Cryptocurrency crash: What contagious risks can a Celsius and three stocks pose? Here’s what to watch

The latest crisis began on Sunday with Celsius, one of the largest crypto-lending platforms, temporarily halting all withdrawals, swaps and transfers between accounts. The company has reportedly hired restructuring lawyers to advise on possible solutions to its mounting financial problems, according to a report in the Wall Street Journal on Tuesday.

Meanwhile, rumors spread about possible pressure at influential hedge fund Three Arrows Capital, following a mysterious situation. Tweets late Tuesday from its founder Zhu Su, who wrote, “We are in the process of communicating with interested parties and are fully committed to working on it.”

On Wednesday, The Block reported that Three Arrows “is in the process of figuring out how to repay lenders and other counterparties after being liquidated by the space’s top-tier lenders.”

As a major player and one of the most popular hedge funds in the crypto space, Three Arrows was estimated in March to manage around $10 billion in assets, according to Bloomberg, citing data from Nansen. The company also owns more than 6% of the Grayscale Bitcoin Trust GBTC,
-2.09%And the
The world’s largest bitcoin fund, as of December 2020, according to a regulatory filing.

is reading: As the cryptocurrency crash deepens, there are 4 signs that the worst is yet to come

Concern increased 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 Federal Reserve said it would raise its benchmark interest rate in Biggest price increase since 1994. Bitcoin BTCUSD,
+ 0.33%
It was recently traded at around $22.487, up 1.2% in the past 24 hours.

And all of this is happening a month after the Terra blockchain crash, which shook some investors’ confidence in the nascent crypto industry.

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

Sue and representatives at Celsius did not respond to requests for comment.

Other Lending Platforms Tested in risk management

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

These platforms allow investors to deposit their cryptocurrencies and earn extremely high returns. In degrees Celsius, consumers are supposed to get up to 18.6% APR, according to its website, while most “high-yield” US dollar savings accounts offer annual returns of close to 1% or less, according to Bankrate.

David Semmer, CEO of Wave Financial, said in an interview that crypto-lending platforms have been “in a battle to get the best deals possible for retail clients to include them quickly.” As companies race to offer higher returns to retail clients, “the only way to do that, unless you just shy away from venture capital money, is to continue to take riskier, riskier payouts,” Semmer said.

“A lot of people who have sprouted up in these types of lending institutions can now go and redeem,” Michael Safai, co-founder at Dexterity Capital, said in an interview.

Cryptocurrency lenders will be tested on their ability to manage risk, according to Bill Barhit, CEO of crypto financial services platform Abra, a rival to Celsius.

“Usually when you make withdrawals, it’s because of the term mismatch as a lender,” Barhit said, pointing to possible reasons for the Celsius situation. “Term mismatch between your average loan term and the time it takes to process a withdrawal for your clients. If the two don’t match, stop your withdrawals because you will end up in trouble.

After Celsius announced its account was frozen on Sunday, Zack Prince, CEO of rival crypto lender BlockFi, said, chirp To assure customers that “all BlockFi products and services continue to operate normally.”

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 interest, BlockFi’s Corporate Business Division Tweet Wednesday That “We can confirm that we maintain a rigorous, prudent and proactive approach to risk management across our business. This includes managing the risks that any individual client may pose.”

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

Another crypto lender, Nexo, chirp On Wednesday it said it “has a $0 exposure to Three Arrows Capital. Nexo has always distinguished itself from others as a very conservative lender with strict risk management and stringent over-collateral requirements, regardless of the borrowers’ reputation.”

‘Systematic exposure’ leads the market

If investors are to recoup money with crypto lenders, “lenders will have to return the loans to the people they lent money to,” said Safai of Al Mahara. “In the long run, that means less volume on the exchanges, because there will be less credit, and there will be fewer assets to trade. And that’s just bad news in general.”

Some retail exchanges that offer high-yield products could be particularly at risk, if they lent their money to companies like Three Arrows, according to Siemer.

Meanwhile, there may also be some crypto hedge funds “now getting tangled up with all of this because they are lending their assets to the percentage point or depositing assets there,” according to Simer.

“It’s a systematic exposure, and that’s what’s driving the market at the moment. It’s like no one knows who the counterparty is anymore. So everyone is taking back the assets,” Semmer said.

Bitcoin, ether sale

According to Safai, the panic also affected the price of Bitcoin and Ether. “We have already seen a huge influx of Bitcoin and Ether, because they are the most liquid. And when people are trying to escape their positions, they want to enter the most liquid market so that they can get the best prices.

Bitcoin and Ether ETHUSD,
-0.74%
On Wednesday, many small cap coins underperformed many other coins, such as XRP XRPUSD,
-0.06%And the
Solana Solosed,
+2.43%
and Polkadot DOTUSD,
-1.83%.

Institutional interests

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

David D. Tawil, president and co-founder of ProChain Capital, has a different opinion. He said the cryptocurrency crash could attract distressed investors from the traditional finance industry.

As for the institutional investor, Tawil said, “Cryptocurrency is going through this difficult time, assuming it’s an ongoing technical sell-off, I can go ahead and invest at a good price.”

Read also: Bitcoin Bull Michael Saylor Says Recent Deflation Presents ‘Definitely’ Buying Opportunity

Regulation looms

Some participants in the crypto industry expect stricter regulations.

Tawil said that lawmakers and regulators “have been really all about cryptocurrency in general.” “What should they do about C depositors? Should they feel comfortable by mistake as they deposit money in banks? Or what kind of disclosures should those companies have?” said Al-Taweel.

more: SEC Chairman Gensler says the cryptocurrency crash has ‘highlighted’ the need for regulation

According to Celsius’ website, it has 1.7 million customers. Although there is no other evidence to support this number, with the platform temporarily pausing customer withdrawals, this means “[Gary] “A Gensler’s Dream,” according to Simer. Semmer said the SEC chairman “has the perfect case study of the million retail investors being robbed by this black box, quasi-organization that’s not strictly regulated and operates as a bank.”

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