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Elements of the crypto industry appear to be seizing up as the currency plummets in value.
Dan Kitwood/Getty Images
Four days after crypto giant
Celsius
Network abruptly halted withdrawals for customers, other firms in the industry are showing cracks.
A major crypto hedge failed to repay some creditors. And another firm that like Celsius holds crypto deposits said it would cap customer withdrawals.
Still, the biggest shoe to drop so far has been Celsius. As recently as mid-May, Celsius held $11.8 billion worth of crypto assets on its platform with promises to pay alluring yields sometimes exceeding 10% to investors. To earn that yield, the company lent money to institutional investors and in some cases made large investments on “decentralized finance” protocols that paid Celsius even higher rates. But recent pressures in the crypto market—as well as the lack of liquidity in some of Celsius’ investments—apparently lead the company to suspend withdrawals, triggering fears about how long investors’ money might be locked up and whether they might ever get it back.
A Celsius spokesperson referred to a blog post promising customers, “We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations.
By Thursday the pain had spread much further. A crypto hedge fund that at one time managed $10 billion called Three Arrows Capital failed to meet margin calls and had positions liquidated. Its CEO Su Zhu this week posted a cryptic tweetsaying “We are in the process of communicating with relevant parties and fully committed to working this out.” That was followed later by an announcement from crypto yield firm Finblox that said it would cap withdrawals for users, noting that it relied in part on Three Arrows Capital for liquidity.
It’s unclear where the pain will stop, but what is clear is that contagion is alive and well in the crypto markets.
Take the investment that apparently lead to Celsius’ pain. The company engaged in many yield generating strategies. One involved buying a digital token, called “Lido Staked ETH,” tied to another token called Ether that would earn investors yield once the Ethereum blockchain reached a milestone expected later this year. In the past, the prices of Lido Staked ETH and Ether hewed together, but in recent days as investors sought liquidity, Lido Staked ETH fell well below that of the underlying token. For a company like Celsius, which promises immediate liquidity for investors who need it, the combination was too much to handle.
It’s unclear how many other crypto banks and investors are vulnerable to the staked ETH “depegging” or other issues like it, but if Celsius or other firms fail to make good on their own loans—and those firms in turn can’t meet obligations—it’s easy to see how a crypto swoon can lead to permanent damage in the industry.
Write to Joe Light at joe.light@barrons.com