The Great Bankruptcy Bonanza ????

The big talk ??

Poof, and they were gone. Crypto has been learning all about bankruptcy this week, the hard way.?

Celsius has gone belly up, and Voyager Digital and Three Arrows Capital have collapsed, taking billions of investor money with them. In explicit terms, Voyager Digital, a Canadian investment firm has lost $650 million of investor money, DeFi lender Celsius had a $1.2 billion hole in its balance sheet and owes $4.7 billion to investors and Three Arrows Capital (3AC) had $10 billion under management a few months ago, all of which is now gone.?

While the three companies’ business models were all different, they all relied on the same principle: that crypto prices would continue to trend upwards, and new investors would follow.?

They also relied on other, less salubrious aspects of working in Web3: namely, obscuring who is spending what and how that might effect others.?

The trio of companies all had exposure to each other’s businesses, whether they knew it or not. All three appeared to have been happy to give money to others without digging into what that money might be used for, and what were the risks. Take 3AC as an example.?

It specialised in touring the offices of large digital-asset lenders - like Galaxy Digital - and wealthy hodl-ers, asking them for money. They also offered to look after other people’s money, what’s called treasury management services, for a fee of course.?

Once the money was in the kitty, they went to play the crypto markets. They sank $200 million into Luna, as well as millions into other DeFi projects promising suspiciously high returns for buying and holding their tokens.?

During the good times, these rockstar investors could do no wrong. In the bad times, they hid their losses and used other people's money to double down. From records now emerging, it never told backers how leveraged it was on certain bets or what it was doing with their funds.?

?? There’s a very good deep dive on Bloomberg.?

Geek time: Leverage trading is the practice of borrowing more than you bet in order to maximise your profits. Let’s say you were making bets with 100x leverage. If you were right, you get 100x what you put in. If you are wrong you lose everything. Even if you are partly wrong, you also lose everything, thanks to what’s called a margin call. This is a buffer around a trade that if crossed cancels the bet to project the bettor.?

While 3AC was doing that, DeFi platforms had been promising huge returns for not very much effort. All they had to do was buy and leave tokens in so-called liquidity pools. Those liquidity pools were then used as loans to traders. The platforms charged interest on those loans and used that interest to pay back the people who had dumped tokens into liquidity pools. Companies like Celsius.?

If you’ve noticed, this whole thing was based on gambling. Just like in the 2008 financial crisis: too many people took too many risks on financial products that were, essentially bets on the housing market eternally going up.?History doesn't repeat itself, but it sure as hell rhymes.

So what happens now? Well, regulators are rightly deciding that crypto children need adult supervision. The US, Europe, and elsewhere are all in the process of passing regulation that forces crypto to become much more transparent. Which is ironic, as the blockchain was supposed to be the transparent tonic which meant the industry didn’t need oversight.?

Oh well. We live and we learn.?

What people are shouting about: ???

• Crypto lost $718 million to scams in Q2 2022 - Oh yes, just in case you thought things couldn’t get any worse, scammers had a field day with investors looking for safe havens amidst the market crash, according to Beosin, a security analytics firm.? The amount stolen in Q2 was more than double that of Q1.?
• Speaking of bursting bubbles, OpenSea lays off 20% of its workforce - CEO Devin Finzer took to Twitter to break the news, reassuring the markets that it is totally fine and that all is well. They clearly haven’t been checking their charts. NFT sales are down more than 60% in the last week. The layoffs might not end here.?
• The cost of mining Bitcoin is falling - as the price of Bitcoin slipped into the toilet, so has the price of producing it, it turns out. Miners' profits have been erased by the market collapse, forcing some firms to disappear all together.? But those that have remained appear to be looking for ways to stay in the black.?
• People are wondering what’s up with Coinbase - the US-based exchange is sliding into obscurity, according to a new report. It’s dropped out of the 10 biggest crypto exchanges, accounting for just 2.9% in trading volume among the 30 biggest companies.? That’s down from 3.6% average in the second quarter of this year and 5.3% in the first quarter, the report said. The exchange had been targeting the crypto curious, positioning itself as the onramp for Joe Public. But Joe doesn’t give a toss about crypto right now, heaping pressure on the company to find more cost savings.
• MetaMask Founders label space they made millions off of a “crypto casino” - the crypto wallet maker that made $200 million in revenue off the back of the DeFi boom, is now saying it’s all oh so terrible. In a bid to shore up its position as being more than just a DeFi gateway, it told Vice magazine how thoughtful it had now become - presumably because profits aren’t quite as bumper as they were last year. Good for them.?

The at first glance incredibly boring, but in reality, incredibly insightful and interesting thing you should read this week ??

A surprising number of investors are collecting what’s called Zombie coins. In particular, Terra’s now defunct token Luna Classic. Investors are buying up vast amounts of defunct tokens in the vain hope that at some point, people find value in them again, turning a modest investment into a million dollars or more.?

Find out more in this week’s Bloomberg Crypto Podcast.?

Chart of the week ??

Ouch. Celsius’ token price dropped 47% after it filed for bankruptcy.?

Strange but true ??

• Human clothes horse Bella Hadid is minting NFTs, of herself - because why would she mint anything else? She spoke to Vogue about the project, insisting it definitely, isn’t a cash grab. “I want it to be a collective. It’s not a one-stop-shop — this is a real passion. I want to be used as a vessel for communication and respect and love.” All right love.?
• Dubai’s government has decided it needs to be in the metaverse - The emirate is on the lookout for someone who can help the government set up shop in the virtual world so that its citizens can access government services. Because who doesn’t want to apply for a parking permit while standing in line in a virtual world that's not quite as seamless or as coherent as our own? ?
• A bottle of champagne and its digital equivalent sold for $2.5 million - The bottle comes with a bunch of NFTs including a bored ape sold at auction for the eye-watering sum. The Italian brothers who bought the bottle said they are not going to drink the champagne, which before it had the NFTs attached, cost $14.60. Bear market? What bear market??
• You can now be sued by NFT - A UK judge gave the go-ahead to serve legal documents as an NFT. The ruling comes from a case brought by Fabrizio D’Aloia, founder of an online gambling company, who’s suing Binance after his crypto assets were fraudulently cloned on the brokerages. Effectively giving new meaning to the term, 'airdrop'.
• Disney sets up a crypto incubator - It has partnered with Polygon to help build Disney NFTs. I know what I’m asking for this Christmas.?

And that's a wrap. You made it. Now go outside, smell the roses, and never buy crypto ever again.

Oh and see you next week for more punishment.