The Crypto Liquidations Are Starting
All this kicked off with celsius earlier last month, so celsius was basically one of the worlds leading crypto lending platforms that decided to suspend withdrawals and freeze accounts on its network. Now this is the same celsius network that was valued at over 3.25 billion dollars in november, and it services 1.7 million customers. Now as of today, those customers are losing hope of seeing their money ever again. It was also reported that they also laid off some 150 employees over the weekend. If that wasnt bad enough news for the crypto market, we also had the crypto hedge fund, three arrows capital, 3ac, ordered to liquidate by quartz, which sent shockwaves across the entire crypto industry. As a result of their downfall, which well talk about later in this video, we saw many other crypto platforms get into financial trouble, and that really opens your eyes on how intertwined the crypto industry really is. For example, blockfi, which loaned out money to three arrows capital, was reportedly given the option by crypto brokerage ftx to be bought for a value of 240 million dollars. That might sound like a lot of money because well it is but relatively speaking, it is not. At the peak of blockfish valuation, they were valued at over 4.8 billion dollars, so a sale of 240 million dollars would represent a loss of over 95 percent. From its all time, high valuation, other firms like voyager and babel finance are also in trouble and with inflation.
At all time, highs interest rates are going up as well. There are just no bullish catalysts for the crypto market in the foreseeable future. That would bolster crypto asset prices and, if you pair that, with a looming threat of a recession, well thats what you have right now now many people actually already think that we are in a recession, especially since the atlanta fed just came out with a report that The latest q2 gdp estimate, as of july 1st, was negative. 2.1 percent. A recession is defined as two consecutive quarters of negative gdp and, as you may remember, in q1 we already had a negative gdp reading. So if indeed, q2 does come in negative well officially be in a recession, now were gon na talk about all the liquidations and consolidations in the crypto market in todays video, and also go over some thoughts. I have on where crypto investors could go from here because lets be real. It looks like the crypto winter might be inevitable, and it looks like its coming quite quickly. All right, so after celsius came out with their news that they would be suspending withdrawals. We also saw the price of bitcoin and ethereum fall dramatically. The overall crypto market dropped to below one trillion dollars in market value for the first time since 2020, and the price of bitcoin at the time had dropped to below 24 000 after trading for around 27 000. ethereum also dropped to below 1200.
From its earlier support of around 1450., a few days later, it was reported that three arrows capital also had liquidity problems and bitcoin further dropped to below the twenty thousand dollar mark. Now, three arrows capital is a singaporean hedge fund that started off as a hedge fund. Investing in traditional currencies, it started off with 1.2 million dollars in capital and in 2017 they actually decided to make the sole focus of their fun cryptocurrency. One of their famous calls was calling the bottom of the bitcoin market when it was close to 3 800 per bitcoin, and they loaded up and their assets under management had once reached an estimated 10 billion dollars as of last year. Their focus was to invest in anything crypto related, so companies, currencies, nfts, etc. Now some of their biggest holdings included, tara, luna, staked ether and the grayscale bitcoin trust. As you know, with luna, it collapsed from more than 40 billion dollars in market value to basically zero. In the matter of weeks, losing 98 to 99 of its value, 3ac confirmed that they lost around 200 million dollars from their luna position alone. According to sources, 3ac had ties to almost all the major crypto firms, and it was said that quote: they worked with everybody. 3Ac would basically borrow crypto and cash from these firms, like blockfi and voyager, in an attempt to leverage their crypto positions. So, while leverage could multiply your gains, it also works the other way around.
If everything crashes, you could end up owing more than your original investment. So the gist is, is that three arrows capital was borrowing way too much levering up their portfolio with highly risky bets. On june 22nd, the wall street journal reported that voyager digital would issue a notice of default to 3ac if it didnt make a full repayment of around 665 million dollars by june 27th. Voyager had reportedly lent 15 250 bitcoins and 350 million dollars in usdc23ac. Just five days later, on june 27th, three arrows capital received a notice of defaults. So later that day, a british version – islands court ordered the liquidation of 3ac after creditors sued the fund for failure to repay its debt. Three arrows capital imploded, resulting in massive losses. For many crypto giants so, for example, genesis was facing losses of into the hundreds of millions of dollars. In the meantime, it kept pulling credit lines from various counterparties left and right. So whats interesting is. I think that something that was pretty normal for these crypto companies was that the massive risk and leverage that was taken by them it seemed pretty normal among the entire landscape. Their overall strategy was mostly downplayed by their executives now in a bull market. This probably would have been fine, but in a market where the asset price, like bitcoin, is falling 50 to 60 percent in a matter of weeks, this can cause huge ripple effects across the entire industry.
Now some companies are faring fine during this time, for example, sam bankman freeds ftx is one of those companies, as i mentioned in the intro, they gave blockfy an option to acquire them for 240 million dollars, but they also provided them with a 400 million dollar. Revolving credit facility, in addition, sbf sam bakeman, freed committed 500 million dollars in financing to voyager it, doesnt sound, like theyre, going to get their 600 million dollars back from three arrows capital, so they definitely need this line of credit. Theyve already pulled 75 million dollars from that line of credit that sbf offered them. Basically, sam bankman freed is just bailing out crypto companies left and right at this point, and the reason is because all these crypto companies are so intertwined with each other. At the end of the day, spf believes in the crypto industry. His incentives are definitely aligned with the crypto industry doing very well. So, if hes able to bail out even his competitors, hes single handedly, basically saving the entire crypto industry. Hes even said that hes open to acquisitions of troubled crypto miners in order to help stem contagion. Contagion is the concept that, because all these crypto companies are intertwined with each other, if too many of them fall, the entire industry will fall so whats exactly going on with the crypto miners, and why is sbf also considering helping them out as of right now, crypto Miners are also facing margin, calls and defaults, as they collectively owe up to four billion dollars in debt.
You see many crypto mining firms would actually take loans out to create more operational facilities where they could mine more bitcoin. These facilities would take a lot of capital because you would need to rent warehouse space in addition to buy the equipment required to mine bitcoin. This seems like a pretty simple problem. Why dont? They just cancel the warehouse lease and then just not buy any more equipment. Thats, probably a question that i would ask myself: the truth is that many mining firms took out loans secured with future orders, meaning that they would have to pay off mining equipment rigs that arent even making them any money. A lot of these rigs are becoming worth less and less because other miners are willing to sell their rigs at a cheaper price in order to get liquidity. The other reason crypto miners are suffering right now are definitely the higher energy prices. So if you knew from the cpi data this year, electricity prices are up roughly 12 percent year over year. If you couple this with the price of bitcoin, falling miners are becoming less profitable and are forced to liquidate some of their crypto holdings to pay for operating costs instead of just totaling it. So if you think about the ecosystem, more broadly, if the miners who are just used to holding bitcoin have to sell it now well, it basically creates downward pressure on the price of bitcoin, thus creating a mini downward cycle.
Unless the price of bitcoin would turn around. You can see from this graph on the screen that bitcoin sold by public miners in 2022, nearly quadrupled in may alone, and that trend is likely continuing. A huge reason why the crypto economy grew so fast was no doubt due to the amount of money supply, increasing, plus the quantitative easing and the low interest rates during the pandemic and beyond, with quantitative, tightening or qt beginning. Many people are not wanting to buy risky assets, as you can see from this chart with the total crypto market cap in the billions. Its basically returned to 2020 levels were also seeing suppressed activity in first time active crypto users, which really shows you how cold the crypto market has become. By the way do you know how to search google on freezing cold days? Well, you have to use the winter net, that was a joke and it wasnt a very good one, but, alas, lets continue. Another sign of the bad crypto times are actually luxury good prices. More specifically watches this article on bloomberg came out last week highlighting wristwatches as the next victims of the crypto meltdown after reaching record highs. Earlier this year, the price of desirable watches, including the rolex daytona, have fallen considerably. The subdial 50 index, which is made up of a basket of the top 50 most traded, watch models on the secondary market, nearly doubled in two years from 2020 to 2022.
. Recently, though, its been giving up some of its gains now, the funny thing is the sub dial 50 index. The majority of it is just comprised of rolex, with a sprinkling of patek and audemars in there as well. Most watches that are not so luxury have not appreciated it at all. So, for example, the omega speedmaster and the tudor black bay models have remained mostly flat. The biggest gainers are shown in this graph. The patek philippe nautilus, 5711a retails for 35 000 and at its peak in 2022, was selling on the gray market for 237 000. The ap royal oak, similar situation, 23 000 retail 165k at its peak and the rolex daytona, which retails for 12 thousand dollars, peaked at 48.7 k and is now trading for 44.5 k. A huge reason for the peak in prices was due to the combination of a roaring stock market and cryptocurrency, reaching all time highs. So many of these investors were kind of spooked by the ukraine, russian war, aka geopolitics, as well as inflation, and they chose to invest in more tangible goods, like rolexs in fact quote many of the same factors that boosted watches also lifted demand in the primary market. For sneakers bags and fine jewelry, analysts said jeffries have estimated that crypto wealth accounted for 25 to 30 percent of growth in u.s top end sales last year. So in a recession, we will likely see the prices of luxury items dropping in addition to all the other purchases that might not be as necessary all right.
So what should you do as an investor or an investor in crypto during this time? The first thing id like to do is to move any crypto that you do have to a well funded exchange. An exchange like ftx operates, lean and hasnt freezed, hiring among layoffs in the industry. According to its founder sam bankman freed. He says quote because we hired carefully, we can keep growing regardless of market conditions, because we exponentially scaled our revenue and productivity. Not our expenses. Binance.Us is also another crypto exchange that is still growing and seems well positioned for the future. So you could also move some of your assets over there. Now there are some non crypto investments that you can look at during recessionary times as well. Goldman sachs found that during the past five recessions, the energy consumer, staples healthcare and utility sectors consistently outperformed the index consumer stable companies typically do better in recessions because they produce goods or services that have relatively inelastic demand. That means theres almost always demand for these goods. No matter how good or bad the economy is doing now, crypto is hardly something that people need during a recession. So, for example, the nft that you bought is never going to wash your clothes for you, whereas if you invested in procter and gamble well, your clothes wouldnt be washed by them either, but they do make tide detergent and no matter how good or bad the economy Is at least tide will probably still continue to sell because everybodys got to wash their clothes out of all the sectors.
In the s p, 500. Only one sector has positive returns, 12 months before recession through the recession and after recession and thats the consumer staples sector. So this is everything thats going on in the crypto market. As of this moment, and with the upcoming cpi data report on july 13th were gon na get a good glimpse into how the year is shaping up. If the cpi report reading comes in hot, we may see a further rise in interest rates in july as well. And if this happens, we could see asset prices like homes come down further, as well as cryptocurrency and the tech sector be negatively affected by interest rates. As well also make sure to check out my newsletter hump days, its a completely free publication, where we give you updates on the markets and technology and, in fact, a lot of what was covered in todays, video was covered in a previous newsletter, make sure to grab Some free stocks down below in the description and also subscribe to the channel.