What You Can Learn From Three Of The Biggest Crypto Casualties

Jonathan Hobbs

about 2 months ago3:26 mins

What You Can Learn From Three Of The Biggest Crypto Casualties

Crypto has been on a terrible run of form this year. Heavy-hitters from Luna to bitcoin have taken a spill, with the latter having slipped below $20,000 over the weekend for the first time since a pandemic-crippled 2020. But there is a silver lining: three of the biggest casualties could offer clues to help you protect yourself from the next crypto crash.

Casualty 1: Celsius Network

On June 13th, crypto lending platform Celsius Network (CEL) announced it was freezing all user withdrawals because of “extreme market conditions.” That’s a big deal: the lender has over 1 million users, and reported having almost $12 billion of user assets under management in May this year.

Until recently, you could have deposited crypto with Celsius and earned decent interest rates. Depending on the token, that could have been as high as 19%, according to the platform’s website. But to sustain those yields, Celsius was plugged into the riskier DeFi space.

For one thing, Celsius was exposed to the Terra USD stablecoin collapse, with substantial deposits on Anchor protocol. Celsius also held large volumes of “staked ether” (StETH) on Lido – a DeFi platform for staking ether to earn yield. When Lido users wish to stake ether, they get StETH on a one-for-one basis. Except, StETH started decoupling from ether, as more investors were prompted to sell StETH and cash out of their staking strategies during the recent market crash. As of right now, one StETH fetches just 0.94 ether, according to Coingecko.

What’s the lesson here?

Celsius has reportedly hired restructuring lawyers. If the crypto lender goes under, it's unlikely users will recover their assets: they would be treated as “unsecured creditors,” according to the platform’s terms and conditions. This highlights a popular mantra in crypto: “not your keys, not your coins.” So,unless you’re using your crypto to trade or to lend out to earn a yield, opt for self-custody crypto storage solutions whenever you can.

Casualty 2: Three Arrows Capital (3AC)

Singapore-based hedge fund 3AC had over $3 billion worth of crypto in April this year. But things quickly turned south for the fund in the bear market – and it’s now exploring various settlement options to fend off its creditors.

Like many large players in the crypto market, 3AC was heavily invested in the Terra ecosystem when it imploded. The fund’s co-founder, Kyle Davies, told the Wall Street Journal that 3AC invested over $200 million in LUNA tokens, which fell more than 99.99% in May. The fund also holds a massive position in the Grayscale Bitcoin Trust (GBTC), which has come down more than bitcoin during the market selloff.

What’s the lesson here?

3AC lost money in a down market, which does happen. It made some bad investments, sure, but its Achilles heel may have been that it used too much leverage to try to boost returns. As a result, the fund had a cascade of “margin calls” from lenders like BlockFi and Genesis, and leveraged crypto exchanges like BitMex, and that obviously exacerbated its losses.

Moral of the story: leverage is a dangerous game, and even the pros get taken out by it. So don’t use leverage in crypto – the market is volatile enough. When you simply buy and hold a token (i.e., without using leverage), you’re still holding that token if the price goes down – and the price might eventually recover. But if you use leverage, you’re just borrowing assets from an exchange, and that can really compound your losses when the market goes against you.

Casualty 3: Solend and a stubborn Solana whale

The next domino involves a project called Solend, a decentralized lending platform built on Solana. One unknown whale – a big-time crypto investor – deposited around 5.7 million SOL (roughly $200 million at today’s prices) on the protocol to borrow about $100 million worth of the USDC stablecoin. If the price of SOL goes down to $22.27, those funds will be liquidated by Solend because the borrower’s collateral won’t be worth enough to sustain its stablecoin loan.

Problem is, the whale's position represents about 95% of all SOL deposits on the platform, and around 85% of all its USDC borrowings. In other words, if the whale gets liquidated, it would take all the fish on the platform down with it.

Solend tried to contact the whale to work out some sort of deal, but received no response for some time. That prompted Solana holders to vote on an “emergency power to temporarily take over the whale's account” so the liquidation could be processed over the counter (OTC) – rather than directly on the Solend protocol (as this would be far less detrimental to other Solend users).

The vote has since been passed, and then invalidated after it became apparent that over 90% of the votes came from a single Solana holder.

What’s the lesson here?

The price of SOL is currently about $37 – well above the $22.27 liquidation level. And according to Solend’s Twitter feed, the whale has now been in contact with the platform to find a solution. Given this fact, there is still a chance that the platform will salvage itself – though a lot will depend on how events unfold.

That said, an important takeaway still applies: don’t keep all your crypto in a single DeFi platform or strategy – especially in bear markets, where large liquidations are more likely to occur.

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