Crypto exchanges should be cash cow printing machines - you take on no risk and just collect a cut of every transaction. Volatile crypto markets should be great for them. Even with leverage, you liquidate people's accounts if they hit their margin calls, so there's still no risk to the exchange. Yet somehow, some crypto exchange named Coinflex managed to violate its own leverage policies and is now unable to do withdrawals by giving an exception to one client who's now not willing to pay up. Better yet, their solution to this is apparently to issue a new coin, promise 20% interest on it, and re-capitalize themselves.
Matt Levine's Money Stuff doing work on unraveling the garbage underneath finance. https://www.bloomberg.com/opinion/articles/2022-06-29/crypto-loves-its-shadow-banks Celsius Spoiler Here is a financial literacy test for you: You can borrow $18 billion at 8% interest. You can take that money and invest it in loans that pay 20% interest. You don’t have to put up any of your own money. So you get $3.6 billion a year in interest (20% of $18 billion), and you pay out $1.4 billion in interest (8% of $18 billion), so you keep about $2.2 billion for yourself. Is this good? This is not a yes-or-no question, and the right answer is probably something like “well, good for who?” If you are a person who invents a business like this, and you are able to do it for a year or two and squirrel away the $2.4 billion, it is very very good for you and you can buy yachts and stuff. But in the long run, if you are borrowing at 8% and lending at 20%, you are taking some huge risk somewhere. Those 20% loans are risky and correlated and illiquid and possibly Ponzi schemes; that 8% money is flighty and unstable; you are lending out all the money you are borrowing and there is no cushion anywhere. At some point the people lending you the money at 8% are all going to ask for it back, and the people borrowing the money at 20% aren’t going to give it back, and you’re not going to have the money to pay back the 8% people, and they’re going to be really mad, and that’s when it will be useful for you to have a yacht to sail away on. Anyway here’s a Wall Street Journal article about Celsius: Celsius Network LLC CEO Alex Mashinsky built his cryptocurrency lender into a giant on a pitch that it was less risky than a bank with better returns for customers. But investor documents show the lender carried far more risk than a traditional bank. The lender issued numerous large loans backed by little collateral, according to Celsius investor documents from 2021 reviewed by The Wall Street Journal. The documents show that Celsius had little cushion in the event of a downturn, and made investments that would be difficult to quickly unwind if customers raced to withdraw their money. Celsius didn’t respond to requests for comment from the Journal. Celsius had $19 billion of assets and roughly $1 billion of equity as of last summer, before it raised new funds, according to Celsius investor documents from 2021 reviewed by the Journal. The median assets-to-equity ratio for all the North American banks in the S&P 1500 Composite index was about 9:1, or about half that of Celsius, according to data from FactSet. We have talked a lot about crypto banks recently, and Celsius’s roughly 5.3% capital ratio is, if anything, high. Tether’s capital ratio is about 0.2% (!); Voyager Digital Ltd.’s is about 4.3%. This banking business, this business of borrowing at lower rates and lending at higher rates and having a thin sliver of equity, this is a pretty well-known business, and in traditional banking there are lots of safeguards around it. That sliver of equity can’t be too slim, you need to keep some cash on hand to give back to your depositors, you need to make prudent loans that are not too risky or too concentrated or too much to your own affiliates, etc. In traditional finance there are “shadow banks” that try to do this sort of business with less regulation, but there are regulatory and market constraints on how much of that is allowed, particularly after shadow banking blew up in 2008. Meanwhile in crypto absolutely anything apparently goes. More in link
To be fair, all the implosions are coming from centralized finance. The De-fi protocols are at risk of programming flaws, but those protocols actually handle liquidations pretty well. Celcius, CoinFlex, BlockFi, etc - these are centralized operators taking stupid risks with customer funds. It's actually a pretty strong argument in favor of De-fi, because the programming determines what happens. There's no opportunity for people to interfere and make poor decisions.
Voyager's next, apparently... Voyager Digital Provides Market Update ...announced it is temporarily suspending trading, deposits, withdrawals and loyalty rewards, effective at 2:00 p.m. Eastern Daylight Time today.
This seems like poor risk management: https://www.cnbc.com/2022/07/01/voyager-digital-suspends-all-trading-deposits-and-withdrawals-.html On Monday, the broker issued a notice that prominent crypto hedge fund Three Arrows Capital (3AC) had defaulted on a loan worth more than $670 million. At the time, Voyager said that it intended to pursue recovery from 3AC, and in the interim, said it would continue to operate and fulfill customer orders and withdrawals. As of June 24, Voyager said it had approximately $137 million in U.S. dollars and owned crypto assets. The company also noted that it has access to a $200 million credit line in cash and USDC stablecoins, as well as a 15,000 bitcoin ($318 million) revolving credit line from Alameda Ventures, which is FTX founder Sam Bankman-Fried’s quantitative trading firm. How does a company with that little in assets even initiate a single $670 million loan?? And to a risky hedge fund?
SBF is swooping assets up like Pacman. Consolidation will be interesting with the cryptoverse when these brokers trend into big monopolies like FANG.
Voyager Is Sending Back Mysterious Data From Beyond Our Solar System https://www.sciencealert.com/nasa-s...m-beyond-our-solar-system-puzzling-scientists
