The crypto carnage continues as nervous investors rush out and big digital asset-focused companies Celsius and Three Arrows Capital (3AC) feel the pressure.
On Wednesday afternoon, it appeared that Three Arrows Capital (3AC) had been selling assets, including $40 million of its Lido Staked Ethereum (stETH).
The token, known as “staked ether,” has suddenly become a key focus for crypto traders trying to manage the extreme tension in digital asset markets, as major players from beleaguered lender Celsius to hedge fund Three Arrows Capital and industry heavyweight Sam Bankman-Fried’s Alameda Research are dumping their holdings.
So it is known that something is wrong with Three Arrows Capital, but it is not yet clear if that means it is insolvent, as rumors spreading through the cryptosphere suggest.
“there was more risk in this than was fully appreciated”
Celsius Investors
The massive crypto-focused venture capital firm based in Dubai and Singapore has suffered over $400 million in liquidations and is feared insolvent, Be[in]Crypto has reported.
The key metric is the discount between the price of staked ether (stETH) – a Lido Finance protocol token that is supposed to trade at a price close to ether (ETH), the native cryptocurrency of the Ethereum blockchain – and the price of ether itself.
Lido Staked Ethereum, which allows people to stake Ethereum and receive an equal amount of StETH in return, has been trading at a 6% discount.
Right now, the entire cryptocurrency market cap is languishing below $1 trillion, with Bitcoin (BTC) edging ever closer to $20k and Ethereum (ETH) threatening to drop into triple figures.
Following the Ethereum difficulty bomb delay, confidence began to fade with Lido finance’s stETH. As liquidators haunt the two lenders Celsius and 3AC, hoping they will go into automatic liquidation, there has never been a worse time to try to offload stETH.
the celsius case
Part of the reason investors are so paranoid is that just a couple of days ago, Celsius Network, one of the largest providers of DeFi lending, ran into liquidity problems and froze all withdrawals.
In a blog post on Sunday, Celsius said it was pausing all withdrawals, trades, and transfers between accounts, citing “extreme market conditions.”
Rival Nexo was quick to react to the news, submitting an offer to acquire “certain assets” from Celsius.
Apparently, Celsius was one of the big institutional funds hit by the fall of Terra.
The snowball is generated by the loss of confidence that Celsius can cover their withdrawals, that loss of confidence inspires more and more people to withdraw, which makes people lose confidence even more, etc. This is a typical “run”.
In any case, it is not clear if Celsius is insolvent, or, instead, has liquidity problems, which is not the same thing. If you are creditworthy but illiquid, then you would have the funds, but not quite available.
And if there is no liquidity, where is the money?
Apparently in various places:
1. There would be about $400 million in staking on the Ethereum Beacon chain.
2. There is another $400 million leveraged in the Maker protocol, which has been dangerously close to liquidation, although Celsius continues to add funds to defend its position and prevent such a liquidation.
Although in recent hours there has been talking of a rescue, this would not be something confirmed according to a report in the Wall Street Journal.
Two pension funds that had recently invested capital in Celsius would also be unwilling to add more funds for a bailout. Take Caisse de dépôt et placement du Québec, a major Canadian pension fund, and New York-based WestCap Group, which led Celsius’s $750 million Series B funding round last year, raising the company’s valuation to $3.5 billion.
Apparently, they don’t feel good about the state of things at Celsius, finding that “there was more risk to this than was fully appreciated,” they reportedly told the WSJ.
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