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Cryptocryophobia (the Fear of Crypto Winter)
Temperatures are beginning to drop below zero in the cryptoworld, with Bitcoin challenging an old assumption that each new cycle’s lowest point is always higher than the previous one’s all-time-high. Well, the previous ATH in 2017 was $19,600, and the Bitcoin permabulls find themselves sitting at a rather uncomfortable $20,400 on this frigid Saturday morning. The rest of the market has been chased down by polar bears, with a hypothermic $ETH at $1,086 (previous ATH was $1,164), $SOL catching frostbite at $30 (now down 89% from ATH), and $AXS in suspended animation at $13.
As we survey the frozen wreckage, a couple of names have started to dominate the crypto news cycle: Celsius, 3AC, and an entire industry of crypto lenders. What is Celsius Network? They’re a centralized wallet that accepts customers’ crypto deposits and promises a reliable APY of up to 9%. Sound familiar? Yes, it’s a bit like the now-infamous Anchor Protocol promise for $UST deposits, which was at the center of the whole Luna debacle last month. These high-APY promises are not unique to Celsius or Anchor, they’re similar across most of the crypto world right now. Look at BlockFi, Nexo, or the Earn tab on Binance. Nearly everyone has to make claims like that in order to be competitive, and during the bull market of 2021, hitting numbers like that was actually quite possible.
So what exactly happened with Celsius? One of their strategies was to hold their customers’ ETH and trade it for a relatively new contraption called stETH. Remember how Ethereum is supposed to upgrade to its second version in the coming months? Part of that upgrade was that people could lock up their ETH in anticipation of the new version and earn ETH rewards for doing so. Now, in order to participate, you have to have a minimum of 32 ETH, but most small fish don’t own that much. This is where stETH comes in. In late 2021, stETH was introduced as a new way to pool everyone’s ETH together. The idea was that you deposit your ETH and then get back a token called stETH. Your locked ETH could continue earning rewards while you have stETH that you can still trade like a normal token. On the face of it, this is pretty benign — it’s exactly like how Tether works, where you deposit 1 USD, and get back 1 $USDT in exchange. As long as you can trade 1 stETH for 1 ETH, everything is great.
Now, Celsius was sitting on over $450M in stETH at one point, and they borrowed stablecoin against it in order to generate more returns for their customers. But because the price of Ethereum has dropped so much recently, all sorts of bad things are starting to happen. The first is that Celsius’ collateral was no longer enough to cover the money they had borrowed. The second, more worrying thing, is that stETH and ETH are no longer at a 1:1 parity. As I write this, stETH is trading at 7% less than a real ETH, meaning that the market is having a hard time getting their real Ethereum tokens back. Meanwhile, Celsius itself has suspended all customer withdrawals while it races to stabilize its finances. Most recently, it was reported that they had hired attorneys to restructure their organization. They were holding over $11B in customer deposits at their peak. (Read the Decrypt coverage for more details.)
And that’s not even the end of the story. Recently, Three Arrows Capital (3AC) has become part of the news cycle also, and not in a good way. 3AC is a $10B crypto hedge fund that’s been around for nearly a decade, and pre-dates household crypto names like Ethereum and Solana. But what’s a hedge fund anyway? A hedge fund is an investment vehicle led by a small team of professional investors who use the deposits of high-net-worth individuals to make high-risk bets. If you look at 3AC’s list of investments, it includes some of the most well-known names in the cryptoworld: coins like Bitcoin and Terra, companies like BlockFi and Axie Infinity, and protocols like Aave and Balancer. 3AC is one of the biggest institutional borrowers in the space, and it’s looking like they can’t meet their debt obligations. Who do they owe money to? People like Celsius Network, BlockFi, Genesis, etc. If 3AC goes down, it’ll cause a chain reaction amongst all of the companies that it owes money to, because hardly anyone can spare the cash right now.
One unfortunate victim of 3AC’s tumble is a younger startup called Finblox, which was recently launched here in the Philippines. Like many of its competitors, Finblox was offering 10%+ APY on some of its crypto deposits, and I mentioned on Twitter a few weeks ago that I was “waiting for their product to mature further before I put funds in.” I may have dodged a bullet there, because they’ve recently begun restricting withdrawals on their app to just $1500 per month, blaming the situation with 3AC. In a private Twitter conversation, I explained that I like to wait for a product to be a “couple of years old so that I know it’s been thoroughly battle-hardened” before I put funds in, and sadly this is one of those cases that emphasize why that’s often a good idea. After all, what good is a 20% annual return if you risk losing 100% of your position?
All that being said, the cryptowinter is not just about losses and capitulation. A handful of companies, either through great leadership or great luck, are in strong positions: Binance and Kraken are hiring over 2,500 people, and Nexo has offered to buy the remaining assets of its rival Celsius. I’ve recently moved some of my personal funds to Nexo, as an attempt to spread around the risk. My funds are now distributed amongst 4 centralized providers — Crypto.com, BlockFi, Nexo, and Binance — as well as the decentralized liquidity pools in Sushi.com and in cold storage.
Although it’s a good idea to minimize risk during the winter, it’s important to remember that the crypto market is much bigger than just these billion-dollar failures. It is still possible to go overboard with our forecasts of a crypto-apocalypse. In some ways, the fear of cryptowinter can be more damaging than the actual winter itself. Let’s call it cryptocryophobia. Essentially, an excessive amount of de-risking and FUD will cause even stable projects and platforms to lose their customers. Nexo cofounder Antoni Trenchev recently compared the events of this month with the Panic of 1907, a historic stock market collapse that ironically led to the creation of the US Federal Reserve. TLDR; don’t stop building and learning, but keep your parka on.
See you next week, cryptofam!