Crashes and Contagion are Resetting Crypto

After a relatively quiet period, markets have crashed and the crypto space is experiencing significant turmoil. There had been a hiatus after the Terra/UST meltdown, but it now appears that contagion is spreading, and all this is occurring during a period of substantial financial uncertainty.

Celsius and 3AC

Celsius is a comprehensive crypto platform that, among other services, facilitates borrowing and lending in cryptocurrencies. Users could also deposit crypto on the platform, and receive interest at high rates in return. Additionally, Celsius utilizes its own token, CEL. Of note is that although Celsius operates for the most part as a decentralized finance application, it is at its core a centralized entity with full control over user accounts.

The current drama comes as Celsius appears to have become hazardously illiquid. Part of the problem is that it utilized the kinds of methods that may be ordinary among individual DeFi users, but which might not be expected from a secure and stable financial service.

These include using user deposits as collateral for loans on MakerDAO (a decentralized lending protocol, and the creator of the DAI stabletoken), and trading user funds into stETH.

The stETH token is issued in exchange for staked Ether by the Lido platform. stETH is pegged to ETH, but recently the peg slipped, creating selling pressure. What’s more, stETH cannot be redeemed back for ETH until after the Ethereum merge takes place, and there is uncertainty about when that will happen.

In a bearish, price-drop situation, if too many users want their funds back then Celsius, lacking sufficient liquidity, is in trouble. In fact, the platform has had to resort to restricting user withdrawals and transactions as it tries to find a way to survive. Remarkably, it currently looks as though it may have navigated a path out of the woods, posting the collateral necessary to outrun liquidation, and starting to pay back loans.

Celsius pulling off an escape, if that were to happen, looked as though it would prevent further tremors, until currently unsubstantiated rumors, at the time of writing, began to appear speculating that influential crypto fund Three Arrows Capital might be facing insolvency, causing further concerns while BTC and ETH prices dip lower again.

One might argue that precarious operations are par for the course on the wild west crypto frontier, but current developments are happening at scale. Furthermore, the narrative lately has been about increased mainstream crypto adoption, which can’t possibly tally with the image of recklessness that is filtering out.

Macro Elements Unfold

The plot twists around Terra, Celsius and now, possibly, Three Arrows, are significant trigger aftershocks and domino effects, which can impact prices, but they are foreground details against the wider macro backdrop. And, at this larger scale, the story unfolds with steady inevitability.

Globally, economies have been heavily damaged by state-enforced shutdowns and ongoing supply-chain disruption, and in order to control soaring inflation, interest rates are hiked and the money supply has tightened. There is debate as to whether the US economy is in a recession or about to enter one, but either way, no-one can be certain exactly as to how long this economic phase will last, meaning that the main option appears to be to ride it out until the outlook improves.

As a result, we get our current market meltdown, which is taking down tech stocks and crypto in particular. Have we seen the crypto bottom already, and additionally, can bitcoin (and, perhaps, a very small number of other cryptocurrencies) ever decouple from other markets and provide a safe haven?

The former question, that of a bottom forming, looked plausible, but there is still the likelihood of further crypto organizations imploding and causing drops in prices. The latter topic, a bitcoin decoupling, has not happened in this cycle, but remains a future possibility.

Back to Basics

Amidst the mayhem of market contagion, with some major players looking fragile and ill-prepared, and all within the context of a huge macro correction, a return to first principles can be beneficial.

It’s been said that every crypto crash forges new bitcoin maxis, who realize that meddling with altcoins and convoluted DeFi protocols can be diverting and temporarily profitable, but that bitcoin itself is both revolutionary and secure at the same time.

Certainly, no matter which organizations topple, or execute unlikely escape plans and scrape through, one thing that will remain, straightforward and functioning, as it always has been, is Bitcoin.

What advice might a maxi distribute, at this point? Most likely, the same as at any other time in Bitcoin’s history: don’t get distracted, accumulate BTC, hold your own keys. And, if you want to go further, look at running your own Bitcoin node.

Simultaneously, though, the most recent crypto cycle, through NFTs and the web3 trope, has vacuumed up participants from previously distant spheres, including art, photography and music, a significant number of whom will stick around and keep working, having tuned in to the benefits of decentralized, digital sovereignty.

Despite the noise, and from a zoomed-out perspective, this crypto crash and the rebalancing to follow can feel less like a catastrophe, and more like a creatively destructive reset. One thing that is clear this time around, is that in crypto there are no bailouts, and the landscape after the storm will be instructive.

After a relatively quiet period, markets have crashed and the crypto space is experiencing significant turmoil. There had been a hiatus after the Terra/UST meltdown, but it now appears that contagion is spreading, and all this is occurring during a period of substantial financial uncertainty.

Celsius and 3AC

Celsius is a comprehensive crypto platform that, among other services, facilitates borrowing and lending in cryptocurrencies. Users could also deposit crypto on the platform, and receive interest at high rates in return. Additionally, Celsius utilizes its own token, CEL. Of note is that although Celsius operates for the most part as a decentralized finance application, it is at its core a centralized entity with full control over user accounts.

The current drama comes as Celsius appears to have become hazardously illiquid. Part of the problem is that it utilized the kinds of methods that may be ordinary among individual DeFi users, but which might not be expected from a secure and stable financial service.

These include using user deposits as collateral for loans on MakerDAO (a decentralized lending protocol, and the creator of the DAI stabletoken), and trading user funds into stETH.

The stETH token is issued in exchange for staked Ether by the Lido platform. stETH is pegged to ETH, but recently the peg slipped, creating selling pressure. What’s more, stETH cannot be redeemed back for ETH until after the Ethereum merge takes place, and there is uncertainty about when that will happen.

In a bearish, price-drop situation, if too many users want their funds back then Celsius, lacking sufficient liquidity, is in trouble. In fact, the platform has had to resort to restricting user withdrawals and transactions as it tries to find a way to survive. Remarkably, it currently looks as though it may have navigated a path out of the woods, posting the collateral necessary to outrun liquidation, and starting to pay back loans.

Celsius pulling off an escape, if that were to happen, looked as though it would prevent further tremors, until currently unsubstantiated rumors, at the time of writing, began to appear speculating that influential crypto fund Three Arrows Capital might be facing insolvency, causing further concerns while BTC and ETH prices dip lower again.

One might argue that precarious operations are par for the course on the wild west crypto frontier, but current developments are happening at scale. Furthermore, the narrative lately has been about increased mainstream crypto adoption, which can’t possibly tally with the image of recklessness that is filtering out.

Macro Elements Unfold

The plot twists around Terra, Celsius and now, possibly, Three Arrows, are significant trigger aftershocks and domino effects, which can impact prices, but they are foreground details against the wider macro backdrop. And, at this larger scale, the story unfolds with steady inevitability.

Globally, economies have been heavily damaged by state-enforced shutdowns and ongoing supply-chain disruption, and in order to control soaring inflation, interest rates are hiked and the money supply has tightened. There is debate as to whether the US economy is in a recession or about to enter one, but either way, no-one can be certain exactly as to how long this economic phase will last, meaning that the main option appears to be to ride it out until the outlook improves.

As a result, we get our current market meltdown, which is taking down tech stocks and crypto in particular. Have we seen the crypto bottom already, and additionally, can bitcoin (and, perhaps, a very small number of other cryptocurrencies) ever decouple from other markets and provide a safe haven?

The former question, that of a bottom forming, looked plausible, but there is still the likelihood of further crypto organizations imploding and causing drops in prices. The latter topic, a bitcoin decoupling, has not happened in this cycle, but remains a future possibility.

Back to Basics

Amidst the mayhem of market contagion, with some major players looking fragile and ill-prepared, and all within the context of a huge macro correction, a return to first principles can be beneficial.

It’s been said that every crypto crash forges new bitcoin maxis, who realize that meddling with altcoins and convoluted DeFi protocols can be diverting and temporarily profitable, but that bitcoin itself is both revolutionary and secure at the same time.

Certainly, no matter which organizations topple, or execute unlikely escape plans and scrape through, one thing that will remain, straightforward and functioning, as it always has been, is Bitcoin.

What advice might a maxi distribute, at this point? Most likely, the same as at any other time in Bitcoin’s history: don’t get distracted, accumulate BTC, hold your own keys. And, if you want to go further, look at running your own Bitcoin node.

Simultaneously, though, the most recent crypto cycle, through NFTs and the web3 trope, has vacuumed up participants from previously distant spheres, including art, photography and music, a significant number of whom will stick around and keep working, having tuned in to the benefits of decentralized, digital sovereignty.

Despite the noise, and from a zoomed-out perspective, this crypto crash and the rebalancing to follow can feel less like a catastrophe, and more like a creatively destructive reset. One thing that is clear this time around, is that in crypto there are no bailouts, and the landscape after the storm will be instructive.

Sam White

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