Bankruptcies domino among crypto companies

Due to the price drop of bitcoin, various crypto companies have run into serious problems. Several companies are bankrupt or on the verge of collapse. In this article you can read what exactly happened and why the statement: Not your keys, not your coins, still applies.

What is going on?

In recent years, dozens of lending platforms have emerged in the bitcoin world. These are platforms on which people can receive interest on their bitcoin or borrow (fiat) money with bitcoin or other cryptocurrencies as collateral. An interesting, but not entirely harmless development, it turns out.

UST & Centigrade

After the value of stablecoin UST lost the $1 peg in early May, fear arose in the crypto market and the price of bitcoin fell. A month later, rumors arose about possible liquidity problems at lending platform Celsius. This had a similar effect to what is known as a ‘bank run’: Many customers withdrew their bitcoin in a short period of time and sent it to their own wallet or sold it.

Because Celsius was not liquid enough at that time, the company ??????temporarily??????? stopped the possibility to withdraw credits from the platform on June 13. However, at the time of writing, withdrawal of funds is still not possible. The company appears to be on the verge of bankruptcy and laid off 150 employees last week to reduce costs.

Lending platforms often promise customers high interest rates on the funds they deposit, this return has to come from somewhere. Companies like Celsius use their customers’ money to look for profit in a variety of ways.

Regulations

Unlike a bank or other type of asset manager, crypto lending platforms are often not regulated. This means there is no oversight over where clients’ money is invested.

Due to the lack of regulations, crypto lending platforms could therefore in principle gamble with the customer’s money in the casino, or invest in DeFi yield farming, staking or obscure altcoins, which is also a type of gambling.

According to Twitter account Otterooo, something similar has also happened. The liquidity problem of the platform is most likely due to the fact that the company has tied up a large part of its crypto assets in a yield contract that promises a high return. When many customers wanted to withdraw credits at the same time, Celsius reportedly took out various loans to meet these obligations. If Celsius goes bankrupt, these parties could whistle for their money.

Just the first domino

So far this development sounds reasonably clear, but this was only the beginning. Celsius is not the only lending platform that has run into problems. The crypto fund Three Arrow Capital (3AC) is also unable to meet its financial obligations and is already officially bankrupt. Because many parties in turn had lent money to 3AC, which are now also getting into trouble, more and more crypto companies are falling like dominoes.

For example, crypto lending company Voyager, which had lent about $600 million dollars to 3AC, also filed for bankruptcy. Voyager had between $1 and $10 billion in assets under management from some 100,000 clients. Still other parties had lent money to Voyager to complete the circle, which may now also be in trouble again.

Crypto company Blockfi is rumored to have had to liquidate (compulsory close) a $1 billion loan to 3AC. As a result, this company also ran into problems, but trading platform FTX has put a stop to the bankruptcy. The two parties have entered into a partnership for around $250 million dollars. FTX has been growing rapidly under the leadership of Sam-Bankman Fried in recent times and is occupying an increasingly prominent position within the crypto market.

Furthermore, crypto giant Digital Currency Group’s lending platform, Genesis Trading, also suffered heavy losses as the company lent money to 3AC and lending platform Babel, which was also unable to meet its financial obligations.

There are also a number of relatively small lending platforms, such as Finblox and Coinflex, which have also run into problems due to the bankruptcy of Three Arrow Capital and the problems at Celsius.

Not your keys, not your coins

All in all, it is currently a mess in the bitcoin world. For people who have lost money or can no longer access their coins, it is an expensive and painful lesson. The contrast between the bitcoin world and the banking system is very clear. Crypto companies, unlike banks, are not bailed out with financial help from a central bank when things go wrong. The customers of the bankrupt companies have most likely lost their money.

Keeping Bitcoin in your own wallet is and remains the most secure and risk-free way to manage your coins. Although the high interest rates and other promises from third parties sometimes sound attractive, they are almost always associated with extremely high risks and things almost always go wrong in the long term.

Owning your own private keys is crucial to make sure nothing happens to your coins that you don’t know about. The autonomy and independence of keeping bitcoin in your own wallet is unprecedented: you don’t have to trust a bank, person or other third party. Just only yourself.

The bankruptcy domino is now playing out in the sector of lending platforms, but could also happen with exchanges. They have full control over your bitcoin and can, in theory, do whatever they want with it. Hence the statement: Not your keys, not your coins!

Read in this article about why only bitcoin and in this article how best to keep bitcoins safe.

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