June 22, 2022 | Read Online

The Four Horsemen of the Crypto-Pocalypse

Luna | Celsius | 3AC | The Fed

We are in the middle of a crypto-crash of biblical proportions. BTC is down 55% on the year, ETH is down 70%! How did we get here? To explain that, we have to talk about the four horsemen of the crypto-pocalypse

Luna

The first horseman to arrive was the Terra Luna ecosystem (or maybe the people who took it down). This fell when UST, Terra's stablecoin pegged to the US Dollar, was attacked. The attack caused UST to de-peg - 1 UST should always be worth $1 and after the attack it was worth much less. This led to the downfall of the whole ecosystem. For a full breakdown of this crash, you can have a look at this post. Below is a quick bullet point summary of the attack on the UST stablecoin:

The attacker bought up a tonne of UST and started dumping it. This caused other people to panic and sell their UST, which caused the price of UST to go a little below $1.
The Luna Foundation began selling other cryptocurrencies like ETH and BTC to buy UST and bring the price back up to $1.
The attacker may have anticipated this and shorted BTC and ETH (shorting is when you bet on the price to go down). They knew the Luna foundation and other backers would sell a tonne of BTC and ETH, and this selling may cause the price to fall. They made money by betting on this, as well as betting on the value of Luna falling.
This is when mass panic hit.
A key part of this was Anchor Protocol. This was essentially a bank where users stored UST and made a 20% yearly return on their savings. But as the price of UST started to fall, savers who had their money in Anchor started to panic. 50% of all funds in Anchor Savings were taken out, which led to further pressure on the price of UST.

As mentioned, the Luna foundation sold a tonne of BTC and ETH during this fiasco which caused their prices to fall, but the LUNA crash shook investor confidence and led to falling prices all over the crypto-sphere.

Celsius

Then came Celsius. They also took unsustainable risks with their customer's money, and it came back to bite them. Celsius promised their customers very high returns, and they took risks with customer money in order to earn these high returns for customers.

Specifically, Celsius relied a lot on staked ETH ($stETH) to produce the high returns it promised on its customer's money. Staked ETH cannot be exchanged for normal ETH until 6 months after "the merge" goes live on the Ethereum network, so there was no mechanism preventing the value of staked ETH falling below the value of ETH. This is what happened. So Celsius had exchanged ETH for Staked ETH at a 1:1 valuation, but now their $500 million of staked ETH had lost value, and could no longer be exchanged for $500 million worth of ETH. There was no liquidity anywhere for Celsius to unload this huge position in $stETH, so this (among other financial gaffes led to Celsius freezing withdrawals and falling into crisis.

Three Arrows Capital

Three Arrows Capital (3AC) was one of the top three venture capital funds in the crypto space. At its peak, the fund was managing $18 billion in assets. They had made big returns on investments like $AVAX, $NEAR and $ETH. But unfortunately, they got reckless.

3ACs troubles can be traced back to the Luna crash. Before the crash, 3AC bought $559.6 million worth of Luna tokens. That position is now worth $600. Some say - and this is just speculation - that 3AC began trading really aggressively to try and make back this loss.

Another problem 3AC had was illiquidity. 3AC had made some great returns, but some of those returns were stored in tokens that were staked and locked away for years. If they were suddenly facing a crisis, there was no way to withdraw those funds.

3AC had over $250 million worth of ETH stored as collateral on the AAVE platform, which they used to borrow $198 million. This was very high leverage, and rumours started swirling that they were about to liquidate from this position. At this point, 3ACs lack of liquidity became a problem. Then, Zhu Su, 3AC's founder, wrote a tweet indicating there was some trouble brewing.

Zhu Su 🔺@zhusu

We are in the process of communicating with relevant parties and fully committed to working this out

Jun 15, 2022

9.04K Likes 990 Retweets 3.28K Replies

Things got worse. As well as Celsius, 3AC held $stETH and they were forced to sell off a large chunk of it, to try and stop their positions from being liquidated. Many in the market thought that it was just Celsius that was responsible for the mass-selling $stETH, but it seems that 3AC were also doing the same thing.

3AC is invested in a huge number of projects that are very important to the crypto ecosystem.

Trouble at 3AC means that they will be forced to sell off tokens as soon as they unlock, which could lead to ripple effects and falling prices for these projects, and the wider market in general.

The Fed

Then, the Fed hiked interest rates by 75 basis points (0.75%), which was the largest monthly hike since 1994. When a central bank hikes interest rates, this leads to a rise in borrowing costs for all financial institutions, businesses and individuals. It often leads to a "risk-off" environment where investors take their money out of risky assets and move it into safer, less volatile assets. Because crypto is a risky asset class, the Fed rate hike led to investors (particularly retail investors) taking their money out of crypto.

The Next Horseman to join?

BlockFI

BlockFI is a crypto exchange. And just like horsemen 1 and 2, Luna and Celsius, they offered big, big yields to try and attract new users. According to some leaked documents, BlockFI has lost $285 million over the last couple of years and they, just like Celsius, have a problem with liquidity. They are trying to raise money from VCs to get themselves out of this hole. It looks like they are teetering on the edge of bankruptcy.

Babel Finance

Babel Finance is a crypto lender. They had reached a $2 billion valuation just last month, and have billions in assets under management. They have recently suspended withdrawals, so users cannot get their money out of Babel Finance. As we saw in the case of Celsius, that ain't a good sign...

So is it all bad news?

Maybe not. If you really believe in web3 and crypto, this may be one of the few times where you are able to earn a solid return just by investing in the biggest, safest crypto assets like BTC end ETH. But that's in the longer term. In the short term, there may be more pain to come.

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quick bullet point summary Three Arrows Capital other financial gaffes The Four Horsemen Celsius freezing withdrawals The Luna Foundation Terra Luna ecosystem

The Four Horsemen of the Crypto-Pocalypse

The Four Horsemen of the Crypto-Pocalypse

Luna | Celsius | 3AC | The Fed

Luna

Celsius

Three Arrows Capital

The Fed

The Next Horseman to join?

So is it all bad news?

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