- «Downward spiral»
- «Regulation is coming»
- The dollar index
- «The wrecking ball»
- How Celsius Network is scrambling to get out of the mess
According to an analyst, the decline of integral crypto players has caused a “downward spiral”, leading to the decline of other crypto investors and companies. The sector has suffered a slew of disruptive events recently, including the bankruptcies of some major players.
“The crypto market is undergoing a profound de-leveraging process right now,” said Winston Ma, managing partner of CloudTree Ventures, and author of “The Hunt for Unicorns, China’s Mobile Economy and Investing in China.”
Ma cited the case of Three Arrows Capital (3AC), a hedge fund that manages about $10 billion in cryptocurrency assets, which recently filed for bankruptcy in March as a telling example.
“3AC had creditors from across the sector, it used all of that leverage to make extremely risky bets on other crypto projects, and crucially, many of 3AC’s lenders were themselves lending out cash invested in their platforms by individual investors looking to earn high DeFi returns of up to 20%,” Winston Ma said.
He added that cryptocurrency liquidity and credit problems continue to plague other crypto firms, noting that crypto lenders Celsius and Voyager have also filed for bankruptcy.
“The fall of integral crypto players like those has triggered a downward spiral that’s taken other crypto investors and companies down with it,” he said.
“The US bankruptcy courts have never dealt with an insolvency proceeding of a crypto company on the scale of multiple billions. The uncharted nature of the proceedings means some US crypto regulation may emerge from the US court system first, while the US Congress and federal financial regulators are still mulling over a regulatory framework for the cryptocurrency market,” he added.
Unlike broker-dealers or banks, these cryptocurrency firms have no established rules and insurance for customer funds against cryptocurrency bankruptcy, according to David Lesperance, managing partner of immigration and tax adviser at Lesperance & Associates.
“Bankruptcies take years to be finalized as they work through the major question of the priority of the creditors. In short who gets paid back, how much and in what order. Customers will probably be considered unsecured creditors. This means that a bankruptcy court would pool customers’ funds as part of the bankruptcy estate, whereas customer accounts have to be kept separate in a stockbroker bankruptcy,” he said.
Lesperance pointed to the case of credit platform Cred, which classified its customers as unsecured creditors in its November 2020 bankruptcy filing.
“Regulation is coming,” he said. “But it likely won’t arrive soon enough to provide relief in the Voyager or Celsius cases.”
Frank Corva, senior analyst for digital assets at Finder, said “many eyes remain focused on the strength of the US Dollar Currency Index (DXY), which measures the US dollar’s strength against a basket of six major currencies.”
“The DXY is stronger than it’s been in almost 20 years, which is a major reason why not only crypto, but other risk-on assets are still feeling the pain. These assets are down in part because the US dollar is up. Also, the relative strength of the US dollar is currently wreaking havoc on emerging markets,” he said.
Korva said that most emerging market debt is denominated in US dollars, and when the currency strengthens, these countries struggle to pay back their loans.
“When more money has to go to servicing debt in these markets, market participants in these jurisdictions have less disposable income to invest,” he said. “And so emerging market stocks have also taken a major hit as of late. When the US dollar gets as strong as it currently is, some refer to it as ‘the dollar wrecking ball.”
What is particularly worrisome about the dollar now being in a “wrecking ball” state is that the leading currency continues to lose purchasing power in the United States as inflation this week stood at 9.1 percent.
According to Korva, if things do not change for the better, we could see the first cryptocurrency fall in the $10,000 to $14,000 range.
At a bankruptcy court hearing Monday in Manhattan, cryptocurrency lender Celsius Network said bitcoin mining is key to the company’s restructuring efforts. New Jersey-based Celsius received approval from US Bankruptcy Judge Martin Glenn for $3.7 million in costs to build a new bitcoin mining facility and $1.5 million for customs and duties on imported bitcoin mining rigs.
Patrick Nash, a Celsius lawyer, told Glenn that bitcoin mining could provide the company, which has suspended other business operations, particularly cryptocurrency lending, an opportunity to repay customers whose assets were frozen weeks before filing for bankruptcy.
Celsius hopes the mining efforts will help rebuild relationships with customers, some of whom sent threats and hate mail to some company employees in the weeks before the Chapter 11 filing.
But a group of equity investors foresees a possible fight over control of bitcoin mining operations. Dennis Dunn, the investors’ lawyer, said the recently mined coins should be considered the property of the UK subsidiary that raised the funds for mining, rather than distributed for the benefit of all Celsius creditors.
Customers could also object to Celsius’ spending on bitcoin mining providers at a time when their own recovery is in question, the US Justice Department’s bankruptcy watchdog said.
The Celsius bankruptcy hearing will be held via video link on the morning of August 10.
The US trustee is currently in the process of forming and appointing a committee of creditors. These committees are typically made up of the debtor’s seven largest unsecured creditors and help oversee bankruptcy proceedings, investigate the debtor’s conduct and business operations, and help the court formulate a plan to reorganize the company’s debt.