Im your steve van meter and thanks for joining me today and another major crypto lender has frozen billions in customer deposits, as the crypto market goes illiquid, but todays story isnt about crypto its. What happens to risk assets when central bankers pull liquidity out of markets? Lets head over to bloomberg, where we pick todays story up as crypto turmoil spreads as lender babel puts freeze on withdrawals and the move is in response to unusual liquidity pressures, or perhaps the lack of the crypto market has seen major fluctuations as some institutions in the Industry have experienced conductive risk events according to an asian based lender and asset manager, send a notice on his website to explain the temporary measure. A spokesman babel told bloomberg that the team has faced some pressure and are working on it, which means were not sure when youre going to get your money. Nor are we sure how but were working on it. Hong kong based babel is considered one of the biggest bigger lenders in crypto and often serves as a bridge between asia and the west. With about 500 clients in the business focused on bitcoin ether and stable coins in may babel reached a whopping 2 billion valuation. In a funding round with investors, including generation capital and 10t holdings, babels website shows that sequoia capital and tiger global are listed as its current investors. At the end of 2021, the firm had an outstanding loan balance of more than 3 billion and, while babels main clients have included many bitcoin and ethereum minors, its focus has shifted to include more institutions since chinas industry ban celsius, which we covered earlier this week.

By contrast, as more retail investors among its customers, with more than a million people, entrusting their savings to the firm by celsius account and what we have is another case, we talked about with a celsius story where you have a lender who lent out three billion in This case, and now doesnt have the assets to back it as people start wanting their money and when do people want their money when things go down, remember people sell the most near the bottom and buy the most near the top and with crypto down people are Looking to get their money out and as they hear that more and more lenders and places are struggling to provide liquidity in our freezing deposits, all its going to do is cause more people to run and try to yank their money out and that could disable the Entire industry and both firms have come under pressure as market declines. Reverberate across an industry still reeling from implosion. Last month of the terror, usd stablecoin and his sister luna an experiment in the loosely regulated world of decentralized finance that went spectacularly wrong. Three arrows an influential hedge fund with a diverse range of different crypto assets, participated in the sale of luna tokens earlier this year and also among firms and defy whose use of leverage is now causing a severe pinch as market declines threaten forced liquidations. And this see, this is a story that we find thats going to happen in the stock market in the real estate market.

You look back to the great financial crisis, and people want to point well out the you know. The housing market only blew up because interest rates went up and all those people that took out those adjustable rate mortgages. Well, they were wrong in doing that. But what you really start to find out is that when central bankers keep monetary policy too easy for too long, you get a massive amount of leverage built up. And if you pull back just a little bit of price, the whole thing starts crumbling down and were seeing that happen in the crypto space now weve seen it happen in the housing market and theres still a ton of leverage built up in the equity markets that Hasnt come out yet and thats why we see these stories? The word leverage is going to show up a lot in the future and three arrows raised alarms earlier this week that it was under duress when co founder tweeted, that the firm was in the process of communicating with relevant parties and fully committed to working. This out. On friday, the wall street journal reported three hours of exploring options, including asset sales and a rescue by another firm. According to the co founder and crypto hedge fund, three arrows, as we just talked about now, capital considers asset sales in a bailout, and so you know you talk about driving price down and what happens when these firms start getting margin call when people start wanting their Money out – and this leads to forced liquidations and what happens to force liquidations.

Well, we know what happens with stocks. People are forced to sell. We know what happens in real estate when people are forced to sell and whats happening in crypto now is prices are coming down as people need to get out and they will willing to sell at any price. Cryptocurrency focus hedge fund, three arrows capital has hired legal and financial advisors to help work out a solution for its investors and lenders after suffering, heavy losses from a broad market self and digital assets. According to the firms, founders weve always been believers in crypto and we still are despite the fact that were on the edge of being liquidated, three arrows co founder said in an interview that we are committed to working things out and finding an equitable solution for all. Our constituents, the nearly decade old hedge fund, which may not be around much longer, was started by former schoolmates and wall street currency traders that had roughly 3 billion in assets under management. In april this year, three arrows was among a group of large investors that took part in a 1 billion token sale. Earlier this year by luna foundation, a non profit organization started by a south korean developer and the creator of terra usd the funds were torn at bitcoin denominated reserved for the stablecoin and were meant to help maintain terra usds value at one dollar per coin. Mr davey said three hours invested about 200 million in luna as part of that deal, some that was effectively wiped out 2 0, when tara, usd and luna both became worthless in a matter of days, and this is where you start to understand its not just about Leverage its about the key part of this part of the story is you have a hedge fund and what didnt they do.

They did not hedge their risk, and this is what investors do when central banks keep policy easy and risk assets rise. Investors start to look around and say: why do i need to hedge my portfolio? Why do i need to have any form of protection or insurance? I have the central bank and then the central bank starts pulling liquidity out of the market, and investors get this belief that hey its okay, the market can keep going and when it doesnt, they find out that theyre coming crashing down and theyve got no airbags. No safety, nothing to keep them from crashing lets, keep going because mr davey said three arrows was able to withstand the luna losses, but the subsequent cascaded events that caused prices of bitcoin ether and other cryptocurrencies to plummet in recent weeks created more problems. Credit conditions have tightened markedly as digital asset values have fallen across the board, leading some letters to demand partial or full repayment on loans they previously made to crypto investors and heres another issue. You start to look at what these companies will do when theyre in duress, and they will try to go out and borrow money to you know double down on their investments just get solvent again and in fact the opposite happens. Not only does nobody want to lend to them, the people that did lend to them are starting to realize that theyre not going to get their money back and say hey.

We want our money back and that again leads to more selling, as people and funds get liquidated rapidly. Rising u.s interest rates results of the federal reserves attempt to rein in high inflation have also worsened the sell off in riskier assets. He said that three arrows is still trying to quantify its losses and values, illiquid assets which include venture capital, investments and dozens of private cryptocurrency, related companies and startups. We are the biggest investors in the fund and our intent was always for everyone to do well. Of course, as were seeing that just isnt the case, and maybe the investors will be lucky to get out with anything now, if youre concerned about what the beginning of a crypto crash could be to other risk assets, because we know, as crypto goes down, tax costs Go down and that could lead to a whole host of liquidity. Problems for the market and youre not hedged for the downside. Risk well be sure to check out portfolio shield ill, put a link up here in the corner in the description below to manage strategy that hedges its risk during downturns lets continue on, because the story well back to celsius, which we covered previously gets worse as celsius Investors unlikely to provide more funds to bail out crypto lender and now, if you are feeling okay about things that one person with knowledge of the discussions between celsius and investors, there was more risk in this and fully appreciated.

The person said which goes to show. No one did risk management celsius which runs cryptocurrency lending platform, spooked investors on sunday, when it paused all withdrawals, swaps and transfers by its customers to stop iran. In its accounts, the company takes cryptocurrency deposits from customers and lends them to other users to earn a return, but cryptocurrency values have been crashing and the lender has trouble meeting its obligation to depositors and other creditors, and you can start to understand why? Because they lent the money out and the people they lent the money to are not obligated to lend put it back. They have a loan, they have a term, they got the money, and now the depositors want their money back and theres no money to give back because its all gone. Existing investors seem willing to stand back and let another company try to buy the exchange or simply let the business restructure according to a different person, close the efforts to save celsius, businesses and, of course, investors in this case – have no choice. They have none and then what happens this morning is investors around the world are waking up. Well, crypto assets are crashing even more and bitcoin falls below 20 000 for the first time since 2020, as digital assets remain under pressure. Amid ongoing death by crisis and bitcoin is falling for 12 days of stress and crypto amounts largely now going to be decided due to central banks, bitcoin dropped below 20 000 for the first time since december 2020.

As evidence of deepening stress when the crypto industry keeps piling up against a backdrop of monetary tightening, the largest token by market value, tumbled more than nine percent to under 19 000 by early morning in london on saturday marking a record breaking 12th straight day in the Red and here you can see whats going on now, i dont have access to bitcoins price through the fred database, but when we overlay the monetary base or the feds balance sheet in bloom there, you can see against the wilshire 5000 price index on a year over. Your rate change, which is a total u.s stock market. You can see now, since the great financial crisis theres a strong correlation between risk assets and central bank liquidity and central banks, pull liquidity, which we know is happening because not only is quantitative tightening officially started, but we had a 75 basis. Point rate hike this week and powell mentioned nothing about the stock market, making it very clear that theyre likely to continue raising rates at the next meeting and the quantity of tightening was going to continue and theres, probably even likely to be another hike at the following. Meet after that in september, telling us that risk assets are headed lower and this isnt just a story as we started out with this isnt about crypto its about stocks, its about real estate, its about anywhere theres leverage and speculation built up. Investors are continuing to position defensively following last years: liquidity driven digital asset bulb market, although painful removing the sectors froth, thats likely healthy, as investors should focus on projects with clear road maps to cash flow and profitability versus purely revenue growth.

A toxic mix of bad news cycles and higher interest rates has been the the serious to risk. Your assets, like crypto, contributed to roughly 70 sliding bitcoin from its all time. High in november, the federal reserve raised its main interest rate on june 15 by 75 basis points the biggest increase since 1994 and central bank signal that will keep hiking aggressively this year in the effort to tape inflation, which will be bad news for risk assets. Until this is put to an end, and one of the reasons youre seeing prices fall is because there arent enough buyers, and how do we know that? Well, we can look at the personal savings rate and the personal savings rate is the governance calculation, their formula that they use to determine. After all, your expenses are paid how much people have to invest and speculate in markets, and that number is shrinking and it has an interesting relationship here with the stock market. Again, dont have data on crypto and the fred database, but no, no as the personal savings rate in blue slows down here on the left column, look what happens the year over year rate and change in the stock market in red it heads, lower savings rate, slows Down stock prices holding and they come down, savings rates coming tumbling down, and what that tells you is there are no buyers in this market and sentiment in crypto markets is that the unknown unknowns are likely the most significant at this point in time.

The resurgence of counterparty risk is a reminder that not everything that matters in risk management can be precisely quantified risk is what is left after you think youve thought of everything and investors of course, have taken a lot of risk, have not hedged their positions and where Crypto goes stocks will follow and where stocks go, the housing market will be last im. Your host steve van meter, thanks for joining me today, make sure you take care of yourself protect your portfolios.

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