There is now blood on the crypto streets. Terra/Luna and Celsius both suspended withdrawals and effectively collapsed (the crypto equivalent of if a bank told its customers they can’t withdraw their money), while Binance suspended Bitcoin withdrawals for several hours.
Q2 2022 hedge fund letters, conferences and more
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Another Crypto Winter
Coinbase warned of recession on Tuesday, announcing 18% of its workforce would lose their jobs. “We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period,” Coinbase CEO Brian Armstrong said. Other firms have hinted at layoffs, as well, including the Winklevoss twins’ Gemini, the Peter Thiel-backed BlockFi, and Crypto.com.
The Terra/Luna and Celsius collapses represent potentially structural crypto issues. In May, the TerraUSD (UST) stablecoin collapsed. Its sister token, Luna, then suffered the same fate, sending the cryptocurrency market in turmoil. More than $17 billion in crypto value was swiftly wiped out.
Celsius was one of the biggest lenders in crypto. On Sunday night, it paused withdrawals, swaps, and transfers on products, which included offerings of yield as high as 17%. The platform held billions of dollars in cryptocurrencies under management. Its action accelerated a selloff in the broader crypto markets. If further crypto brokers have the same issues, we could see a further collapse of the crypto markets. Terra/Luna and Celsius weren’t the only collapses in crypto markets—they were just the most reported. The Anchor protocol froze its earn and borrow functionality after it too fell victim to an $800,000 exploit.
As the week came to a close, reports that crypto hedge fund Three Arrows Capital was insolvent. Having suffered heavy losses in the recent market meltdown, 3AC confirmed it had hired legal and financial advisors to figure out an “equitable solution” for all of the firm’s “constituents.”
Untold numbers of people deposited money into Anchor, Celsius, Terra, LUNA, UST, and 3AC. In many cases they were seeking unrealistically high APYs on stablecoins, but without understanding the risks of giving up their keys and losing all of their funds. Many protocols seem to be based on ponzi like structures to achieve unrealistically high APY and lure in naive investors. Such schemes work so long as people continue to invest, but once the market capitulates, the scheme disintegrates and people lose everything.
People had thought they could earn risk free money. In most cases, they did not understand where the interest originated, and who paid it. If a bank offers you negative interest rates on your EUR, but Anchor offers you 20% per year, you must stop and examine the risk factors. You’ll then learn about Proof of Keys, and how important it is to hold your own funds.
Ethereum dropped about 75% from its November peak, leading the price collapse in the crypto index. It has already fallen through its 2017 high. Ether has already experienced an 80% price collapse from its high. But, don’t expect Ethereum to ever return to its old highs without Federal Reserve intervention. Macroeconomic conditions are swiftly changing from the previous cycle.
Liquidations and Leverages
Now that we’ve broken the previous all-time Ethereum price peak, liquidations have been triggered in leveraged markets. “Only when the tide goes out do you discover who’s been swimming naked,” as Warren Buffet would say. There is a lot of pain when leverage unwinds.
The events at Terra, Celsius, etc. have almost certainly alerted most participants in the crypto markets that a bonafide crypto winter has been underway. Individuals and entities will continue to pull money out of these markets as they continue to unwind.
Bear markets expose weak hands. There has been a tremendous amount of capitulation and fear in the crypto markets this week. Yet, the markets could still move lower, especially considering the challenging macro-environment. Although ether’s price cycle reflects 2018, participation by the retail public is much lower as most demand now has been driven by institutional investors.
After $1 billion in crypto value was liquidated on Monday alone, the market settled ahead of the FOMC meeting. All-in-all, the crypto market has lost more than two-thirds of its value since a November peak. With such a bloodbath in the markets, and people feeling so disillusioned, one might presume the bear market is further along than most think. However, there is still a long way to go out. Only time will tell what surprises the crypto market holds for us next.
__About the Author*
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Felix Mohr is the CTO and co-founder of Crypto Fight Club. Aside from spearheading all blockchain and game developments for Crypto Fight Club, Felix (aka MakerOfGloves) has been in crypto since 2016 as a certified fintech professional from the University of Hong Kong as well as the co-founder of MohrWolfe. His focus now is to bridge adoption and security to the play-to-earn space on GameFi through building NFT games and decentralized blockchain product lines.
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