went missing, failing to cooperate with liquidators.
TAC was facing a total of $3.5 billion of outstanding obligations, with many creditors including but not limited to: Bitcoin.com, Genesis/DCG, Voyager Digital, Algorand, Celsius Network, BlockFi, Moonbeam Network, Galaxy Digital, BitGo, SBI Crypto, and CoinList.
Due to lacking cash flow, 2 creditors; Voyager, and Celsius, had to file for a Chapter 11 liquidation as early as July, planning to reorganize debts while remaining ‘operational’, yet the chances of all stakeholders receiving their funds back in full, are considered very slim.
Voyager Digital loaned Three Arrows Capital around $665+ million and is now in need to repay 100.000+ creditors. Celsius Network lent the firm $75 Million, owing about $4.7 billion to 100.000+ creditors while having a major $1.19 billion deficit hole on their Balance Sheet.
Broker Voyager got blamed for acting like a (risk-free) Bank, and lender Celsius got alleged to be a fraud and a Ponzi scheme, with lawsuits and investigations increasingly questioning the adequacy of risk disclosures for users depositing crypto assets on crypto platforms.
The collapse of Terra, the liquidation of 3AC, and the insolvency of Voyager and Celsius were by many considered to be the first domino stones of the crypto crisis, yet more were expected to fall due to (interconnected) liquidity issues, Vauld being the latest confirmed case.
The lender, which relied too heavily on high-stakes, high-risk, interest-driven, yield farming, filed a moratorium order against its creditors with $400 Million of liabilities while completing their due diligence process with Nexo, which signed an all-equity acquisition of the firm.
Earlier this month, also FTX negotiated a term sheet with an option to buy a struggling lender, BlockFi, which dealt with $1.8 Billion of outstanding loans. This happened a week after FTX loaned the company a $250 million credit facility, functioning as a last resort lender.
The day after that, FTX’s trading firm Alameda Research, provided Voyager with a $500 million credit, interestingly, while owing the broker $377 million themselves, yet even despite the credit loan, the venture still had to apply for a chapter 11, FTX thereby becoming a creditor.
Significant loans, asset freezes, liquidations, long lists of creditors, creative bookkeeping, and acquisitions, all, in a rather unregulated, non-banking system, made the financial and legal playing field incredibly complex, especially safeguarding digital asset investors.
To improve user protection and as a response to the ‘Crypto Wild West’, the EU developed landmark ‘Markets in Crypto Assets’, which is aimed to become the ‘first’ regulatory framework for crypto assets, which also contains measures to guard against market abuse and manipulation.
The MiCA got approved on 30 June and is now expected to enter into force in 2024, yet also outside the EU, countries are working on regulatory framework advancements, such as the US, the UK, Singapore, Colombia, Paraguay, South Africa, Marokko, Israel, Australia, and Thailand.
What do you think of the crypto crash, the role of credit, and investment risk? According to you, is there anything/anyone to ‘blame’, and should anyone be held ‘accountable’ for it? Are regulations/frameworks indeed needed, and are they going to work on a local and global scale?
What is your opinion? I would love to hear your thoughts below!
