This week showed the average investor just how closely connected cryptocurrency firms are. Two firms have frozen withdrawals and a cryptocurrency hedge fund is in trouble. Celsius Network, Babel Finance and Three Arrows Capital are all reeling, and it’s not yet clear how bad the damage could be.
All three companies managed other people’s money
This week began with a Sunday night announcement from Celsius Network, a giant crypto lending company, that it would be pausing withdrawals and transfers. After that, the value of bitcoin and other cryptocurrencies, which had already been caught for weeks in a downtrend that some dubbed “crypto winter,” plummeted even further, and five days later, the news hasn’t improved much.
All three companies managed other people’s money. Celsius Network courted retail investors. Babel Finance, which has 500 clients according to CNBC, raised $80 million in a funding round a month ago. 3AC, which invested in crypto startups, had $10 billion in assets under management as of March, according to Fortune. The impact of the companies’ troubles will likely spill over into the broader cryptocurrency ecosystem.
First up is Celsius, which has released a single statement in the week since its freeze: an FAQ that doesn’t tell investors when or if they’ll get access to their funds. CEO Alex Mashinsky tweeted that the team was working “non-stop” and thanked unnamed people for their patience and support, without commenting on reports the company has hired restructuring lawyers.
The company had $12 billion in assets under management as of May. Mashinsky presented Celsius as a hybrid decentralized/centralized financing approach that could be equivalent to securities lending. But Celsius lost millions due to a bug that forfeited restitution payments following the BadgerDAO hack and another 35,000 ETH last summer when Ethereum staking service Stakehound appeared to misplace private keys, rendering its tokens worthless, according to a report in CoinDesk. Customers were not informed of the loss. CoinDesk compared Celsius’s collapse to that of Lehman Brothers in 2008, which spooked financial markets.
3AC has “hosted everyone” in response to margin calls.
Research by blockchain analytics firm Nansen showed a shift in strategy, leaning on DeFi protocols to generate higher yields, CoinDesk noted. While Mashinsky claimed Celsius was not exposed to USterra’s collapse, the report points to other data linking it to staked ether (stETH), which could create problems if it has to sell that stake to attract investors pay.
Meanwhile, in Hong Kong, another crypto lender named Babel Finance has announced its own freeze on withdrawals and redemptions, claiming it is facing “unusual liquidity pressures.” As recently as May 25, it had closed a funding round that valued the company at $2 billion. A report by Decrypt collects allegations that Babel misused customer funds. Genesis Capital, Bitgo, Blockchain.com and Bitcoin.com are among the better known clients.
Finally, cryptocurrency hedge fund Three Arrows Capital (3AC) confirmed to The Wall Street Journal that it has suffered heavy losses. (3AC invested about $200 million in the failed Luna protocol — an investment that went to zero after the collapse of Luna and its stablecoin Terra last month.) The 3AC founders say they are now dealing with legal and financial advisors work together. The company can sell its assets, although it is open to being bailed out by another company.
3AC “hosted everyone” in response to margin calls said Danny Yuan, the head of trading at 8Blocks Capital, on Twitter. That forced other companies to sell assets and drove crypto prices even lower.
3AC closed its positions on the Bitfinex exchange, but FTX, Deribit and BitMEX liquidated their positions after the firm failed to meet margin calls, according to a report by The Block. FinBlox, a crypto staking company, has capped withdrawals at $1,500 per month while investigating its damage from 3AC; Finblox invested $3.6 million in 3AC in December, CoinDesk reports.
As 3AC demonstrates, a major loss on a large investment can create huge knock-on effects, and it can take time to see what they are. Luna collapsed a month ago and the extent of the damage to 3AC was not apparent until this week. Given the connections between 3AC, Celsius Network, Babel Finance and the rest of the market, it seems likely that the cryptocurrency hasn’t bled dry yet.