Crypto Crisis
It has not been a great year for cryptocurrency. Collapse after collapse of household names in the crypto industry. Everything started in July 2022 after the fall of a crypto hedge fund Three Arrows Capital.
Three Arrows Capital had investments in projects such as ethereum, luna, the grayscale trust and blockify. These investments were mostly funded with money from shareholders, as the value of their investments kept increasing, the value of their fund kept increasing. However, besides using shareholder money, Three Arrows Capital took out loans and leveraged their investments. Just like a “lever” it increased their financial strength and profits. As the crypto market was booming in the two year period before the collapse, Three Arrrows Capital were enjoying massive profits. However, just like with any investment the more profits there are, the more risk is involved, therefore as prices started going down leverage amplified their losses. The most damage was done when the price of one of their biggest investments Luna plummeted to virtually zero. Eventually in July, when Three Arrows Capital could not meet the demands of their lenders, they had to announce bankruptcy, owing 2.8 billion dollars. Similarly to the fall of Three Arrows Capital, a highly leveraged crypto bank Celcius Network also announced bankruptcy in July.
These two companies started a chain reaction in the crypto world. BlockFi and Voyager were the first ones to be infected. In theory, though since BlockFi and Voyager are only brockers they were not supposed to be affected, because they don’t deposit or invest money, but they were not only brockers, they also let their customers deposit money that they used to invest in to the crypto market. One of their investments was completely unrisky and not highly leveraged company Three Arrows Capital, thus when one of their biggest investments defaulted on their loans, BlockFi and Voyager experienced a massive loss, but their liabilities did not. In economics this is called “direct contagion”.
Direct contagion, can be stopped if the company suffering experiences a big inflow of money. This is where FTX come in, bailing out BlockFi, stopping a further infection of companies that invested into BlockFi. Unfortunately, direct contagion is not the only cause of the crysis, there is another factor which is the indirect contagion. When Celsius started collapsing they had to sell their assets such as Bitcoin, driving it’s price further down. Since, most crypto firms portfolios consist of the same assets, whenever such sell outs of assets happened, they all experienced a fall in revenue.
As crypto prices fell throughout the year, FTX was the next player to go down. Just like BlockFi and Voyager, FTX did not only act as a crypto exchange but also as a bank, accepting deposits at high interest rates and using this money to invest in risky investments. FTX also done some sketchy things such as investing funds that were promised not to be invested, into it’s sister company Alameda Research. This company was also a highly leveraged hedge fund. Eventually, FTX filed for bankruptcy in November 11th, without its backer BlockFi had to file for bankruptcy in the same month.
Written by Islam Buleshov | Proofread by Yasmin Uzykanova
