6.17.22 [archives]
Celsius and Three Arrows Capital are probably insolvent, companies are cutting headcount, and crypto is cratering ... but at least the Golden State Warriors are your 2022 champions
Now this is what winter feels like. Bitter, cold, and a constant battering of bad news. If you were fortunate enough to spend the last week outside and away from a computer, I apologize. The turbulence of the last week is a good reminder that while many of us believe we can reach our destination of self-sovereign money, permissionless access to digital services, and ownership of one’s data, the ride to get there will be neither smooth nor linear. We’ve had a solid unwind (thanks Terra) and we’re now seeing forced selling and capitulation (hat-tip to Celsius and Three Arrows Capital). All that is left to complete Bear Market Bingo is bottomless exhaustion!
Ever the optimist, I come with rays of sunshine, if only because the next few hundred (thousand?) words will carry a heavy darkness: the fundamentals of crypto are still benefitting from meaningful secular tailwinds – continued high-quality talent inflows, institutional adoption and mindshare, and real world use cases. The pace of momentum may slow, but the trajectory, for now, remains on course. If that changes, I promise not to run from the truth.
☣️ Contagion: Crypto
As it is still early days in crypto, the community remains relatively tight-knit. However, a close community also makes for an interconnected one, and that is what can cause weeks like this past one. The collapse of UST and Luna was the first domino to fall, and now another major player is staggering: centralized crypto lending platform Celsius. They will not be the last to face questions of insolvency in this bear market – someone may want to check in on Michael Saylor and MicroStrategy – but they headline this week’s agenda.
Celsius has quickly become the company most publicly feeling the heat of this crypto winter right now. A platform that reportedly held $20B+ in AUM last year and had 1.7M customers is now potentially-maybe-probably insolvent after mismanaging its assets. On Sunday, the company announced that it was pausing withdrawals from its platform, citing ‘market conditions.’ Anytime a financial services company, especially one in crypto, stops users from accessing their own money abruptly and indefinitely, it’s lights out. Lullaby time. 💤 It doesn’t help that Celsius’s on-chain wallets hold assets worth a fraction of the $10B they claim to hold in customer assets, justifying the liquidity mismatch concerns and further deepening the spiral of fear.
While reports suggested Celsius avoided significant Terra contagion – the company had put $500M of client funds into the 20%-yielding Anchor Protocol before kicking off UST’s de-pegging by getting out – they may be done in because of their staked ETH (‘stETH’) exposure. In short, Celsius took ETH deposited by customers and transferred it into Lido’s liquid staking protocol to earn staking rewards on that ETH, allowing them to juice their yields to customers and pocket additional profit. However, in recent weeks, stETH decoupled from ETH, making it nearly impossible for Celsius to convert their stETH holdings back to the ETH necessary to honor customer redemptions, especially considering that selling their massive amount of stETH ($400M+) would only further expand the stETH:ETH spread. Celsius also has a similar amount of BTC leveraged in the MakerDAO protocol, which has been tempting liquidation for days as Celsius uses its remaining collateral to defend its position. If bankruptcy isn’t here yet, it’s knocking on an unlocked door already ajar.
As any self-respecting crypto firm would, Celsius has hired major TradFi financial services conglomerate Citigroup to advise on possible solutions, including potential financing options. Thank you, Father TradFi. Decentralized enthusiasts weep.
For their part, Celisus rivals BlockFi and Nexo have distanced themselves from stETH – BlockFi confirmed they have ‘zero stETH exposure’ while Nexo holds only a ‘limited number of stETH.’ Nexo is even offering to buy Celsius’s assets. Savage. Still, both firms are probably watching their assets under custody evaporate as trust accompanies the baby with the bathwater.
The worst part about the Celsius story, especially coming on the heels of the UST collapse, is that retail investors are again the ones losing, and again doing so after engaging in what was marketed as a ‘low-risk’ activity. More stories like these and crypto won’t be much more than a carcass picked apart by regulators.
But … I can’t let it go unsaid: this Celsius meltdown is exactly what those building decentralized systems, specifically those in DeFi, are trying to avoid. While crypto-native builders have been targeted relentlessly by the SEC and other regulators, the opacity and mismanagement of assets from their centralized counterparts has gone largely unchecked. For both UST and Celsius, those warning retail users of their risks were those who knew them best – DeFi builders – while critics and regulators offered little of the ‘protection’ they so often claim as their objective. DeFi protocols and applications have their issues to be sure, but a lack of transparency won’t be one of them. While centralized leaders struggle, decentralized finance products continue to perform admirably, orderly, and efficiently.
[Educational note for those less familiar with stETH: stETH is a liquid ‘derivative’ of ETH, redeemable 1:1 for ETH after Ethereum’s transition to proof of stake is complete. ‘De-pegging’ isn’t the perfect term for what is happening to the stETH:ETH relationship as it is fundamentally different from what happened to UST:LUNA – the ‘stETH’ asset is at no risk of permanent collapse, even if there is a ‘run’ on it, as it will be redeemable 1:1 for ETH in the future. Hence, ‘decoupling.’ The two primary ‘risks’ associated with owning stETH rather than ETH are: (1) smart contract risk on Lido’s platform and (2) the length of time it will take Ethereum to complete its transition to proof of stake. The benefits are that you can receive staking rewards on your ETH while retaining the ability to use that ETH in DeFi protocols. If you are willing to hold your ETH for the long term, trust the Lido team’s code, and are not overlevered, the price relationship between stETH and ETH should be relatively harmless, with any spread offering the opportunity to buy 1 ETH for the price of <1 ETH. An argument can be made that stETH should trade at a discount to ETH, considering the smart contract risk and concept of a liquidity premium. In times of crises, a premium is placed on liquidity, and voila, you have an increased risk in a stETH:ETH decoupling.]
🏹 Three Arrows Capital | Three Arrows Capital, a Singapore-based crypto hedge fund founded in 2012, is facing its own insolvency after unforeseen liquidations. The firm once held as much as $18B in assets, and were vocal believers that crypto was entering a ‘supercycle’ allowing it to avoid a meaningful, protracted bear market. If UST was the first domino and Celsius is the second, 3AC is now the third – and they are a huge brand, a pioneer as one of the earliest crypto-focused funds ever, and one of the biggest borrowers in crypto. If the rumors are to be believed, they lost a boatload of cash when Terra collapsed, and are now ignoring margin calls everywhere, getting liquidated everywhere, and ghosting all counterparties as other positions have moved against them (including stETH). Their collapse would extend to their lenders in addition to any tokens or equity they are forced to sell, and we should now expect fallout from this collapse to span the next few weeks. BlockFi liquidated 3AC’s position on their platform, as did FTX, Deribit, and BitMEX. A startup and crypto venture fund with ties to 3AC – Finblox and DeFiance Capital, respectively – have already come forward implying that they have been affected. Hong-Kong based crypto lender Babel Finance has suspended withdrawals and redemptions due to ‘unusual liquidity pressures.’ There have also been unconfirmed reports of 3AC portfolio companies entrusting their treasuries with the firm – 3AC promised 8% yields on their cash – which has unsurprisingly raised questions as to what working capital, if any, those teams have left. Our two-month tally is the collapse of a major stablecoin and the pending collapses of a major lending platform and hedge fund. The good news is that there will eventually, likely one day in the distant future, be good news again. Probably. Contagion is the word of the week.
Bitcoin | TBD, the Bitcoin-focused venture from Jack Dorsey, unveiled its plans to build a decentralized web platform, dubbed ‘Web 5,’ that will bring decentralized identity and data storage to applications built on Bitcoin. Motion to keep this industry from turning into a walking Spiderman joke and drop all ‘web’-based monikers … Jack Dorsey is also partnering with Jay-Z to offer Bitcoin-focused financial literacy courses for residents of the Marcy Houses, a public housing complex in Brooklyn, New York.
Regulatory | Following Celsius’s decision to freeze customer funds, US policymakers are on high alert. The Texas State Securities Board has already opened an investigation. Little late on that one, friends. The regulatory reckoning is upon us … A class action lawsuit against Binance.US has been launched on behalf of US users who bought or sold UST on the exchange … Coin Center, a crypto think-tank, filed a lawsuit against the Treasury Department and the IRS claiming a crypto tax-reporting requirement contained in an infrastructure law – requiring individuals and businesses receiving $10,000 or more in crypto to report the name, date of birth, and Social Security number of who sent them the funds – is unconstitutional and would ‘impose a mass surveillance regime on ordinary Americans’ … SEC Chair Gary Gensler thinks that legislation being thrown around by Senators Lummis and Gillibrand, in which oversight of crypto would shift away from the SEC and toward the CFTC, could undermine market regulations. Gary doesn’t want to lose power. You don’t say.
Macro | The Fed announced a 75-basis point hike this week, contradicting what Chairman Jerome Powell signaled … last month. People do realize how archaic and farcical it is that we all wait on bated breath for a small group of unelected individuals to determine the price of money for the planet’s entire population … right? We could always just program a fair and transparent monetary policy in code, you know…
Buried in this here link, the Fed policymakers’ projections show that they expect to start cutting rates in 2024. This has been programmed … Even Bloomberg – Bloomberg! – couldn’t hold back, dropping an article this week titled, World’s Central Banks Got It Wrong, and Economies Pay the Price, touching on how central banks were too slow to recognize inflation and have now threatened their credibility with inconsistent policy guidance. Maybe relying on that group of unelected ‘officials’ wasn’t the move?… If you want a summary of what the macro picture looks like right now, I present you this: lowest mortgage demand since 2001, lowest consumer confidence ever, highest inflation since 1981. Does anybody know if side-hustle newsletters do well during recessions? … Across the Pacific, things are getting real in Japan. Japan’s debt to GDP ratio – total debt now sits at more than 3x GDP – has long been a favorite macroeconomic small talk topic, with the nebulous context that while catastrophe has lurked for decades, it may never strike. Then again, maybe it will. Japan’s yield curve control strategy appears to be buckling at the knees – is this the crisis that gets the Yen? Japan’s central bank, the Bank of Japan, is staring down a $200B loss on its government bonds. I love discounted Bitcoin and spinach artichoke as much as the next guy, but not every dip demands your chips. The macro is, as they say, kinda sus …
The latest from Arthur Hayes, Floaters, touches on Celsius, the brutal liquidity crunch facing us, and opportunities in DeFi.
CBDCs and Stablecoins | Circle announced a new euro-backed stablecoin. The euro experiment is only ten years older than Bitcoin … Hong Kong and Israel are partnering for CBDC cybersecurity research while the Philippines and Vietnam are conducting CBDC feasibility studies.
NFTs | OpenSea has moved its marketplace to its ‘Seaport Protocol,’ a new smart contract that will allow its 1.8M users to save roughly 35% on Ethereum gas fees. This would have been amazing to see when the entire world a small subset of the online community was day-trading NFTs three months ago … Chevrolet is auctioning off a Corvette NFT that will also grant the winner the actual sports car inspired by the artwork. Sounds cool but read the room, Chevrolet. The disposable income has been disposed of … The team behind the Golbintown NFT project was revealed this week. Please don’t ask me what Goblintown is, it’ll only hurt both of us.
Financings & Fundraises | Zipmex, a Southeast Asian crypto exchange, is raising a $40M Series B that values the company at $400M. Coinbase will invest as a strategic investor after rumors of it pursuing an acquisition … The team behind Words With Friends raised $46M for their Series A to build a gaming platform on Polygon. Maybe they can call it Bear Market Besties? … Arrington Capital is launching a $100M growth fund in partnership with the Moonbeam Foundation to back new projects and protocols on the EVM-compatible Polkadot parachain … Man has this segment gotten quiet. Candidly, I stretched on my thresholds so that I would have something to share here this week.
Exits | FTX is acquiring Canadian crypto trading platform Bitvo. The empire expands to the Great White North.
Bits | For a few hours, there was fear that Binance would join the insolvency party, as the world’s largest crypto exchange paused bitcoin withdrawals due to a ‘stuck transaction.’ Thankfully for all of us, Binance lifted the restriction and the pause was considered coincidental. MicroStrategy is a common pick to cause the industry’s next day of repentance – the odds-on favorite? – but a Binance catastrophe might be a newsletter ender … The former president of the New York Stock Exchange, Stacey Cunningham, has joined Uniswap as an advisor … Deloitte dropped a report sharing that surveyed retailers are gearing up to accept crypto, with 85% believing crypto payments would be ubiquitous within five years and 83% saying that enabling stablecoins is a high priority. The key takeaway here is that consumer demand is pushing businesses to adopt crypto or get left behind. No word on if crypto assets will be worth enough to buy anything, though … On cue, American Express announced a new partnership with crypto wealth management platform Abra that will enable the launch of the Abra Crypto Card on the Amex network. The card will allow users to earn crypto rewards for spending US dollars … Speaking of spending crypto on things none of us can afford anymore, Farfetch and Lacoste both announced crypto plans this week – Farfetch will accept crypto as payment, Lacoste opting for an NFT launch – becoming the latest luxury brands to wade into the suddenly unluxurious waters of crypto … Wall Street regulator FINRA has a message for those laid off by crypto companies: join the dark side and help them better understand crypto. Temptation lurks because of crypto’s headcount mismanagement … Crypto analytics platform Nansen launched a messaging app for web3 communities, one of the latest to take a direct shot at Discord’s market share … Security firm Halborn discovered a critical bug affecting popular web3 wallets like MetaMask and Phantom. The vulnerability has been fixed; it would have made it possible for hackers to extract recovery seed phrases from computer disks … Martin Shkreli launches a Uniswap clone to be a ‘thorn in [Uniswap creator Hayden Adams’s] side.’ Visionary founder or recently released felon? Tough one … Crypto is eating finance, consumer brands, disposable income, and now politics? A new crypto fundraising startup, Engage Raise, is launching in July to allow federal candidates to raise campaign cash solely through crypto assets … Anthony Hopkins shared his love for NFT artists and changed his Twitter name to ‘AHopkins.eth.’ Feels like that’s worth a green candle of 5%, at least … May saw venture capital firms invest $3.5B into crypto startups, the lowest number since last October.
Sad Bits | The number of crypto companies announcing layoffs continues to climb, with BlockFi (20%), Coinbase (18%), and Crypto.com (5%) announcing cuts. This follows similar news from Gemini and Bitso. Coinbase in particular will lay off more than 1,000 people. Talk about a company begging for the calendar to turn to Q3 after an excruciatingly painful Q2. Leading crypto companies have now laid off more than 2,000 individuals in recent weeks, and it’s likely to get worse before it gets better. Kraken and Binance both announced hiring pushes this week, so there’s that … Want to learn some lessons in real time? As recently as February, Coinbase intended to embark on a hiring spree of 2,000 employees. In November, Crypto.com spent $700M to rename the Staples Center in Los Angeles. BlockFi had to make a $100M settlement payment. Gemini’s founders spent a night performing Don’t Stop Believin’ after announcing their layoffs. Okay, ‘performing’ is a stretch. The lesson: everybody in crypto talks about its volatility but few have shown capable of actually planning for it.
Your 2022 NBA Champions, the Golden State Warriors | Holy cannoli. Welcome back to the Warriors Invitational, also known as the NBA Finals. Steph Curry is your Finals MVP and stamped as a Mt. Rushmore figure in NBA history. Get that man his (fourth) ring.
Source Code
Crypto lending firm Celsius pauses withdrawals and transfers, citing market conditions:
Embattled Celsius CEO Alex Mashinsky Breaks 3-Day Silence:
https://decrypt.co/103035/embattled-celsius-ceo-alex-mashinsky-breaks-3-day-silence
Crypto fund Three Arrows Capital faces potential insolvency after lender liquidation:
Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout:
Jack Dorsey's Bitcoin venture TBD unveils proposal for decentralized Web platform:
Following Celsius freeze, US policymakers are on high alert for crypto systemic contagion:
Class action filed against Binance.US for sale of TerraUSD:
Coin Center sues Treasury and IRS, claims tax-reporting rule unconstitutional:
Crypto Legislation Could Undermine Market Regulations, Gensler Says:
Circle announces new euro-backed stablecoin:
https://www.theblock.co/linked/152448/circle-announces-new-euro-backed-stablecoin
OpenSea Moves to Seaport Protocol to Cut Ethereum Gas Fees by 35%:
https://decrypt.co/103034/opensea-moves-to-seaport-protocol-to-cut-ethereum-gas-fees-by-35
Chevy is auctioning off a Corvette NFT, and the winning bidder gets the car, too:
https://www.theverge.com/2022/6/14/23166278/chevy-corvette-nft-xsullo-auction-blockchain-web3-crypto
Truth Labs Revealed as Team Behind Goblintown:
https://thedefiant.io/nft-roundup-goblintown/
Coinbase to make strategic investment in Zipmex following acquisition talks:
Team behind Words with Friends raises $46 million for new gaming venture on Polygon:
Arrington Capital Launches $100M Growth Fund for Moonbeam Ecosystem:
FTX is acquiring Canadian cryptocurrency trading platform Bitvo:
https://www.theblock.co/post/152681/ftx-is-acquiring-canadian-cryptocurrency-trading-platform-bitvo
Binance paused bitcoin withdrawals for several hours Monday due to a ‘stuck transaction’:
https://www.cnbc.com/2022/06/13/binance-pauses-bitcoin-withdrawals-as-crypto-sell-off-deepens.html
Uniswap Labs Hires Former NYSE President to Be Adviser:
Merchants getting ready for crypto:
The first US crypto rewards credit card on the American Express network is here:
https://techcrunch.com/2022/06/10/american-express-us-crypto-rewards-credit-card/
Wall Street Regulator FINRA Wants To Hire Fired Crypto Employees:
https://blockworks.co/wall-street-regulator-finra-wants-to-hire-fired-crypto-employees/
Dump Discord? Nansen Launches Messaging App for Web3 Communities:
https://decrypt.co/102958/dump-discord-nansen-launches-messaging-app-for-web3-communities
MetaMask and Phantom crypto wallets fix browser extension vulnerability:
‘Pharma Bro’ Martin Shkreli Launches Uniswap DEX Clone Albumswap:
https://decrypt.co/103152/pharma-bro-martin-shkreli-launches-uniswap-dex-clone-albumswap
New crypto fundraising start-up will take political donations in digital currencies as 2022 midterms heat up:
[Disclaimer: Any opinions expressed are solely my own and do not express the views or opinions of my employer. Because the information included in this newsletter is based on my personal opinion and experience, it should not be considered professional financial analysis or advice.]