WTF.
Seriously, WTF, FFS.
I have been wrong recently . . .
. . . and I have lost money . . .
. . . but I will sleep well tonight knowing I didn’t lose multiple billions of other people’s dollars like DeFi lender Celsius and crypto VC firm Three Arrows Capital.
No, I confine my losses to my own Coinbase account, thank you.
And furthermore, when I get rekt the whole damn market doesn’t threaten to lose its lunch. But, like a weirdly serious game of “Among Us,” the market is now losing its sh*t over who is the most sus.
So how the hell did we get here, especially when it seemed not just two months ago that the market had weathered the storm and was turning?
First, LUNA’s swift swan-dive, which now feels like it was six years ago instead of six weeks ago. I lost a substantial sum of nearly three figures when the moon coin was suddenly worth around one-millionth of itself, but Three Arrows held, oh, about $560 million of it.
You can do the math on what that’s worth now, or, if not, here’s a large-screen graphing calculator that will do it for you for about that much.
Word on the street is that 3AC compounded their big fat L by revenge trading, which is basically the investor’s version of the guy who loses a big pot with pocket aces shoving all-in on the next hand with eight-three offsuit. Poker players call that “going on tilt,” because, almost invariably, it landslides all your chips away.
To throw more gas on this dumpster fire, 3AC was also leverage trading, meaning they were risking borrowed money. This is a very bad idea unless you know what you’re doing, and everyone’s a genius in a bull market.
But when things get stupid, overlevered losers reach two grim milestones: margin calls and liquidation.
As 3AC were not exactly forthcoming about their balance sheets (foreshadowing), let’s use someone whose leverage is very public: on March 29, when BTC/USD was more than twice what it is now, Michael Saylor took out a massive loan to buy over 4,000 more bitcoin, collateralized by the Scrooge McDuck vault he already owns.
On May 3, MicroStrategy’s CFO announced on its Q1 earnings conference that the company faced a margin call if Bitcoin fell below $21,000, meaning that Silvergate could force them to either put up more collateral or sell. Saylor has denied that this has happened thus far and tweeted that even if Bitcoin falls below $3,562 MicroStrategy can continue to post more assets, but one thing that is inarguable is that if the price falls enough, their entire position will be liquidated, as they’ll have bills they can no longer pay.
We know Three Arrows Capital faced margin calls from some of their investors, and they responded the way I did to my landlord once when I was behind on rent: they just kinda stopped answering their phones. (I even hid from a firm knock on the door. Not my proudest moment.)
Now, 3AC is not broke. They still have a lot of assets — in fact, as early investors in many popular crypto projects, they’re still sitting on billions. But most of those tokens are locked for months and do them no good when they need cash now.
Three Arrows quietly began unloading its stETH holdings in May after their LUNA bags disintegrated. Staked ether is a token created by Lido Finance that allows investors to post their ethereum and receive a token in exchange (as opposed to locking ETH up for months, as Coinbase and others do).
It’s been a common headline that this dumping caused stETH to “depeg” from ETH, the same way UST, Terra’s stablecoin, depegged from $1 and collapsed into a death spiral that sucked LUNA down to hell with it. But that’s not accurate, as Lido cofounder Jordan “@Cobie” Fish explains.
stETH is basically an IOU for ETH (plus some interest). If you’re at a McDonald’s and have a coupon for a free Big Mac, that coupon is worth 1 Big Mac. But if it’s a coupon for a free Big Mac that can only be redeemed at some indeterminate point in the medium-term future, even if it comes with a side of fries, someone on the open market may not want to trade 1 Big Mac for it. Especially if Three Arrows Capital is dropping 60,000 such coupons from out of a helicopter. As Cobie puts it:
The stETH discount to ETH will be a function of how much existing stETH holders need liquidity, vs demand for buying this staked ETH derivative at discounted prices.
And some larger players have been expressing their need for liquidity by exiting stETH recently.
Every stETH 3AC sold made the next one even cheaper, as sell pressure made them worth less and less with each transaction.
Celsius held more than 400,000 stETH, all of which was losing value against ETH even as ETH itself hemorrhaged 40% in a week.
As its customers were trying to reacquire their rapidly depreciating crypto to panic-sell it, Celsius’ own debt-to-assets ratio was taking on water. The capsize happened rapidly enough that it caught founder and CEO Alex Mashinsky off-guard. On June 11, he personally replied on Twitter that an analysis of Celsius’s upcoming insolvency was the common three-letter acronym for “fear, uncertainty and doubt.”
. . . and the very next day, Celsius caved and froze all withdrawals.
Their fall came first because 3AC was still playing shell games with its creditors, at least one of them alleges:
But if you want a shell game, try to follow what Celsius was doing with depositors’ money to try to earn more yield than they were offering:
1. stake ETH on Lido ➡️ get stETH
2. send stETH to Anchor vault on Ethereum ➡️ mint bETH (Binance’s stETH)
3. send bETH to Terra network using Wormhole
4. deposit bETH on Anchor to gain 19.5% yield
According to one on-chain analyst, Celsius funneled upwards of $275 million into the soon-to-be-doomed Anchor Protocol in the two weeks straddling late April and early May — but then, according to The Block Crypto, they yanked at least $500 million right back out juuuust before the whole thing went toes-to-Jesus.
Despite their protestations, it is possible that contributed to the LUNA/UST immolation — and thus, indirectly, their own demise.
So, WTF?
Look, I’m no expert. In fact, shorting me has been a winner for months now. But, paraphrasing long-term bulls smarter than me, this dump in the crypto markets is necessary to flush out the very bubbles created by ridiculous douche-bro moves like overleveraging and recursive yield farming.
At this point, even the slightest amount of FUD can rattle everyone in the market, and there’s no shortage of it. Look, everybody’s freaking out about Tether again:
But, the LUNA/Celsius/3AC ménage à twerp seems like a perfect circle of stupid, where the contagion was confined to themselves. Everybody else who’s on the precipice is so minor a player that Sam Bankman-Fried can be a one-man bailout machine, which makes sense. I mean, the man’s name literally is Bank:
So I expect that we’ve seen the worst of it.
But I know nothing, so I took a whole bunch off the table during this dead-cat bounce.
Which means it will probably go parabolic soon.
WTF.
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