Maker Minds #8 — The collapse of Celsius — The insolvency of Three Arrows Capital
Hello! 👋
In November 2021, everyone was ecstatic. Hundreds of crypto influencers were predicting a 4th quarter that would see BTC hit $100,000 and ETH hit $10,000. Individuals and institutional investors alike bought into this narrative. It seems all too obvious in hindsight that 20% "risk-free" interest rates, $1 million JPEGs, and X10s are just a manifestation of the greater fool theory.
The markets are just as irrational on the upside as they are on the downside. While analysts continued to adjust their price targets upward in 2021, they are now continually adjusting them downward. It's the same irrationality repeating itself, just in reverse.
One of the main catalysts for the liquidation chaos of the past week seems to have been the massive sales of Celsius. This is an investment product that allows users to deposit funds in exchange for market returns. Celsius was able to offer annual returns of 20%. How? By deploying users' tokens across a myriad of DeFi protocols. Celsius rewarded depositors with the profits it earned from these protocols and reserved a margin for itself.
Celsius was a crypto unicorn. Recall that it raised $400 million in October from investors who believed it had the potential to revolutionize finance by expanding retail access to DeFi.
Now the company is being criticized for the behavior of its fund managers, who have conducted themselves like pure degens. Celsius was never fully transparent about how it deployed its users' funds behind the scenes.
A wave of selling orchestrated by Celsius last week suggests that, as a result of some risky investments, the company is now on the verge of insolvency. Celsius has paused transfers and withdrawals, and recruited debt restructuring specialists to try to get its head above water. Read more in this week's briefing!
💰 Crypto
🔘 72 of the top 100 cryptos by market capitalization are down more than 90% from their all-time highs.
🔘 Circle announced a new digital asset called Euro Coin ($EUROC), a stablecoin backed entirely by euro-denominated reserves. The new stablecoin will launch on the Ethereum blockchain on June 30. Other networks will be supported later in the year. $EUROC will be available on Binance.US, Bitstamp, FTX, and Huobi Global.
🔘 Michael Saylor, MicroStrategy's CEO, bought 129,218 BTC at an average price of $30k. Today, that investment is in unrealized losses of $1 billion. MS also recently took out a loan of over $200 million (to buy more bitcoins). This loan was subject to a margin call if BTC reaches $21k, something that happened on Saturday, June 18. This isn't too worrisome as MicroStrategy still has billions on hand to put up as collateral. However, a much larger liquidation would occur if BTC hit $3.5k.
🔘 Investors pulled $2 billion out of $USDT, the largest stablecoin by market capitalization, this week amid growing nervousness due to falling prices.
🔘 Three Arrows Capital is facing possible insolvency after incurring at least $400 million in liquidations. The fund is currently in the process of paying off lenders and other counterparties. 3AC is closing its existing crypto positions to reduce collateral requirements for other positions. 3AC had invested in $ETH, $SOL, and $LUNA, which have fallen 80%, 90%, and 99%, respectively, from their all-time highs.
🔘 Three Arrows Capital's failure is monumental because 3AC borrows from all major lenders. Its collapse would therefore transfer the economic risk to them. Lenders are not prepared for this and defaults will result in significant erosion of equity.
🔘 In November 2020, 8 Blocks Capital (8BC) entered into an agreement with Three Arrows Capital (3AC) in which 8BC paid 3AC a fee to use its trading accounts. 3AC was never to move 8BC's funds without authorization. However, 8BC recently discovered that approximately $1 million was missing from its accounts. 3AC had used these funds to meet its margin calls. This demonstrates the magnitude of the liquidity crisis that 3AC is experiencing at this time.
🔘 Celsius have added collateral to reduce their risk of liquidation. They will now be in trouble if bitcoin hits $14,000. On the one hand, this means they have margin. On the other hand, the market now knows exactly what price target Celsius is forced to sell at, and that's rarely a good thing...
🔘 Lending platform Nexo has announced its interest in purchasing Celsius' secured loan portfolio. Nexo is also interested in acquiring Celsius' brand and customer database.
🔘 Coinbase is laying off 18% of its staff and they are not the only ones. Gemini, BlockFi, and Crypto.com have all announced job cuts to their teams recently.
🔘 Ethereum developers have decided to delay the difficulty bomb until August. The difficulty bomb was designed to force validators to accept Ethereum's Merge, which will migrate the network from a proof-of-work consensus to proof-of-stake. It has already been delayed 5 times. Several bugs appeared after the Merge on the Ropsten test network.
🔘 Helium is a wireless sensor network powered by token-rewarded node operators. Helium is launching 2 new crypto tokens tied to specific networks. The existing $HNT token will now serve as a reserve currency for the expansion of the Helium ecosystem. A new $MOBILE token will reward people who operate a 5G node and contribute to Helium's network coverage. An $IOT token will reward node operators for contributing to the network designed for Internet of Things devices. Both tokens can be redeemed for $HNT tokens, but HNT tokens cannot be redeemed for $MOBILE or $IOT tokens. The MOBILE token will launch this month and the $IOT token is expected to launch in August.
🔘 Goldman Sachs is now offering a type of ETH-related derivative.
🔘 MetaMask users can now use their wallets to interact with Near blockchain applications. The integration is unofficial as it was developed by the Near team itself and not by MetaMask.
🔘 Spanish airline Vueling is partnering with BitPay to accept cryptocurrencies as a new payment method.
👩🏻🎤 NFTs & Metaverse
🔘 Ethereum's NFT markets facilitated a trading volume of $600k ETH over the past month. This amount, while significant, is down 60% from the 1.7 million ETH traded in the previous 30-day period. In other words, there has been a significant drop in NFT trading activity over the past few weeks.
🔘 OpenSea is changing its backend to the Seaport protocol it developed itself. This change could reduce transaction costs on the platform by about 35% and save users $460 million next year. Among other things, the new protocol allows users to bid on entire collections.
🔘 TAG Heuer is allowing its NFTs to be displayed on its luxury watches.
🔘 Lacoste lands in the web3 world with its first NFT project named UNDW3. Few details have been revealed for the moment, but the brand promises an immersive experience in collaborative fashion.
🔥 What’s Poppin’?
🤡 Meme of the day
Click here to connect on Linkedin.
See you next week!