Crypto crash: What contagious risks could Celsius, Three Arrows pose? Here’s what to watch


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

Meanwhile, rumors swirled about potential stress at influential hedge fund Three Arrows Capital, following a wave of Tweeter Tuesday evening from its founder Zhu Su, who wrote that “we are in the process of communicating with the parties concerned and fully committed to resolving this issue”.

On Wednesday, the Block reported that Three Arrows is “determining how to repay lenders and other counterparties following its liquidation by the space’s major lenders.”

As a major player and one of the most prominent crypto hedge funds, Three Arrows was estimated in March to manage around $10 billion in assets, according to Bloomberg, citing data from Nansen. The company also held over 6% of the Grayscale Bitcoin Trust GBTC,
the largest bitcoin fund in the world, in December 2020, according to a regulatory filing.

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

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

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

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

Other Lending Platforms tested on risk management

Investors are closely watching the situation of Celsius’s peers, such as crypto lending platforms BlockFi and Nexo.

These platforms allow investors to deposit their cryptocurrencies and earn extremely high returns. On Celsius, consumers could supposedly get up to 18.6% APR, according to its website, while most US dollar “high yield” savings accounts offer annual percentage returns closer to 1% or less, according to Bankrate.

Crypto lending platforms have been “in a battle to get the best deals possible for retail customers to get on board quickly,” David Siemer, chief executive of Wave Financial, said in an interview. As companies raced to deliver higher returns to retail customers, “the only way to do that, unless you just walked away from venture capital money, was to continually take bets of increasingly risky,” Siemer said.

“A lot of people who have deployed to these types of institutional lenders could now go in and buy out,” Michael Safai, founding partner of Dexterity Capital, said in an interview.

According to Bill Barhydt, managing director of crypto financial services platform Abra, a competitor of Celsius, crypto credit companies will be tested on their ability to manage risk.

“Usually when you hold withdrawals it’s because there’s a tenure mismatch as a lender,” Barhydt said, referring to potential causes of Celsius’ situation. “A time mismatch between your average loan term and the time it takes to process a withdrawal for your customers. And if the two don’t match, you have to stop withdrawals because you’re going to end up with a problem,” he said.

After Celsius announced its account freeze on Sunday, Zac Prince, chief executive of rival crypto lender BlockFi, tweeted to reassure customers that “all @BlockFi products and services continue to operate as normal.”

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

In response to market attention, BlockFi’s Institutional Affairs Department tweeted Wednesday that “We can confirm that we maintain a disciplined, prudent and proactive approach to risk management across our business. This includes managing risks that may be posed by any individual client.

“Our customer experience is unchanged and customer funds are protected,” he added.

Another crypto lender, Nexo, tweeted Wednesday that it “has $0 exposure to Three Arrows Capital. Nexo has always differentiated itself from others as a very conservative lender with rigorous risk management and strict overcollateralization requirements, regardless of reputation. borrowers.

“Systemic exposure” boosts the market

If investors return funds to crypto lenders, “then the lenders will have to remind the people they lent the funds to of the loans,” Dexterity’s Safai said. “Longer term, that means less volume on exchanges, because there will be less credit, there will be fewer assets to trade. And that’s usually bad news.

According to Siemer, some retail exchanges that offer high-yield products could be particularly at risk if they have loaned their funds to companies such as Three Arrows.

Meanwhile, there could also be crypto hedge funds “that are now tied into all of this because they are lending their assets to Celsius or depositing assets there,” according to Siemer.

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

Bitcoin, ether sales

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

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

Institutional interests

According to Wave Financial’s Siemer, the collapse of Terra and recent speculation around Celsius and Three Arrows could hurt institutional investors’ confidence in the crypto space. “I really think it pushes everything back at least a year,” he said.

David D. Tawil, president and co-founder of ProChain Capital, has a different opinion. The crypto crash could attract distressed investors from the traditional financial sector, he said.

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

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Imminent regulation

Some players in the crypto industry expect stricter regulations.

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

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According to the Celsius website, it has 1.7 million customers. Although there is no other evidence to support such a number, the platform suspending withdrawals for customers is “[Gary] Gensler’s dream, according to Siemer. Now the chairman of the United States Securities and Exchange Commission “has this perfect case study of a million retail investors being ripped off by this black box quasi-institution that was not tightly regulated and acted like a bank,” Siemer said.


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