MARKET WRAP

1. Bitcoin Drops 59%, A Record Half-Year Loss

CoinDesk – July 1, 2022 at 4:24am EST

After multiple weeks of decline followed by weeks of its price bouncing around support levels, bitcoin’s ($BTC) price dropped for a five-day consecutive streak this week, leading to the worst half-year loss ever for the currency. The decline comes in response to new regulations from the Securities and Exchange Commission (SEC) late on Wednesday.

According to CoinDesk, the price decline follows the rejection of an application by CoinDesk's sister company Grayscale to convert its Grayscale Bitcoin Trust (GBTC) into a bitcoin-holding exchange-traded fund. Combined with other discouraging headlines like that of crypto futures exchange CoinFLEX, which halted withdrawals after it began fundraising for its recovery token rvUSD, this news strikes a blow on the market at large.

Passing below its crucial support level of $20,000, $BTC fell below $19,000, down 5.6% over the past 24 hours at the time of writing. According to Oanda senior market analyst Edward Moya:

“Bitcoin could be vulnerable to one more ugly plunge that could have many traders fearing a fall towards the $10,000 area.”

Altcoins followed suit, with Polygon’s $MATIC token falling 10% and ether ($ETH) dropping 8.6%. 

In traditional markets, overall performance also declined heavily as consumer spending slowed. According to Bloomberg, US consumer spending fell for the first time in 2022, increasing fears that inflation will run far more rampant than previously expected. In response, a large selloff in stocks dropped the S&P 500 for the second time since 2020, plunging over 20% from its peak in January. Accompanying this 21% decline in the US equity benchmark is a decline in treasury 10-year bond returns from 3.5% to 3%. The last time this index saw a decline of this magnitude was in 1970.

2. Three Arrows Capital Liquidation Mandated by British Virgin Islands

Bloomberg – June 29, 2022 at 10:29pm EST

The British Virgin Islands court declared that they are discussing legal remedies with consulting and advisory firm Teneo to deploy the liquidation of assets owned by Three Arrows Capital (3AC) after it failed to make loan payments tied to large bets.

Teneo will work with relevant buyers who may be interested in 3AC’s remaining holdings, such as tokens or equity stakes in crypto startup projects. After working with shareholders, Teneo will set up a website to locate creditors and determine who is owed what. The portfolio of 3AC has spanned all key segments of the market like decentralized finance platforms (Aave and dYdX), base protocols (Avalanche (AVAX)), and infrastructure projects (StarkWare). However, it is not known what or how much of these assets will be liquidated to repay debtors. 

Additionally, a key partner of 3AC Kyber Network announced that it will take legal action in order to recover its funds from 3AC. Back in 2012, 3AC’s fortune rose along with the crypto market bull run, and the value of assets under 3AC’s management was estimated at $10B. From its meteoric rise, Three Arrows became a reputational fund in the industry, finding itself in an excess scenario during the bull run year, amassing well over $4.5M in registrable securities.

However, by overutilizing leverage from lending platforms as well as unlawfully using the capital of its partners, the fund hobbled as the market turned. As an inevitable consequence of its high-risk strategy, most of 3AC’s loans on lending platforms were liquidated. This shows how many centralized institutional leaders in the crypto space maintained poor risk control and now have put their customers at risk. 

As a solution to cooling the wrath of the various concerned parties, the British Virgin Islands Court has required a 3AC fund to be liquidated if it cannot afford its loans. The money recouped from the liquidation will be distributed to investors who are owed by Three Arrows Capital. 

3. Genesis Faces Millions in Losses after 3AC Exposure Leaves Crypto Lenders Vulnerable

CoinDesk – June 30, 2022 at 9:18pm EST

Genesis Trading, a cryptocurrency market maker and lending firm, is facing potential losses in the hundreds of millions.

With the recent collapse of Three Arrows Capital (3AC) and the over-leveraging of Hong Kong-based crypto lender Babel Finance, Genesis is on order for “a few hundred million dollars”. Due to the exposure of 3AC, firms such as Genesis have been left vulnerable due to substantial financial loss.

While the exact value of Genesis cannot be verified, some of its losses are being mitigated by counterparty repayment and hedging. Amidst the chaos, Genesis has continually pulled credit lines from counterparties to offset the unpredictable market that crypto lenders are currently heading toward.

Genesis, owned by Digital Currency Group (DCG), issues a statement from their CEO Michael Moro:

"As we already stated on June 17, we mitigated our losses with a large counterparty who failed to meet a margin call to us. We sold collateral, hedged our downside, and moved on. Our business continues to operate normally and we are meeting all of our clients' needs."

With the unraveling of high-profile firms like Terraform Labs, 3AC, and Celsius, along with a significant drop in overall crypto market value, firms and investors are liquidating assets to survive the crypto crash.

Even so, Genesis reported originating over $44.3 billion in loans during the first quarter of 2022. Additionally, their parent company, DCG, has a war chest rumored at about $1 billion. This will undoubtedly buffer a portion of the damage that seems to be affecting crypto lenders alike.

4. $100M Harmony Hack Traces Back to North Korea

Coindesk – June 30, 2022 at 9:37pm EST

Last week, Harmony Protocol was exploited for over $100M in crypto assets in a hack conducted similarly to the $625M hack that drained the Ronin bridge used for the fan-favorite game Axie Infinity.

Recently, it has been speculated that the offender in this hack is none other than North Korea’s Lazarus Group, the same collective responsible for the Ronin exploit. While not confirmed by any means, the notion that Lazarus is responsible for the attack comes from blockchain analytics company Elliptic, who also uncovered the identity of Lazarus in connection to the Axie Infinity hack. 

“Based on the nature of the hack and the subsequent laundering of the stolen funds, there are strong indications that North Korea's Lazarus Group may be responsible for this theft.”

This is reinforced by the fact that the majority of the Hacker’s wallets happened during Asia - Pacific nighttime, and the mea

ns of exploitation targeted validator nodes to acquire a majority power, just like how Ronin was attacked.

On-chain data shows that the hacker’s wallet still houses more than $56 million worth of Ethereum from the theft.

 

The Harmony Protocol has been doing everything in its power to retrieve the stolen fund from its Horizon’s bridge. The first attempt from the team was to offer the hacker $1M dollars to return the stolen funds. However, this offer was clearly deemed “unattractive” by the culprits as they started to transfer the stolen token to Tornado Cash in a laundering effort.

After that, Harmony Protocol 10x’d their bid and called this “one final opportunity” for the thief. In case the funds are safely returned, the attacker(s) could walk away with $10 million without any legal consequences. In tandem with the final offer, the team has launched a “global manhunt” that offers the same amount of $10 million to anyone who could provide information leading to the identity of the hacker.

The Harmony team is also working with multiple security and forensic firms in an effort to shed more light on the hacker behind the scheme.

5. FTX Capitulates in the Face of A $2B Hole on Celsius’s Balance Sheet

The Block – June 30, 2022 at 9:06am EST

Acquisition interest in Celsius from giant crypto exchange FTX has evaporated after its team examined Celsius’s balance sheet. The troubled lending and borrowing protocol was reported being $2B short of its financial obligations.

Despite having received help from Citigroup, Celsius has reportedly been fighting its own lawyers’ and advisors’ proposal to file for bankruptcy. This new discovery, however, certainly pushes them many inches closer to the edge of Chapter 11.

As of May 17th, Celsius reportedly manages $11.7 billion worth of crypto assets. However, a series of bad macroeconomic conditions coupled with the historic downfall of UST and LUNA has challenged the sustainability of the firm’s business model. Problems accumulated under the rug of Celsius until June 12, when it halted all withdrawal transactions invoking “extreme market conditions” as its reason.

Since then, questions regardings billions of dollars worth of assets under the protocol’s management has emerged left and right within the market. While 1.7 million customers are left hanging, the state of the protocol’s current asset management portfolio is still unknown.

References

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