Crypto Weekly: Swimming naked in an ocean of speculation Crypto Weekly: Swimming naked in an ocean of speculation Crypto Weekly: Swimming naked in an ocean of speculation

Crypto Weekly: Swimming naked in an ocean of speculation

Summary:  Warren Buffett once said: “Only when the tide goes out do you discover who's been swimming naked.” It now seems that many are swimming naked in the crypto market following the tide, as a large lender has halted withdrawals, citing liquidity concerns, while a substantial crypto hedge fund is likely underwater, due to leveraged longs.


The crypto market tumbles

Fear of contagion has spread throughout the crypto market the past week upon concerns that several crypto lenders and a hedge fund are insolvent. The fear culminated this weekend, as Bitcoin tumbled to as low as 17,500 (BTCUSD) and Ethereum to 880 (ETHUSD). These levels were last touched in December 2020. At present, Bitcoin trades at 20,400 and Ethereum at 1,120.

Centralized crypto-lender Celsius halts withdrawals

The centralized crypto-lender Celsius halted withdrawals 8 days ago, citing liquidity concerns due to clients withdrawing funds amid concerns over insolvency. Celsius has been popular among retail investors since launching 4 years ago for paying lucrative interest rates on crypto of often over 10% yearly. At one point, Celsius had over $10bn in assets under management. The interest rate is earned by allegedly lending the crypto to institutional investors and through decentralized finance protocols. However, to offer such interest rates in a low-interest rate environment, Celsius has to take on severe risk. For instance, Celsius is publicly known to have lost well over $100mn in exploits of decentralized protocols in the past year. Not to mention that Celsius can also have lost a great amount in loans issued to its institutional clients without the public’s knowledge.

Observed due to on-chain analysis, Celsius still owns a substantial amount of crypto, but whether these holdings are sufficient to at least cover its liabilities is not certain yet. If Celsius is insolvent, it will be a harsh hit to the industry, particularly in terms of the trust of retail investors in the industry alongside a potential contagion across the industry. BlockFi, a similar company, is rumored to soon halt withdrawals as well. Speaking of BlockFi, the company is reportedly desperately trying to raise money to a valuation shy of $1bn after raising money to a valuation of $5bn last year, emphasizing the troublesome conditions of crypto. The cases of Celsius and potentially BlockFi stress the urgency for a proper regulatory framework to mitigate the risk of not fully transparent services that operate in the shadows between traditional finance and crypto.

Crypto hedge fund Three Arrows Capital is likely underwater

The large crypto hedge fund Three Arrows Capital is seemingly underwater, due to hefty losses on leveraged long positions. As late as April, Three Arrows Capital had over $3bn in assets under management and has for years been one of the most influential trading firms. The company has seemingly bet heavily on what one of the founders Zhu Su has called a crypto supercycle, in which prices would continue to surge. In late May, Zhu Su went to Twitter to write: “Supercycle price thesis was regrettably wrong, but crypto will still thrive and change the world every day.” It seems that the company has been so confident in this thesis that they have leveraged their long positions for instance by borrowing through BlockFi. The latter reportedly liquidated Three Arrows Capital as they failed to deposit more collateral. It seems reasonable to consider that Three Arrows Capital is insolvent. According to the founders, they are looking at different options to save the firm.

Alongside the cases of Celsius and BlockFi, this highlights the speculative nature of the crypto market. When one of the largest crypto hedge funds can be underwater due to leverage, participants in the market must be aware of the total leverage in the market and how it is affected during times when this credit suddenly vanishes upon a potential contagion. The latter has the power to take many crypto lenders to their knees, effectively fueling the contagion further.

Bitcoin/USD - Source: Saxo Group
Ethereum/USD - Source: Saxo Group

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992