Unchained Podcast Ep 364: Why possible insolvencies by Celsius and 3AC could spell disaster for crypto
Primer: Laura Shin, host of the Unchained podcast, interviewed Mika Honkasalo, an independent crypto researcher and writer for The Block, as they talked about the recent troubles that plagued Celsius and Three Arrows Capital (3AC). What is going to happen going forward and who is going to be the next in line? All these and more in this pod summary of the episode.
Celsius
Context
Celsius is pausing all withdrawals, swaps and transfers between accounts
In May, Celsius reported having $11.8B under management with 1.7M customers
Celsius is this Fintech layer on top of DeFi that allows trading of crypto assets, earning yield and also borrowing against these assets
Significance of pausing withdrawals
Had early signs on-chain that shows something weird is happening that shouldn’t happen
E.g Suspected Celsius are selling their stETH positions
At first, people are downplaying it, but soon they realised that the situation could get very serious
stETH is a derivative of Ethereum that allows one to access the yield that is already on the beacon chain in Ethereum 2 and also redeem the derivative to the underlying collateral Ethereum in about a year or so, but doing so will lock up the staked Ethereum
stETH is trading near 1 to 1 with ETH for most of its history but people are getting sceptical of how these derivatives are to be priced after UST and LUNA collapsed
All these started when Celsius started selling stETH in the market but they shouldn’t unless they mismanaged their risk
Only have limited liquidity in the market and if one still has to sell it, it’s a red flag that something is off and they need the money right now
The market misunderstands that there is a price peg between stETH and ETH but it is not
Why is Celsius hit harder than its competitors?
Started from the LUNA/UST debacle
Celsius had exposure and that puts them in a bad position
All boils down to risk management and it seems Celsius did not do a good job
All the criticism and downside risks about LUNA/UST and the stETH are all there but it seems that during the bull market, all these are ignored
Lost about $22M from the BadgerDAO hack and another 35,000 ETH (about $39M) from Stakehound when they misplaced private keys
What is most likely to happen to Celsius and its customers?
The Wall Street Journal reported that the VCs of Celsius are unlikely to provide more funds to bail the company out. They also reported that Celsius had hired some restructuring lawyers
No point for VCs to bail out because, at this point, Celsius is a ‘dead company’ so it is just throwing money down the sink
Not sure how bad the financial situation is for Celsius, so can’t tell how much users can get back
Three Arrows Capital (3AC)
Context
Rumours are swirling around that 3AC was being margin called and possibly insolvent
Nothing is confirmed but it seems clear that 3AC is in deep trouble
3AC is a proprietary trading firm and did some venture investing with limited partners, and has very prominent figures, Su Zhu and Kyle Davies, heading it
Surprising to a lot of industry players
Surprising to many people because 3AC is a very large name and people trusted them
When the rumours came, no one really believed them
Hard to believe that a smart investor got liquidated when BTC hits 25-30k because you can’t pay your lenders
It’s not even a big drop for BTC, so how can a veteran not be able to survive such a hit?
Margin called and liquidated
In essence, 3AC longed the market with leverage
They likely got very good terms with lending platforms because they are a trusted partner, which makes it all the worse
“There’s a huge difference between just being down a lot, like down 90%, and actually being in a position where you’re levered long and can’t pay your debts. It’s more understandable to make a loss and just be wrong about stuff than to manage the risk that poorly.”
~ Mika Honkasalo
3AC is one of the firms that were affected by the LUNA/UST collapse because they were big investors in LUNA
When the price of the general market drops, their positions on margin got affected
They also had similar positions as Celsius, where they sold a 30,000 stETH sell into the Curve pool, which is the classic sign of disaster right now
Like Celsius, stETH positions are meant for the long term and are not liquid at all, so why are they market selling?
Who gets hurt when 3AC goes under?
The large lending platforms that 3AC do business with, like BlockFi and Genesis
Will be surprised if any of these platforms will go into existential crisis because of 3AC, but if it does, it again highlights the importance of risk management
3AC seems to be borrowing from everyone unsecured at the last minute. The purpose for this capital is unknown but is likely to answer some margin calls
What happens if both Celsius and 3AC goes under?
The worry is whether these are the only two companies affected
If the price of BTC goes under 20k, this might also expose other players that are in a similar situation
If that happens, this will lead to a big flush out
Things to monitor:
Who is next in line to fall?
Who is affected when this particular entity goes under?
Who to look at next?
Funds (similar to 3AC)
Lending platforms that lend to these funds, especially those that had taken on high DeFi yields on behalf of their customers (similar to Celsius)
Look at the company and how they behave - do they seem like the sort of institutions to go so far out in a risk curve that they will be in trouble
There are some long-term companies that do not take such risks but suffered in growth - these could be the big winners now
The positive silver lining is that in the next cycle, companies that took on excessive risk will be weeded out, so the industry as a whole will be stronger
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