Crypto Deleveraging Causes Shock Waves
The strong decline of crypto prices in 2022 resulted in widespread financial stress across the crypto ecosystem.
Several crypto companies were operating with excessive amounts of leverage, which then resulted in a domino effect that
forced many crypto custodians to halt withdrawals and cease operations. Crypto customers were left holding the
bag and unable to access their funds
because the custodians they trusted with their crypto mishandled their funds.
Crypto prices peaked in Fall 2021 and gradually faded in 2022 during the onset of the current bear market.
Bear markets are normal, natural, and healthy – most economic cycles operate like a pendulum swinging between bull and bear markets.
Bear markets can become dangerous and unhealthy when there is an excessive amount of credit in the system. Excessive credit (debt)
causes wild price swings, bankruptcies, and loss of funds.
Historical crypto bear markets did not involve excessive amounts of credit. The recent bear market that started
in Fall 2021 is different – now global financial institutions and DeFi represent a larger component of the overall crypto
ecosystem. Credit liabilities off-chain (traditional banking sector) now influence on-chain events. DeFi and
traditional financial institutions have introduced larger amounts of credit into the market.
The beginning of the current crypto credit crisis started with the collapse of Terra Luna.
This event was the first domino to fall, wiping out the savings and collateral of over $50 billion.
Several crypto custodians began halting withdrawals as their balance sheets crumbled, which in turn
caused more problems in the crypto ecosystem.
Credit crises have existed for thousands of years. The first credit crises recorded were during the Sumerian civilization.
Sumerian kings announced debt jubilees
to reset the economy when credit had become excessive and posed a risk to the economy. Humans tend to be over-optimistic by nature – this leads to a buildup of debt and credit in the system
which eventually needs to be reset. Excessive system-wide credit imbalances make economies sensitive and
volatile to asset price changes (similar to global financial crisis of 2007-2008
and the current crypto credit crisis).
“I was darn wrong because I didn’t realize the magnitude of leverage in the system.
“What I don’t think people expected was the magnitude of losses that would show up in
professional institutions’ balance sheets and that caused the daisy chain of effects.
“It turned into a full fledged credit crisis, with complete liquidation and huge damage on confidence in the space”
– Mike Novogratz, CEO of Galaxy Digital at Bloomberg Crypto Summit on July 19, 2022
Source: Financial Times and CryptoCompare
Not Your Keys, Not Your Crypto
Elon Musk and Jack Dorsey
have been strong proponents of self-custody wallets similar to Avana Wallet. Last year Elon Musk highlighted the risks of
crypto custodians, noting that users do not truly own the crypto they have on deposit with the crypto custodians.
Customers cannot access their funds when crypto custodians halt withdrawals.
“If you own crypto in an exchange and the exchange does not give you your private keys, it is not clear that you own anything. If that exchange breaks or is hacked or is subject to seizure by the government then your crypto is gone. So in order to have properly decentralized finance (defi) then you have to own your private keys.
“You should be the only one who has your private keys. If you are the only one that has your private keys, then you own it. If someone else has your private keys effectively they own it too, and the security of your crypto is then dependent upon them, or any entity that can affect them.”
– Elon Musk on the merits of non-custodial crypto wallets
Customers who deposit funds with crypto custodians ultimately trust that the custodians will act in their best interest.
Crypto custodians act similar to traditional banks – banks take customer deposits and use those deposits to generate income. History is
full of examples of banks that engaged in risky behavior with customer funds to benefit themselves at the expense of customers.
Banks earn outsized returns when they engage in risky bets that work. The team at Avana Wallet believes that
such as our crypto wallet, offer users better long-term protection because only the user controls funds. No agency risks
are present with non-custodial crypto wallets.
List Of Crypto Custodians Who Halted Withdrawals
Zipmex, a cryptocurrency exchange that operates in markets like Singapore and Thailand, halted withdrawals as the fallout from a series of
defaults spreads further throughout the digital-assets industry. The company cited “volatile market conditions” and its exposure to troubled
crypto lenders Babel Finance and Celsius for its liquidity crisis in its announcement. The Thai Securities and Exchange Commission has
since requested clarifications of Zipmex’s deposited funds, and the company disclosed in a statement that it loaned $48 million to Babel Finance
and $5 million to Celsius.
“Our exposure to Celsius was minimal, as such, we were intending to write this off against our own balance sheet,” the company said.
7/18/2022 SkyBridge Capital
SkyBridge Capital has halted withdrawals from one of its crypto funds. SkyBridge’s Legion Strategies fund had
exposure to the digital asset world through other funds managed by SkyBridge Capital, including vehicles focused on Bitcoin, Ethereum, and Algorand.
By February 2022, nearly a quarter of the fund’s assets were invested those crypto exposed funds.
Crypto lender Vauld on Monday paused all withdrawals, trading and deposits on its platform and is
exploring potential restructuring options, the company said. Vauld said it is facing “financial challenges” due to “volatile market conditions” which has led to customers
withdrawing more than $198 million from the platform since June 12.
7/1/2022 Voyager Digital
Voyager Digital announced that it suspended withdrawals, deposits, and trading on its platform.
Voyager Digital issued a default notice to hedge fund Three Arrows Capital, which owes Voyager Digital approximately $646 million.
“This was a tremendously difficult decision, but we believe it is the right one given current market conditions,” said Voyager CEO Stephen Ehrlich.
“This decision gives us additional time to continue exploring strategic alternatives with various interested parties while preserving the value of
the Voyager platform we have built together.”
Crypto staking platform Finblox raised its daily withdrawal cap to $3,000 with an additional increase to $50,000 planned next week for verified users.
The decision comes two weeks after the company imposed a $1,500 limit as a result of its exposure to hedge fund Three Arrows Capital.
“We are doing everything in our power to restore faith in our platform, unlock the access to the users’ funds affected by this market event and
complete the return to normal operations,” Finblox CEO Peter Hoang said.
Cryptocurrency futures exchange CoinFLEX has temporarily halted withdrawals due to the extreme volatility in the cryptocurrency market,
as well as “continued uncertainty involving a counterparty,” Chief Executive Officer Mark Lamb.
The company had a $47 million hole in its balance sheet after. CoinFLEX claimed that Bitcoin investor Roger Ver, often called “Bitcoin Jesus”, failed to meet a margin call and left CoinFLEX with the loss.
CoinFlex claimed that Ver’s account went into “negative equity.” Normally, the exchange would liquidate an investor’s position in this situation.
But Ver had a particular agreement that meant this did not happen, the exchange said.
Crypto lending service Celsius announced it would pause withdrawals, citing “extreme market conditions.”
The company announced it would also pause its swap and transfer products, according to a blog post. It did not provide a timeline for resuming withdrawals.
“We are working with a singular focus: to protect and preserve assets to meet our obligations to customers. Our ultimate objective is stabilizing
liquidity and restoring withdrawals, Swap, and transfers between accounts as quickly as possible. There is a lot of work ahead as we consider
various options, this process will take time, and there may be delays,” the blog post said.
Binance, the world’s top cryptocurrency exchange by volume, halted Bitcoin withdrawals for its users.
A statement from Binance following Zhao’s initial tweet references a “batch of transactions” that were unable to be processed using Bitcoin, while Zhao singled out a singular transaction earlier in the morning.
In November 2021, the exchange temporarily paused withdrawals for all cryptocurrencies on its platform due to a large backlog of transactions.
On that occasion, the network was able to resume transactions after less than half an hour of downtime.
Understanding Solana Non-Custodial Wallet Concepts And Benefits
Investopedia: Definition of Credit Crisis
FT: Crypto feels the shockwaves from its own ‘credit crisis’
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