“How could this have happened?”
That’s what many cryptocurrency investors were wondering last week.
The crypto markets were in shock, after crypto lender Voyager Digital filed for bankruptcy.
The bankruptcy left thousands of crypto investors unable to withdraw their holdings. And those amounted to no small sum…
Voyager recently said it had roughly $1.3 billion of crypto assets on its platform.
It was a publicly traded company on the Toronto Stock Exchange. And it claimed to be insured by the FDIC (Federal Deposit Insurance Corporation).
But as it turns out, that wasn’t really the case.
More on that in a moment. First, here’s why I’m telling you this today…
News that Voyager customers likely won’t be getting all their money back has struck a new kind of fear into crypto investors.
That’s because it’s not the only crypto lending platform to implode in recent months.
The Voyager news broke on the heels of Celsius Network suspending customer withdrawals last month.
Celsius is another crypto lender. On June 12, it locked up billions in user funds amid “extreme market conditions.” And just yesterday, it said it has filed for bankruptcy.
As these stories continue to unfold, I want to shed more light on what’s happening in the crypto lending space right now.
I’ll also show you what led to this… and what it could mean for your portfolio if you hold Bitcoin.
The Domino Effect
I first wrote to you about the trouble in crypto markets on June 23. Volatility among so-called “stablecoins” was largely to blame.
Voyager is the next domino to fall.
At the center of the ongoing crisis is Three Arrows Capital (3AC).
3AC is a crypto hedge fund based in Singapore. As recently as March 2022, it managed $10 billion in assets.
Unfortunately, 3AC played fast and loose with its money. It made sizable leveraged investments in Bitcoin and Ether. It also took massive positions in risky small-cap altcoins and borrowed millions against them. It’s one of the largest borrowers on major lending platforms.
Late last month, 3AC defaulted on loans worth more than $670 million.
Who loaned 3AC this money?
Voyager.
Voyager said 3AC failed to repay a loan of $350 million in the U.S. dollar-pegged stablecoin, USDC. As well as 15,250 Bitcoin, worth about $305 million at today’s prices.
These failures set off a domino effect. That’s because many of the major crypto lenders and funds appeared to be exposed to each other.
As panic spread, depositors clamored to get their money off these platforms.
The crypto bank run was like the proverbial kick in the stomach for the lenders.
A Matter of Trust
Also, remember how I said earlier that Voyager claimed to be FDIC-insured?
Well, it wasn’t.
Its “banking partner,” Metropolitan Commercial Bank, is FDIC-insured. But Voyager never was.
That’s despite saying things like:
In the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000).
Voyager lied.
This gets to the heart of the problem the centralized crypto lending/borrowing space is currently facing… the problem of trust.
In the current financial system, everything relies on us trusting a handful of powerful institutions. This includes the issuance of money and the setting of interest rates.
And that’s the issue.
Much like people, institutions can’t always be trusted.
I had the “pleasure” of learning about this firsthand during my 15 years working on Wall Street. That’s one of the reasons why I left.
When Voyager went under, I was reminded of my days on Wall Street.
Back then, the Street was brimming with middlemen that over-allocated their capital. And firms that over-leveraged into subpar assets.
When they started to crash, it caused a domino effect that shook the global financial system to its core.
Today, my gut tells me there’s probably another ticking time bomb waiting to go off in the crypto space. When that happens, cryptocurrencies are going to take it on the chin once again.
Bringing It All Together
If you own Bitcoin, you might be wondering what these latest events mean for you…
Unfortunately, though not directly connected to these stories, the premier cryptocurrency has suffered.
It’s down nearly 60% this year…
Some of you may be tempted to sell.
But anyone who’s tried their hand at investing will tell you that it’s never a good idea to sell into panic. Even – or especially – if it seems like everyone else is doing it.
Yes, the crypto market is wrapped in uncertainty right now. No two ways about it.
But the current crisis isn’t one of Bitcoin’s making. This is a lending standards problem.
I believe we will see Bitcoin rebound from these fear levels eventually.
I’m not losing confidence in Bitcoin just because someone gambled with people’s savings using too much risk and leverage. As I saw during my years on Wall Street, many companies came back even stronger after the initial fallout from some of the mistakes that were made.
As I told you last week, history is on Bitcoin’s side… It’s a good inflation hedge… And the White House recently acknowledged cryptocurrencies as a legitimate and important part of American society and the U.S. economy.
And as I showed you last month and in previous essays, the 21 million cap on the number of Bitcoins, plus the ever-decreasing pace these are issued, means each Bitcoin will become more and more valuable in time.
I believe it’s important to keep up to date with events in this fast-moving sector. Hence my essay today about Voyager and 3AC.
But it’s even more important to keep a sense of perspective and not panic when you read some of the more sensationalist headlines in the mainstream media.
So if you currently hold Bitcoin, my advice to you right now would be to stay patient and ride out this current volatility.
Until tomorrow,
Nomi Prins
Editor, Inside Wall Street with Nomi Prins