Cryptocurrency investing is suffering a terrible run this year. The collapse of the Terra protocol affected Bitcoin and has dragged the entire ecosystem with it. Over the past weekend, it dipped below $20.000 for the first time since 2020. But there is a silver lining: three of the ecosystem's biggest victims could offer us clues to help protect us from the next cryptocurrency crash.
Victim 1: Celsius Network (CEL)略
On June 13, cryptocurrency lending platform Celsius Network (CEL) announced that it would freeze all user withdrawals due to “extreme market conditions.” This evoked a situation of extreme distrust. The protocol has over 1 million users and reported having nearly $12 billion in user assets under management in May of this year.
Celsius began moving its clients' funds without any consent. Source: Twitter
Until recently, we could have parked our cryptocurrency investment with Celsius and generated decent returns. Depending on the token entered, we could have reached 19% profitability, according to the platform's website. But to maintain those returns, Celsius was exposed to the collapse of cryptocurrency investment.
Profitability offered in Celsius for locking SNX tokens. Source: Celsius Network
On the one hand, Celsius was exposed to Terra USD stablecoin collapse (UST), with substantial deposits in the Anchor protocol. Celsius also had large volumes of Staked ETH (StETH) on Lido, a DeFi platform for locking ETH for profit. When Lido users want to lock their ETH, they get StETH at a 1:1 ratio. But the StETH token began to decouple from peg to ETH, as more investors were forced to sell StETH and withdraw their staking strategies during the recent market crash. Right now, one StETH is worth just 0,94 ETH, according to Coingecko.
The STETH token has lost peg to ETH for over a month now. Source: Coingecko
What is the lesson here?
Celsius has reportedly hired restructuring lawyers. If Celsius goes bankrupt, users are unlikely to recover their cryptocurrency investment. They would be treated as “unsecured creditors” according to the terms and conditions of the platform. This highlights a popular mantra in cryptocurrency investing: “without your keys, it's not your cryptocurrency.” Therefore, unless we are using our cryptocurrency investment to invest or lend to generate a return, we are better off opting for self-custodial cryptocurrency storage solutions whenever we can.
Low 2: the hedge fund Three Arrows Capital (3AC)
Singapore-based hedge fund 3AC had a cryptocurrency investment worth more than $3 billion as of April this year. But things quickly changed for the fund during the bear market, and it is now exploring various liquidation options to fend off its creditors.
Like many major players in the cryptocurrency market, 3AC invested heavily in the Terra ecosystem before its collapse. The fund's co-founder, Kyle Davies, told the Wall Street Journal that 3AC invested more than $200 million in LUNA tokens, which fell more than 99,99% in May. The fund also has a massive position in Grayscale Bitcoin Trust (GBTC), which has fallen more than bitcoin during the market sell-off.
What is the lesson here?
3AC lost money on its cryptocurrency investment in a bear market. He made some bad investments, sure, but his Achilles heel may have been that he used too much leverage to try to grow returns. As a result, the fund had a cascade of “margin calls” from lenders like BlockFi and Genesis, and leveraged positions on exchanges like BitMex, and that obviously grew its losses.
Moral of the story: Leverage is a dangerous tool, and even the professionals get eliminated. So do not use leverage in your cryptocurrency investment, the market is volatile enough to make our lives more complicated. When we simply buy and hold our cryptocurrency investment (i.e. without using leverage), we still hold that token if the price drops, and the price could eventually recover. But if we use leverage, we are just borrowing assets from an exchange, and that can really compound our losses when the market goes against us.
Victim 3: Solend and Solana's Killer Whale
The next affected involves a project called Solend, a decentralized lending platform built on the Solana blockchain. An unknown whale (an investor with a large investment in cryptocurrencies) deposited nearly 5,7 million SOL (approximately $200 million at current prices) into the protocol to borrow nearly $100 million in the USDC stablecoin. . If the price of SOL drops to $22.27, Solend will liquidate that cryptocurrency investment because the borrower's collateral will not be worth enough to support their USDC loan.
Governance proposal explaining the delicate situation of Solend. Source: Solend DAO
The problem is that the whale position represents around 95% of all SOL deposits on the platform and around 85% of all its USDC loans. In other words, if the whale is killed, it would take all the fish on the platform with it.
Solend attempted to contact the whale to strike some kind of deal, but received no response for some time. That led Solana investors to vote on an “emergency power to temporarily take over the whale account” so that settlement could be processed over-the-counter (OTC), rather than directly on the Solend protocol (since this would be much less disruptive to other Solend users).
Governance proposal to intervene in the whale's wallet. Source: Solend DAO
What is the lesson here?
SOL price is currently around $37, well above the settlement level of $22,27. And according to him Solend Twitter feed, the whale has now been in contact with the platform to find a solution. Given this fact, there is still a chance for the platform to recover, although much will depend on how events unfold.
That said, one important takeaway still applies: we should not keep all of our cryptocurrency investment in a single DeFi platform or protocol, especially in bear markets, where large sell-offs are more likely to occur.