TD₿: The Recent Collapse in Crypto Debt Structures by Caitlin Long with Robert Breedlove
TL;DR Leverage adds unnecessary risks and will motivate regulators to come down on the "crypto" industry.
Hey Bitcoiners,
Fallout emanating from the Terra Luna crash continues to spread across the broader cryptocurrency ecosystem as we continue to learn about firms that were exposed to it.
One thing about leverage is it causes fragility due to its interconnectedness. Someone’s asset is another’s liability. When a large crash occurs like Terra Luna, a chain of blow-ups typically ensues in a highly leveraged industry like “crypto”.
Three Arrows Capital is a hedge fund on the brink of insolvency due to its exposure to Terra Luna, but it’s also because it took on a ton of debt from lenders such as Voyager Digital, a publicly-traded crypto brokerage firm that had $5.8 billion of assets on its platform as of March 2022.
Now it’s being discovered that Voyager’s exposure to Three Arrows Capital is by no means small. It includes 15,250 Bitcoin and $350 million of stablecoin USDC, worth over $650 million — Oops!
It’s becoming apparent that Three Arrows can’t pay back this loan and Voyager is now considering sending a notice of default to Three Arrows for failure to repay it.
Many market participants are wondering if Voyager themselves can survive this kind of massive loss. Voyager has already borrowed ~$500 million from Alameda Research to help see it through this disaster.
This is the essence of leverage. In an event of rapidly falling asset prices and illiquidity, a long chain of risk gets exposed. In these deleveraging situations, you slowly learn of firm after firm that had exposure to the mess.
Caitlin Long has been warning about the risks of leverage in Bitcoin for literally years. She sat down with Robert Breedlove in this interview to discuss the recent events. (06/15/22)
The innovation of “crypto” has turned out to be leverage in disguise.
This will prove to be another test for Bitcoin to highlight its resilience as other cryptos around it continue to implode.
Tick tock next block,
Cory Klippsten
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Quote of the Day
“Leverage drawdowns can be brutally swift. Bitcoin has no lender of last resort to bail out intermediaries or stabilize its price—this is a feature, not bug. They help keep bitcoin’s interest rates pure.” - Caitlin Long, Founder and CEO of Custodia Bank
Meme of the Day