This year, crypto prices have been consistently touching new bottoms, and it’s not just the prices that are killing any optimism present around crypto.
The recent LUNA crash, for example, was one of the most shocking events to have happened to crypto. Where over $40 billion were wiped out of thin air, in less than a couple of weeks. The number one crypto by market valuation, Bitcoin, too, is trading at a year low at less than 20,000 dollars.
Amidst all of this, a recent statement from the CEO of FTX calling out some crypto exchanges to be “secretly insolvent” is starting to raise concerns. He expects a lot of exchanges to be on the verge of collapse, adding he can’t, or rather won’t save everyone.
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Tracing the Insolvency of Crypto Exchanges
A lot of exchanges that aren’t in the top exchanges club are having a rather tough time staying afloat, cited the FTX CEO, Sam Bankman-Fried. A lot of these exchanges are unregulated, with few offering almost 20 times the loan on initial capital, and have been known to have invited a lot of hackers and scammers.
Three Arrows Capital (3AC), a Singapore-based hedge fund manager, had $200 million locked in Luna Classic (LUNC) – currently worth less than a thousand dollars – and was almost insolvent. The firm had borrowed significant amounts of money from other crypto companies, Voyager Digital and BlockFi being the two of them.
Bankman-Fried came to the rescue and bailed these firms out by providing $750 million through both of his firms. FTX provided $250 million to BlockFi in credit, while Voyager Digital received $200 million in cash and 15,000 bitcoins through Alameda.
Although these bailouts seem to have saved the two companies, a helping hand can’t be extended to all crypto companies, and in most cases, they aren’t worth saving. As stated by the CEO, “There are companies that are basically too far gone and it’s not practical to backstop them for reasons like a substantial hole in the balance sheet, regulatory issues, or that there is not much of a business left to be saved,”
In 2016, Bitfinex was hacked for roughly 120,000 bitcoins, worth over $2.25 billion as of today. Coincheck, a Japanese exchange was hacked for over 500 million dollars in 2018. A couple of years back, Kucoin lost 275 million dollars. And just last year, Bitmart was breached for $200 million.
A lot of these mishappenings have been a consequence of a lack of certification standards for these crypto firms to operate and deal with clients’ money. There is hardly any regulation on the exchanges, and only a few derivatives markets are looked upon by a regulatory body. There is no self-regulation organization in the US either.
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Generosity Causing Failures
Another common cause for the failure of crypto firms has been the generous offerings they provided, which the rising prices of crypto allowed them to do. But the firms are having a hard time, now that the markets are in the red. Both BlockFi and Voyager offered customers upwards of 12% yields on their deposits, and so did most other crypto exchanges.
The only way to sustain that was to charge an equal amount of interest, or more to borrowers, or put the money into decentralized finance. Which failed to work, soon after the crypto market wasn’t making an optimistic trajectory. Voyager had a market cap of more than $3 billion a year back, while today, it has a market cap of roughly $100 million.
FTX, on the other hand, has been profitable for 10 quarters. Its competition, Coinbase, however, made a loss of $432 million in the first quarter. The CEO said that FTX was prepared to deploy billions on mergers and acquisitions.
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Not all investments are made with the intent of a return, some are made merely to keep companies such as Voyager afloat. As a venture capitalist, a sound recovery of the market and future growth is considerably important for someone whose fortune depends on it.
On a related note, Bankman-Fried provided reassurance, saying that the fears revolving around Tether aren’t something to worry about. It has previously been regarded as a ticking time bomb, with questionable collateral. Its recent price shift to $0.95 too aided the concern.
However, Bankman-Fried says, “I think that the really bearish views on Tether are wrong…I don’t think there is any evidence to support them.”
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