One of the reasons why many crypto firms have recently run into trouble is that they lend to and invest into each other. Crypto lenders in particular have been getting in trouble for promising lenders high interest and also demanding high interest from borrowers. This model logically starts to crumble when the market starts to fall.
It started with the collapse of the Terra ecosystem. Its crash caused problems for companies that had purchased LUNA tokens or used the UST stablecoin.
One such firm was the hedge fund Three Arrows Capital (3AC). In an attempt to offset this (and other) losses, it borrowed assets totaling $3.5B from 27 different entities.
Their largest lender turned out to be the lender Genesis, which lent 3AC assets totaling $2.36B. They incurred a loss of about $1.1B on that. $462M was just collateral on the loans. The lending companies usually require the borrower to post collateral in cryptocurrencies, which in this case had to be worth 80% of the amount borrowed. Because cryptocurrencies are volatile, this can happen relatively quickly. The borrower will be given the opportunity to make up the amount (basically a margin call). If they fail to do so, their position is liquidated. However, this will result in a loss for the lender. These are often benevolent and the loss will exceed 20%.
The Genesis company hasn’t gone bankrupt yet, which is due to the fact that it is owned by Digital Currency Group, one of the biggest players in the market (whose portfolio includes the likes of Grayscale and Coindesk).
Not so lucky was the second largest lender to Voyager Digital, which lent 3AC $685M. Voyager declared bankruptcy in early July. Among the creditors is another bankrupt company, Celsius, which lent 3AC $75M.
In conjunction with 3AC, Blockchain.com faces a loss of $270M. MAinly for that reason it has now laid off a quarter of its staff.
A breakdown of the accounting ledgers of another failed firm, South Asian crypto lender Vauld, shows that their downfall also started with investments in the Terra ecosystem, specifically the purchase of the UST stablecoin. Another problem here was optimism: they had opened many long positions on the biggest cryptocurrency projects. Here, too, there were losses due to forced liquidations of borrowers’ positions.
These examples are well demonstrated by the spillover of liquidity shortages from one company to another.
The misfortune of one can mean the good fortune of another. Some firms take advantage of competitors’ problems to reach new markets and win customers from failing firms.
The FTX exchange has, through its CEO Sam Bankman-Fried, announced that they intend to invest up to hundreds of millions of dollars to support the failing crypto sector. Binance and Nexo have also expressed their intention to buy cheap crypto assets and failing companies. Indeed, it will be the bear market that will determine the winners and losers of this halving cycle.