18th June 2022 > > Institutional problems.

tl;dr

Declining prices are causing severe problems for over-leveraged players in the crypto space..

Market Snap (at time of writing)

Market Wrap

No sign of any let-up in the stress being caused by the rush of Central Banks to remove quantitative easing and raise interest rates, an entirely predictable outcome that was often predicted here in the CCC Market Wrap.

Of course, timing is everything in the financial world. Knowing that something is going to happen is not nearly as useful as knowing when it will happen, and no-one can lay claim to that prior knowledge.

The bright spot right now is that BTC continues to hold a 2-handle, though that may soon come under pressure. Read the commentary below for more details.

Curious Cryptos’ Commentary – Institutional Problems

Three Arrows Capital (3AC), a Singapore-based hedge fund, has always been very bullish and aggressive in its trading of cryptos. All hedge funds use leverage, to an extent sometimes that liquidation and insolvency is threatened if markets turn against them. The high-profile failure of Long-Term Capital Management (LTCM) in September 1998 posed a systemic risk to the entire financial system.

Some of 3AC’s trading partners have begun liquidating positions held by 3AC following the recent price action of BTC, including BlockFi, Deribit, FTX, and BitMex. This tweet by BlockFi is believed to refer explicitly to 3AC:

3AC were big holders of the Grayscale Bitcoin Trust which yesterday traded at a 30% discount to the market price of BTC, the largest discount to date, further exacerbating the pain being taken by 3AC.

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Celsius, a centralised crypto lender that offers up to 17% APY on crypto deposits, has suspended withdrawals, a tactic most often used by hedge funds when they find themselves in trouble.

Celsius claims on its website to have more than 150,000 BTC equivalent of assets, which if true is worth $3bn or more. Rapid liquidation of those funds to make margin calls on borrowed assets could only have a negative effect on the broader crypto market.

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Babel Finance is a Hong-Kong based crypto lender which has also suspended withdrawals. According to a company statement:

"Babel Finance is facing unusual liquidity pressures."

Once again, over-leverage in a high volatility asset is causing problems and pain.

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The negative feedback loop of declining prices making forced sellers out of holders of any financial assets can be rapid. All financial crises are borne from this type of situation, with the same problems replicated across all classes of risk assets.

We must all hope that these three examples of trouble specifically in cryptos remain isolated and are not an early warning of much larger problems that are about to engulf the financial world.