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Sunday, October 2, 2022

Cryptocurrency Bad News Week As Told By Babel, Celsius And Three Arrow Capital

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This week, the average investor revealed just how interconnected cryptocurrency companies are. Two companies have frozen withdrawals and a cryptocurrency hedge fund is in trouble. Celsius Network, Babel Finance and Three Arrows Capital are floundering, and it is not yet clear how extensive the damage could be.

This week kicked off with a Sunday night announcement from the Celsius Network, a giant crypto lending company, that it would pause withdrawals and transfers. After that, the value of Bitcoin and other cryptocurrencies, for weeks in a slide that some have called a “crypto winter,” plunged even further, and five days later the news hasn’t improved much.

All three companies were managing other people’s money. Celsius Network has courted small investors. Babylon Finance, which CNBC says has 500 customers, raised $80 million in a round of funding a month ago. Investing in crypto startups, 3AC managed $10 billion in assets in March, according to Fortune† The ripple effects of the companies’ woes are likely to impact the broader cryptocurrency ecosystem.

The first is Celsius, which has released a single statement in the week since the freeze: an FAQ that doesn’t tell investors when or if they will access their funds. CEO Alex Mashinsky tweeted that the team is working “non-stop” and thanked unnamed people for their patience and support, without commenting on reports that the company has hired restructuring lawyers.

The company had $12 billion in assets under management as of May. Mashinsky conceived Celsius as a hybrid, decentralized/centralized financing approach that could be equivalent to securities lending. But Celsius lost millions as a result of a flaw that forfeited refund payments after the BadgerDAO hack and another 35,000 ETH last summer when the Ethereum staking service Stakehound apparently lost private keys, rendering its tokens worthless, according to a report in CoinDesk† It did not notify customers of the loss. CoinDesk compared Celsius’s collapse to that of Lehman Brothers in 2008, which shocked financial markets.

Research by blockchain analytics firm Nansen showed a shift in strategy that relied on DeFi protocols to achieve higher returns, CoinDesk noted. While Mashinsky claimed Celsius had no exposure to USterra’s collapse, the report points to other data linking it to Staked ether (stETH), which could cause problems if it has to sell that stake to pay investors.

Meanwhile, in Hong Kong, another cryptocurrency lender called Babel Finance has announced its own freeze on withdrawals and redemptions, claiming it is “under unusual liquidity pressures”. It was still on May 25th a financing round closed value of the company at $2 billion. A report from decode collects claims that Babel misused customer money. Genesis Capital, Bitgo, Blockchain.com, and Bitcoin.com are among the better-known clients.

Finally, cryptocurrency hedge fund Three Arrows Capital (3AC) confirmed that The Wall Street Journal that it has suffered heavy losses. (3AC invested about $200 million in the failed Luna protocol – an investment that was subsequently zeroed out Luna and its stablecoin Terra have crashed last month.) The founders of 3AC say it is now partnering with legal and financial advisors. The company can sell its assets, although it is open to rescue by another company.

3AC “ghosted everyone” in response to margin calls, said Danny Yuan, the head of commerce at 8Blocks Capital, on Twitter. That forced other companies to sell assets and sent crypto prices even lower.

3AC closed its positions with the Bitfinex exchange, but FTX, Deribit and BitMEX liquidated their positions after the company failed to meet margin calls, according to a report by The block† FinBlox, a crypto company, has limited admissions up to $1,500 a month while investigating 3AC’s damage; Finblox invested $3.6 million in 3AC in December, CoinDesk reports.

As 3AC shows, a big loss on one big investment can create huge ripple effects, and it can take a while to see what they are. Luna collapsed a month ago and the extent of the damage to 3AC only became apparent this week. Given the connections between 3AC, Celsius Network, Babel Finance and the rest of the market, it seems that cryptocurrency is not done with bleeding.


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