I’ve been recovering from COVID over the last two weeks and have had some time to reflect on the market and how long we’re going to be in this chilly hibernation. But I guess “hibernation” isn’t even a fair way to describe the current market state, since the industry continues to endure violent upheavals with every passing week. At the top of the list is Voyager Digital, a publicly-listed crypto brokerage that filed for bankruptcy on July 6th. Voyager unfortunately had a mammoth $660M exposure to Three Arrows Capital (3AC), which is itself going through bankruptcy proceedings this month. 3AC was a prominent supporter of Luna, Axie Infinity, and BlockFi, all of which have been through the wringer these past few months.
And then of course there’s Celsius Network, the crypto bank that was reportedly deploying about 10% of its customers’ deposits in high-risk investments that included NFT flipping and DEX liquidity pools. I should mention that there’s not really anything wrong with trading NFTs or parking your funds in the liquidity pools of various decentralized exchanges; that’s a completely valid way to grow your crypto positions. But Celsius’ mistake was that they were engaging in these activities without the appropriate disclosures to their clients, and without the appropriate hedging mechanisms. There’s a particularly damning Twitter thread here authored by one of the individuals responsible for managing these high-risk investments for Celsius. He claims that Celsius was unprepared to handle the impermanent loss phenomenon that is typical of DEX liquidity pools … which is quite literally the first thing you need to be prepared for when engaging in this kind of investment.
So given all these bankruptcies and tales of customer losses, you are probably wondering “where exactly is the recovery?” Well, the way I look at it is this. Your body has to expel or exterminate unhealthy cells in order to get better from an illness, and the industry needs to purge bad companies in order to become strong again. These high-profile implosions are better for the community in the long run. At the very least, it teaches everyone — both founders and customers alike — an important lesson about risk management.
On the flip side, we have a handful of companies that are actively propping up the market. FTX last week announced a $600M deal with the struggling crypto bank BlockFi. The deal was composed of a $400M credit line plus an option to acquire the company outright for $240M. The price tag represents a 90% drawdown from BlockFi’s 2021 valuation of $3.5B, but probably also represents the company’s best chance at survival … not to mention it’ll protect the customer deposits that it still has under management.
Meanwhile, prominent BlockFi competitor Nexo.io has been keeping itself visible by announcing plans to acquire Vauld, another crypto lender that has recently struggled with the temperature drop. You’ll remember that Nexo also attempted to ride the Celsius media cycle by making a formal offer to buy the struggling company’s remaining assets. The Nexo PR team should really be taking notes from Justin Sun though; the Tron founder recently stated that he’s willing to drop up to $5B to “help ailing crypto firms.” For better or for worse, Sun understands the rules of the crypto hype game better than anyone: if you’re going to flex, you need to be willing to slap a number on it.
Speaking of numbers, my portfolio is noticeably green for the first time in months this Saturday morning. Granted, we are all still living in the basement, but Bitcoin is at least over $21,000 and Ethereum is over $1,200. The markets have regained some lost ground over the last week, as the shockwaves from the Luna collapse appear to finally be subsiding. We don’t have nearly enough momentum to stage a real recovery, but for now, it looks like we’re stabilizing at our new floor.
See you all next Saturday, cryptofam, and try to get some rest this weekend :)
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