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Crypto has a contagion problem, and it’s not over yet

on Jun 23, 2022
  • Cascading liquidations and insolvencies in the crypto markets show how intertwined and leveraged the sector is
  • Dan Ashmore warns that further bankruptcies may lie ahead
  • Celsius, Terra and Three Arrows the highest profile, but concern about BlockFi, Tether and more firms too

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The meltdown in the crypto markets continues to take victims, as this week has brought more news of firms staring down the barrel of insolvencies. The cascading distress highlights just how insular and tangled a web the whole cryptocurrency space currently is.

To illustrate this, a simple look at Three Arrows Capital (3AC) is all that is required.

Three Arrows Capital

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Three Arrows Capital is a hedge fund that was established in 2012, and could alternatively be described as a crypto venture capital fund. Founded by the high-profile Su Zhu, it swiftly became one of the biggest firms in crypto.

One of its investments was in Luna, the algorithmic stablecoin ecosystem which imploded last month, sending a $40 billion + project into the ether (pun sort of intended). It’s hard to exactly quantify how much 3AC were exposed to, but jumping on-chain more-or-less confirms at least $200 million of exposure from known wallets, while the figure is suspected to be high as $450 million according to some analysts.

With rumours swirling and the markets continuing to tank, selling pressure mounted and respite was nowhere to be seen. After disappearing from social media for three days, CIO Zu Shu finally broke his silence.

Su had been vocal in the past that we are now in a “supercycle” – in other words, the historically cyclical nature of cryptocurrency is a thing of the past and large corrections or bear markets will no longer occur. He even put the Luna symbol (moon emoji) in his Twitter bio and, much like Luna founder Do Kwon, berated anyone who doubted the viability of the Terra model.

What went wrong

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3AC are yet another firm that seemed to rely on leverage. In a lot of ways, it reads as a more modern, digital version of the infamous bailout of the LCTM hedge fund in 1998. As the bull market rocketed upwards, leverage was liberally instilled and 3AC were printing returns for fun. Now that the music has stopped and the lights are on, we are seeing what these firms are really made of.

The issue we are witnessing with crypto, and what makes the prevailing sentiment one of extreme fear right now, is how intertwined a lot of these firms are. Monday saw crypto broker Voyager Digital, listed on the Toronto stock exchange, announced that they had lent 15,250 bitcoins and $350 million USDC to 3AC, amounting to $666 million based on bitcoin’s current price.

Voyager has asked for the entire loan to be repaid by June 27th, but with 3AC likely insolvent, that appears ambitious. Although the scale of the damage here is still severe and Voyager has since put a $10,000 limit on customer withdrawals. Its share price is down 95% this year.

Contagion continued

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The dominoes continue. Alameda Research, who had previously invested $75 million in Voyager, extended Voyager a $250 million loan to meet “customer liquidity needs”, in the hope of reviving the floundering firm and saving their own investment.

Alameda was started by Sam Bankman-Fried, who is also the CEO of one of the world’s leading exchanges, FTX. FTX themselves extended a $250 million loan to BlockFi on Monday, who are in the same line of business as Celsius, in order to help shore up liquidity at the firm.

BlockFi’s financials were leaked on Twitter, where it was revealed that they somehow suffered a loss during the explosive bull run. Now that we are in a dangerous bear market with contagion swirling, customers are meant to trust them with funds?

Then there is Tether, the controversial stablecoin which has established itself as the biggest liquidity pair for most cryptocurrencies, driving most volume across all exchanges. I wrote last week in my deep dive into the Celsius crisis how Tether had invested in a seeding round for Celsius in June 2020 (as the lead investor) and also extended a $1 billion loan to the company.

The firm was even forced to come out and clarify that “while Tether’s investment portfolio does include an investment in (Celsius), representing a minimal part of our shareholders’ equity, there is no correlation between this investment and our own reserves or stability”.

But in truth, there is no way to verify their claim, and that is part of the problem here. It is challenging to quantify exactly how far the contagion rumbles. Who has exposure to who? Whose liquidity is locked up where? None of these balance sheets are public (with the exception of Voyager Digital), and investors are forced to simply take quotes like the above one from Tether at face value.


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The above are just some of the most high-profile incidents that have come out over the last week. The very fact I am sitting here and writing this at all symbolises how big an issue this is. There should not be speculation and guesswork as to who is exposed to who. But nobody knows what is really going on at all these crypto hedge funds and lending platforms, as there is no regulation and disclosure is minimal.  

I said when Terra went under that contagion would swirl and insolvencies were imminent. We have now seen both Celsius and 3AC fall to the brink. Expect more firms to follow. If you haven’t already, it’s time to be very prudent about your risk, and ascertain exactly who you are exposed to. This isn’t over yet.


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