Crypto Crisis Evokes 1998 Hedge Fund Crash that Crippled Market

When a top investor with a deep hedge fund background says the tumbling cryptocurrency market is starting to feel “a little bit like a Long Term Capital Management moment in crypto,” you know there’s the potential for a rout to turn into a panic.

That’s what Mike Novogratz, CEO of top crypto investment firm Galaxy Digital, told CNBC Wednesday (June 15), referring to the 1998 collapse of a large and highly leveraged hedge fund that sent shockwaves so large through the economy that the U.S. government was forced to intervene and broker a $3.6 billion bailout.

See also: Bitcoin’s Potential as ‘Digital Gold’ Loses Luster as Price Plummets

“When it started unwinding, there was repercussions everywhere,” he said.

Pointing to the withdrawal freeze and reported insolvency of crypto lender Celsius Tuesday and reports that another big crypto investment firm, Three Arrows Capital, may be facing insolvency after $400 million in liquidations, Novogratz added, “we are seeing that in the crypto space right now.”

Read more: Crypto Nosedives Following Celsius Collapse

Mikkel Morch, executive director of crypto hedge fund ARK36, told CNBC, “in the medium term, everyone is really bracing for more downside.”

Bad News Piles On

In a week that started with a wave of crypto exchange layoffs led by Nasdaq-listed Coinbase’s 1,100-person staffing cut and with a fear-raising dip below $20,000 for bitcoin prices looking increasingly likely, the insolvencies and wave of crypto futures liquidations are adding to the broader market’s anxieties as it waits to see how the U.S. Federal Reserve will react another record-high monthly inflation number. Analysts have already moved expectations from an imminent 0.5% rate hike to 0.75%, and possibly even 1%, as broader economic concerns mount

See also: Bitcoin Plummet Triggers $1B in Margin Calls

While bitcoin and the rest of the crypto market have been tumbling since November, it was the early May run and $45 billion collapse of TerraUSD, a non-fiat-backed stablecoin that was No. 3 by market capitalization, and its partner-token LUNA, that sparked the growing sense of panic.

But the two most serious concerns Wednesday morning (June 15) remained Celsius, which Coindesk reported has hired restructuring lawyers and Dubai-based Three Arrows.

Heavily focused on decentralized finance (DeFi), high-profile Three Arrows “is in the process of figuring out how to repay lenders and other counter-parties after it was liquidated by top tier lending firms in the space,” crypto industry news outlet The Block reported  Wednesday (June 15), citing several unnamed sources.

Three Arrows hasn’t commented beyond a tweet from Co-founder Zhu Su that it is “in the process of communicating with relevant parties and fully committed to working this out.”

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

— 朱溯 ? (@zhusu) June 15, 2022

The liquidation of Celsius’ assets, meanwhile, would “further rock the valuation of cryptoassets, leading to a wider round of contagion within the crypto sphere,” Fitch Ratings’ senior director of financial institutions, Monsur Hussain, told CNBC Wednesday.

“Bear markets have a way of exposing previously hidden weaknesses and overleveraged projects, so it is possible that we see events like last month’s unwinding of the Terra [stablecoin] ecosystem repeat,” Morch added.

Stuck in Denial

Meanwhile, a worrying sign is the number of companies issuing denials that they are in financial trouble.

Among these is Tether, the issuer of the No. 1 stablecoin, USDT, which refuted claims that its untransparent cash- and investment-backed reserve was having difficulties that could cause it to de-peg.

In a June 15 statement titled “Tether Condemns False Rumours About Its Commercial Paper Holdings,” the company referred to rumors “being spread that its commercial paper portfolio is 85% backed by Chinese or Asian commercial papers and being traded at a 30% discount.”

Tether added that the stories were being spread maliciously “to induce further panic in order to generate additional profits from an already stressed market.

Read also: Tether Breaks Buck as Stablecoin Panic Spreads

But it doesn’t help that questions have been raised about the existence and make-up of its reserve funds by sources ranging from industry insiders to the senior Treasury Department officials.

Another denier was MicroStrategy, a business software firm that transformed itself into a high-profile bitcoin bull, buying billions of dollars’ worth of the cryptocurrency.

“MicroStrategy has not received a ‘margin call’ against our Silvergate loan even as bitcoin prices have fluctuated recently,” the company said, CNBC reported Wednesday (June 15).

Meanwhile, crypto lenders Nexo and BlockFi also sought to calm fears about their own finances in the wake of the Celsius meltdown.

Nexo told CNBC it had a “solid liquidity and equity position,” while BlockFi said it will “continue to operate normally.”

However, BlockFi did just lay off about 20% of its workforce.

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