A week ago, Celsius, one of the largest crypto lending platforms, paused investor withdrawals. The events since have caught the nerves of anyone in the Web3 sphere, especially those who invested in cryptocurrencies.
Crypto prices have been on a steep decline, with Bitcoin (BTC) dropping to below US$20k. Amid the turmoil, two Singapore based firms made the news: Three Arrows Capital (3AC) missed margin calls; Babel Finance also suspended withdrawals.
These events have made headlines, and the world of news is so saturated with crypto clickbait that the substance of the issue has been completely lost.
In our opinion, the crypto market crash this development is being linked to is not simply a crypto market crash; in fact, the root is not crypto at all.
Here are some of our thoughts:
- Celsius, with a claimed US$12 billion in assets under management, more closely resembles a traditional lender than any sort of decentralised Web3 Structure.
- In fact, aside from the assets (which are cryptocurrencies and tokens residing on blockchains), there wasn’t much decentralised at all.
- Fundamentally, what happened to Celsius, 3AC and others is the typical over-leveraged problem we see in traditional finance all the time.
- Crypto lenders are essentially unregulated banks – cryptocurrencies weren’t built to underpin such structures, in fact they were built to circumvent them. Naturally, these large organisations becoming forced sellers due to mass liquidations drives the price of cryptocurrencies down, causing a “crash”;
- From the above, we can see that the perceived volatility that is plaguing the industry right now doesn’t actually boil down to the underlying technologies or “intrinsic value” of crypto but rather to the organisations handling large volumes of these currencies;
- This once again proves that these decentralised currencies are largely incompatible with traditional centralised models;
- Celsius’s shift in strategy from requiring collateral from individuals they lent to, to complex and long term leveraged positions, as well as incorporating volatile DeFi protocols into said strategy had them inherently gambling with customers’ money;
- For example, allowing users to earn returns on staked ETH as well as retaining the ability to remove it when Celcius themselves are unable to (the functionality hasn’t yet been built in to the blockchain with some protocols) creates a liquidity issue in itself;
- Many seasoned crypto traders we have spoken to have been ‘buying the dip’ – many have already exhausted their ammunition last week. In the long term they will probably be fine (unless they are over-levered and the slump continues);
- It was exactly this “buy the dip” sentiment with LUNA that caused many to go under, by the way. While you might get lucky, be careful about the risk you are taking;
- The worst is yet to come. Unless, miraculously, companies like Celcius and 3AC can solve their liquidation problems, or negotiate a bailout, there is likely to be a further domino effect triggered by forced selling within the crypto market. The meltdown of the Terra ecosystem has been and will continue to be contagious;
- Meanwhile, DeFi protocols such as Aave and Uniswap continue to handle liquidations seamlessly, further enforcing the success of the concept of decentralisation that cryptocurrencies were built to support;
Overall, this is the height of irony. We are repeating the mistakes of the 2008 financial crisis that cryptocurrencies (Bitcoin in particular) were born to avoid.
Let’s not confuse the issue of over-leveraging (leverage went from 12 to 1 in 2004 to 33 to 1 in 2008) with the issue of volatility in the crypto market. Though it is actively happening, the current unfavourable market conditions decreasing trust in the concept of cryptocurrencies is illogical; rather, the trust placed in centralised organisations handling these digital assets needs to be re-evaluated.
You might want to revisit this quote from Charlie Munger: “There are three ways a smart person can go broke: liquor, ladies, and leverage.”
If you want to learn more about Web3, download our report here: https://thelowdown.momentum.asia/country_sector/web3-the-inevitable-next-step/?option=2021-southeast-asia&code=15048
We’ll be deep-diving into Web3, the major concepts and use cases in our event “Web3: The inevitable next step” happening on 29 June between 3-4pm SGT.
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