Crypto Markets Withstanding Uncertain Times

Multiple market cycles in the crypto market have shown that even large and established crypto custodians or exchanges may disappear very quickly. In 2022, events such as the collapse of Three Arrows Capital, Celsius, and FTX had a lasting impact not only on consumers, but also on public perception of the crypto market.

by Gian Stäuble

Global geopolitical tensions, challenging macroeconomic environments, and difficult market conditions have shaken the confidence of many investors. As a result, the markets are under pressure and the underlying promise of crypto and blockchain technology needs to be remembered to restore trust.

We are now shedding light on some of these import- ant developments to understand how they unfolded affecting clients across the globe, including insights into the happenings around FTX last November from Niklas Nygaard, a Senior Trader at Bitcoin Suisse. We provide a look behind the curtain on how Bitcoin Suisse reacted swiftly in these turbulent times and what learnings could be taken.

June 2022 - Celsius Network

June 2022 - Celsius Network, a centralized finance (CeFi) platform, custodied digital assets on behalf of investors and offered rewards in return. According to their terms of use, this granted them the right to “use or invest such digital assets in Celsius’ full discretion”. As these operations were not isolated from risk, deposited assets “may not be recoverable” if Celsius would be unable to meet its obligations[108]. On Sunday, June 12, 2022, Celsius announced they would halt all withdrawals, swaps and transfers between accounts due to what they called “extreme market conditions[109]”. At the time, Celsius was used by more than 1.7 million users. They also ran a native platform token “CEL”, which fell over 70% in value after the firm’s announcement. Later in July 2022, Celsius filed for bankruptcy[110].

On September 8, 2022, Oren Blonstein, the Chief Executive Officer of Celsius, outlined a plan to revive the firm to Celsius’ employees[111]. At the time of writing, it remains unclear whether Celsius will be successfully restructured or if its assets will be liquidated and its business closed.

June 2022 - Three Arrows Capital & Voyager Digital

June 2022 - Three Arrows Capital (3AC), a prominent cryptocurrency fund with ~$18 billion in assets, was hit by the market downturn as the contagion from the developments around Celsius spread. The fund faced massive liquidations on FTX, Deribit, and BitMex after it suffered from closely linked exposure to the LUNA collapse and the stETH-ETH depeg. In the process of unwinding positions, one wallet linked to 3AC was seemingly forced to sell more than 60’000 stETH to pay off loans and debts, contributing to the stETH-ETH depeg and getting even more entities in trouble[112]. On June 27, 3AC then defaulted on a $670 million loan consisting of 15’250 Bitcoin and 350 million USDC that was issued by Voyager Digital. On the same day, a British Virgin Islands’ (BVI) court ordered 3AC into liquidation, forcing them to liquidate assets tied to their BVI company. In August, the advisory firm Teneo was appointed to handle the liquidation of 3AC113. It has been reported that the founders, Kyle Davis and Su Zhu, are not being cooperative in tracing and recovering the firm’s assets to make investors whole[114].

July 2022 - Troubled broker Voyager Digital had to file for Chapter 11 bankruptcy protection after 3AC’s default. Voyager Digital was then set to be acquired by FTX US for $1.4 billion after FTX won in a U.S. bankruptcy auction. This plan was terminated after FTX itself filed for bankruptcy[115].

November 2022 - BlockFi

November 2022 - On November 28, following its deci- sion to suspend withdrawals on November 11, crypto lender BlockFi filed for bankruptcy following a contagion spread from FTX’s bankruptcy filing. BlockFi is owed a total of $1 billion by FTX and its trading firm Alameda Research. FTX and its over 100 affiliated companies’ bankruptcy filings included Alameda Research defaulting on a $671 million loan from BlockFi, as well as frozen FTX accounts worth $335 million. BlockFi’s decision to file for bankruptcy was directly linked to the implosion of FTX. The entanglement and interdependence of BlockFi and FTX started earlier that year, when FTX provided a line of liquidity of up to $400 million to the troubled crypto lender BlockFi, in return for reserved rights to acquire BlockFi at a capped acquisition price of $240 million. Calculating the damage done, BlockFi issued a statement, estimating roughly 100’000 clients to be affected and claiming its assets and liabilities to be in the range of $1 - $10 billion. Currently, BlockFi holds $256.9 million in cash and stated plans to continue operations after a successful restructuring[116].

November 2022 - Genesis

November 2022 - After a series of events unfolding with the FTX downfall, Genesis remains struggling to raise new cash in order to avoid bankruptcy. Genesis Global Trading is an OTC crypto platform which, alongside its sister company Grayscale, are owned by their parent company Digital Currency Group (DCG). Genesis got dragged into the growing pool of troubled crypto corporations due to multiple toxic loans and bad debt holding $175 million locked up in trading accounts held by FTX. Further, it lent $2.36 billion to blown up hedge fund 3AC and has a total of $2.8 billion in outstanding loans leading to a warning by Genesis of a potential bankruptcy in case no funding is found. A disclosure on Tuesday, November 22, revealed that a total of $575 million is owed to Genesis by its parent company DCG, alongside a rumor of an IOU of $1.1 billion117. On January 19, 2023 Genesis filed for Chapter 11 bankruptcy protection.

November 2022 - FTX

November 2022 - The week of November 7 saw FTX-related headlines all over, leading to a culmination of Sam Bankman-Fried (SBF) stepping down as CEO and one of the world’s largest crypto exchanges filing for Chapter 11 bankruptcy. The filing revealed that FTX (crypto exchange) and Alameda Research (connected trading firm) have liabilities that range from $10 billion –to $50 billion. Even the U.S. entities collapsed which according to some SBF’s thread on Twitter were supposed to be “fine”. The avalanche started with a CoinDesk report that leaked the balance sheet of the dangerously intertwined Alameda Research revealing that a significant amount of their balance sheet was held in FTT, FTX’s platform utility and access token. Despite having limited utility and liquidity, FTT was extensively leveraged in DeFi, on FTX and as collateral in Alameda’s books118. FTX reportedly bailed out Alameda that suffered losses connected to 3AC and the Luna collapse in May 2022 and accepted Alameda’s FTT collateral in exchange for funds that at least in portion belonged to their customers. New information came to light when The Wall Street Journal published an article titled “FTX Tapped Into Customer Accounts to Fund Risky Bets, Setting Up Its Downfall”, revealing that FTX had $16 billion in customer assets and gave $10 billion to Alameda who blew119 it. Following a tweet from Changpeng Zhao (CZ), CEO of Binance, stating that they will liquidate their FTT holdings received as FTX exit equity, a bankrun on FTX started. Shortly after, FTX halted withdrawals followed up by a post of CZ announcing a non-binding LOI between FTX and Binance, only to then back out of the deal one day later because of “issues [...] beyond our ability to control or help.”

Contagious effects already started to pop up as Genesis confirmed having $175 million still on FTX, with crypto lender BlockFi, who previously was bailed out by FTX, being highly exposed, or CoinShares having a $30.3 million exposure120. U.S. SEC and Justice Department, among other jurisdictions, started investigating FTX. Several crypto projects were affected as well as FTX ventures that funded various projects such as Solana (FTX holding $1 billion in SOL) or recently launched Aptos. It is yet unclear if wrapped tokens like oBTC ($290 million) and soETH ($640 million) are issued by FTX too.

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Interview on FTX with Niklas Nygaard, Senior Trader at Bitcoin Suisse

[Gian Stäuble] Can you elaborate on your personal experience of the FTX downfall?

[Niklas Nygaard] Having a strong personal interest in the crypto markets I always stay up to date with Crypto-Twitter (CT). As always, in hindsight there were earlier signs; however the first telling hint came on November 2, 2022, when Coindesk published an article leaking the balance sheet of Alameda Research, SBFs second company which is mostly known for their arbitrage trading in Korea and Japan in 2017 and more recently for having been a major market maker on FTX. At this point FTT, FTX’s native token, intraday performance stood at -10%, at a volatility certainly not unknown in crypto markets, hence not overly alarming at that point in time.

It took Caroline Ellison, CEO of Alameda, four days to react to the rumors on Twitter. Without providing more insights, she claimed that the leaked balance sheet was merely a snapshot and that it did not account for another >$10 billion held by its other corporate entities.

A dispute started to unfold on CT between SBF and CZ on November 7, 2022, continuing in the following days, while Caroline Ellison did not comment any further. The dispute mainly concerned two topics, the FTT that Binance was holding, which they were planning to dump, and a possible acquisition of FTX by Binance. At this point my optimism had turned into hopium (*urban definition of false hope).

[GS] What were your first thoughts after hearing about the FTX case?

[NN] As a collapse of FTX seemed unlikely, my first reaction was admittedly disbelief. I was sceptic that FTX was indeed insolvent given the prior reputation of the company throughout the crypto industry. FTX had been a major player as one of the world’s largest crypto exchanges. They were well renowned and a great proponent for adoption by making countless financial contributions to various projects as well as sponsorships.

After it had become clear that FTX had reached a point of no return my focus switched increasingly towards Binance and its financial health given their position in the industry and their involvement in the situation.

[GS] How did Bitcoin Suisse weather these turbulent times?

[NN] As is often the case in turbulent times, trading volumes spiked and the workload in the trading team intensified. Having said that, I am proud to work in a company that managed their exposure related to the collapses and mitigated the risks appropriately. This was largely thanks to our business model: as we are not tied to only one crypto exchange but work with a range of major exchanges and trading partners globally, Bitcoin Suisse operations remain stable even in times of increased market volatility. We carefully select our trading partners and evaluate them on an ongoing basis. In my opinion, this approach is one of the reasons why we are considered a place of stability and security since 2013.

[GS] What are learnings after this whole situation?

[NN] Learnings should be that prudent risk management is extremely important, even more so in an industry that is based on trustless and permissionless technology, where CeFi-players are actively operating. There is certainly a need for increased regulation in many countries, where it still lags behind reality. What has happened is a symptom of a rapidly growing industry whose guardrails have not evolved enough, at least in certain states. It is important to keep in mind though that the fundamental problem was not DeFi technology, but - as far as can be assessed today - criminal business practices and a complete failure of all controls by CeFi companies operating in the crypto space.

[GS] (When) do you think the market will recover from the developments since the FTX collapse?

[NN] I hope that the events end of last year – albeit costing the consumers dearly while creating challenging conditions for the crypto industry – will still help push the industry towards more permissionless and trustless solutions in the form of decentralized exchanges, which would be in the very philosophy of Satoshi Nakamoto. At the same time, the events had a lasting impact on public perception of the crypto market and as a result, regulators are coming increasingly forward to fill the gap of appropriate regulatory frameworks. The collapse of 3AC, Celsius, and FTX certainly took their toll on trust from consumers which has to be restored over time. With that being said, I believe that we are in the midst of one of the most defining phases in the history of the crypto industry and I am confident the crypto market will recover; however, the time frame and speed of this recovery remains yet to be seen. We have seen other crypto winters and from that experience we know that with the current shakeout and recovery process always come new opportunities.