The activities of two large crypto lenders were under threat: the Celsius platform faced a lack of liquidity, and the Three Arrows Capital (3AC) cryptocurrency fund lost the ability to fulfill its obligations to clients.
Celsius Network suspended all withdrawals, swaps and transfers between accounts in mid-June. The company cited “extreme market conditions” as the reason for the termination of transactions.
Singapore-based crypto fund Three Arrows Capital suffered losses during the collapse of the Terra ecosystem and received a default notice from Voyager Digital LLC at the end of June for failing to make required loan payments. On June 29, the court of the Virgin Islands issued a decision allowing the liquidation of the fund’s assets to begin.
Potential bankruptcies of major crypto lenders could have a significant impact on the digital asset industry.
RBC experts predictedhow the situation in the cryptocurrency market can develop, and who is at risk of suffering in the first place.
The Three Arrows Capital Fund has raised funds from all major lenders, including BlockFi, Genesis, Nexo, Celsius and others, a representative of the exmo.me crypto exchange said. According to the specialist, the total assets of the fund amounted to $18 billion, of which only $9 billion was liquid.
The expert pointed out that the main investments of the fund were in bitcoin, which today fell by more than 70%, as well as projects such as Avalanche, Polkadot and Ether, which fell by 60%, 40% and 47% over the past month, respectively. This shows that the value of the fund’s assets today is no more than $2.5 billion, the exmo.me representative specified.
“The fund’s lenders manage amounts of $10-20 billion, of which only 5% is their own capital. This means that the write-off of loans issued by the fund will seriously undermine their financial stability. And then there will be a domino effect: lenders will repay loans issued to other market participants ahead of schedule, and this is $30-40 billion, ”the expert suggested.
According to the interlocutor, such a volume of returns will provoke sales – both in the cryptocurrency market and in the stock market, because borrowers will have to sell assets to return the funds. Such large buyers are unlikely to be found on the market, which means we will see a new round of falling down, both for bitcoin and all the altcoins that they have in their portfolio, the specialist believes.
no one to help
In the late 1990s, the hedge fund Long-Term Capital Management collapsed after the Asian crisis hit. The head of the investment department of ICB Fund Aaron Chomsky compared this situation with the current state of affairs in the cryptocurrency market. The expert explained that the same thing is happening then and now: funding becomes more expensive due to a change in the direction of the policy of the Central Banks.
As a result, liquidity leaves the market and it becomes much more difficult for funds to manage their positions, not to mention margin calls, the expert says. He clarified that at that time the collapse of LTCM forced the Fed to intervene and begin to sharply stimulate the market, which eventually led to the dot-com bubble.
The problem of the cryptocurrency market, according to the expert, is that it does not have its own Fed, as well as safe-haven assets. Therefore, the community has to cope on its own, and investors seek salvation outside of digital assets, for example, in the US dollar.
Chomsky said that industry representatives save some players if they are of business interest, but this is clearly not enough. The expert cited as an example that now there is a struggle for BockFi, the controlling stake of which was first wanted to be bought out in FTX for $250 million, and then a similar offer was made in Morgan Creek.
“It turns out that now the project is estimated at about $500 million, while before the correction this figure reached $5 billion. This is clearly the beginning of trouble. We do not yet see the full depth of problems among the players in the market, and with a new drop in quotes, they should come out, ”the expert added.
According to the specialist, the current situation is unlikely to attract the attention of regulators, since such events are common for the market, and troubled companies are not of the size to be worried about.
The expert said that by the current moment, 80 thousand bitcoin millionaires have already lost their status: their number has decreased by 75% since November. Judging by the current dynamics, bitcoin can easily fall below $10,000, which is another minus 50% of capitalization and new problems for all marginalists, Chomsky concluded.
Time to “tighten the screws”
If creditors start to go bankrupt, then this clearly does not bode well for investors, confirms Mikhail Bystrov, partner, head of the FinTech & Crypto practice at DRC law firm.
He clarified that a lot depends on the jurisdiction in which the project was registered and whether there is regulation of operations with cryptocurrencies. Investors may or may not have access to certain options for collecting funds from projects such as Celsius.
According to the lawyer, it is not known what obligations and with whom these companies are connected – however, it is known that Goldman Sachs planned to buy Celsius assets for $ 2 billion. The situation with Celsius affects the market and may negatively affect other crypto companies, as it undermines investor confidence in operators such projects, Bystrov is sure.
“Moreover, each such scandal is a red flag for regulators, and I do not rule out the possibility that regulators will start to tighten the screws on Celsius and similar projects. For example, to introduce compulsory liability insurance and other measures to protect the rights and interests of investors,” the expert added.
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