The Liquidity Crisis of 2022: Which Crypto Companies Are Most at Risk?Jul 1, 2022, 1:08PM
Crypto companies have responded to harsh market conditions by reducing their services. Can they make a comeback?
Over the course of May and June, Bitcoin prices plummeted from above $39,000 to below $18,000. As result, many crypto companies have begun to face a liquidity crisis as their crypto holdings have potentially lost roughly half of their value.
In response to those harsh conditions, some companies have suspended withdrawals, limited services, or otherwise taken drastic action to protect themselves from losses. The following companies have likely been most severely impacted.
Celsius is among the most notable companies to be impacted by the market crash. The crypto lending firm paused withdrawals, transfers, and swaps on June 12.
It is unclear whether Celsius has definite plans to reopen withdrawals. Though Celsius claims it is in the process of regaining liquidity, the Wall Street Journal suggests that Celsius has hired advisors to prepare for possible bankruptcy.
Additionally, other companies could engage with Celsius. Nexo, a competing lending company, has made an unsolicited offer to acquire Celsius. Reports elsewhere suggest that Goldman Sachs could spend $2 billion to buy Celsius' assets at a discount.
Three Arrows Capital
Three Arrows Capital (3AC) is at the center of this month’s market downturn. On June 17, co-founder Kyle Davies told the Wall Street Journal that 3AC lost money on a $200 million investment in the failed Terra blockchain earlier this year.
Though 3AC managed to survive the collapse of Terra in May, those events also caused crypto prices to fall rapidly, putting additional stress on the firm.
Three Arrows Capital has now hired advisors to help it settle balances with its clients and find rescue from another firm. Other reports suggest that 3AC has defaulted on a $670 million loan to Voyager Digital, as described below.
Voyager Digital, a crypto trading platform, has suspended withdrawals and other services as of Friday, July 1.
Earlier, it reduced its withdrawal limits from $25,000 to $10,000 due to "current market volatility."
Voyager's issues are closely related to those at Three Arrows Capital. As 3AC has failed to pay back its debt, Voyager has now decided to secure another loan from Alameda Ventures. That loan consists of revolving credit worth $200 million in cash and USDC, plus 15,000 BTC valued at approximately $300 million today.
Voyager now says that it will explore strategic alternatives with other companies. It is unclear whether this means the company will be acquired by another.
CoinFLEX, a minor crypto exchange, suspended withdrawals on June 23 citing “extreme market conditions.” It also mentioned issues with an unnamed counterparty that is now known to be Roger Ver. CoinFLEX says Ver owes it $47 million.
CoinFLEX's trading volumes have fallen dramatically since it shut down withdrawals. The company saw daily trading volumes upward of $2 billion as recently as June 22. But since June 26, it has seen roughly $1 million in trading volume per 24 hours.
The company initially expected to re-enable withdrawals by June 30. As that date draws near, CoinFLEX is now planning to raise funds through a token sale for a new interest-bearing cryptocurrency called Recovery Value USD (rvUSD).
The crypto lending firm BlockFi may or may not be facing liquidity issues. On June 16, BlockFi CEO Zac Prince said that his company accelerated a loan with an unnamed client—likely Three Arrows Capital—that had not met its obligations.
Having liquidated those funds, BlockFi has since sought out new loans. On June 21, BlockFi announced that it had secured a $250 million credit line from FTX. Other reports suggest that FTX plans to buy a partial stake in the company as well.
These agreements, combined with the fact that BlockFi has dismissed 20% of its workforce suggest that BlockFi is in need of funding.
Yet BlockFi has not limited its services. In fact, it has increased interest rewards for customers. As such, BlockFi may be more resilient than it seems.
Bancor, a major decentralized finance protocol and exchange, paused an investor protection feature called impermanent loss protection (ILP) on June 19. Bancor cited “hostile market conditions” as its reason for doing so.
Clearly, Bancor’s issues are severe enough that it removed one of its promised features in order to protect itself. However, unlike other platforms. Bancor has not gone as far as to limit withdrawals, so it is probably not at immediate risk of insolvency.
Babel Finance, a crypto lending firm in Hong Kong, suspended withdrawals and redemptions due to market fluctuations on June 17.
Babel has not yet reopened withdrawals or stated a date by which it might do. However, it said on June 20 that it has reached an agreement with counterparties on debt repayments, implying it may reopen its services in the near future.
Unfortunately, a number of the company's leaders are now leaving the company, suggesting that the company's future is not promising.
Will the Crypto Industry Recover?
If the crypto market continues to decline, other companies could take similarly drastic action. Service suspensions have now become commonplace enough that other companies may limit their activities in the coming weeks.
However, the market has made a slight recovery. After hitting a low of $17,760 on June 18, Bitcoin is now valued at $20,300 as of June 28. If prices recover or remain stable, companies that have suspended services may feel comfortable reopening them.
Finally, the largest crypto exchanges such as Binance and Coinbase are unlikely to fully suspend services for any serious length of time, meaning that most retail crypto investors will likely have access to all their funds. The past few weeks have shown that lending firms and capital firms are most likely to suspend services.
Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.