$2 Billion Hole

Crypto Market Week in Review (1 of July 2022)


This week the biggest market fear changed from stagflation to recession. This sentiment supported bonds and pushed stocks even lower. Real rates increased because of plummeting inflation breakevens and pressured technology stocks more than broader indexes.

Crypto assets declined this week, although a 10% Bitcoin drop looks moderate compared with an amount of negative news. Three Arrows Capital finally collapsed as it defaulted on a $350 million loan to Voyager Digital and was reportedly ordered to liquidate by a British Virgin Islands court. Celsius said it was exploring a restructuring of liabilities and so it may soon go the 3AC’s way. BlockFi was more successful and reportedly found a buyer in FTX, but with a 99% discount on its valuation in March 2021. Earlier this month FTX bailed out BlockFi with a $250 million revolving credit facility. The Block said FTX was interested in Celsius too but walked away after examining the finances which showed a $2 billion hole in its balance sheet. We wonder how much is a hole in 3AC’s balance sheet if it shies to ask for a bailout from FTX.

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High-profile failures suggest the crypto market deleveraging cycle is in an advanced stage and won’t be lengthy, JP Morgan says. That sounds reasonable but ironically JP Morgan analysts were also the loudest stock market bulls all the way down during this year’s plunge.

Crypto options traders apparently agree with JP Morgan that further large-scale margin calls are unlikely in the near future or at least are already priced in. Implied volatility of Bitcoin and Ether options as measured by DVOL indexes went sideways this week.

Bitcoin spot price and volatility index (DVOL)

Source: The Block

Ethereum spot price and volatility index (DVOL)

Source: The Block

On the contrary, Goldman Sachs analysts say that after an 80% year-to-date drop now is a good time to turn bearish on Coinbase shares. They downgraded Coinbase from “hold” to “sell” citing concerns about the new plan to merge Coinbase Pro with the baseline trading platform aimed at retail customers. So, GS thinks overcharging retail clients is not a sustainable business model any longer.

Coinbase share price (USD)

Source: TradingView

In other news, US regulators decided to reject Grayscale’s bid to convert Grayscale Bitcoin Trust into an exchange-traded fund. That was expected by legal experts but looks strange because there are ETFs based on Bitcoin futures. It’s curious why does SEC consider physical Bitcoin riskier than bitcoin futures.

MicroStrategy Buys an Additional $10 Million Worth of Bitcoins

Despite recent setbacks surrounding the prices of digital assets, business analytics company MicroStrategy has increased its holdings of Bitcoin (BTC), reiterating CEO Michael Saylor's strong perspective on the leading digital asset.

In its recently released Form 8-K, Microstrategy revealed it had purchased an additional 480 BTC at an average cost of about $20,817.

This depicts an extra $10 million worth of Bitcoin purchases, and it brings the total number of Bitcoins owned by Microstrategy to 129,699BTC ($3.9 billion).

Source: Twitter

The average price for Microstrategy’s purchases is around $30,000, and with Bitcoin’s price temporarily falling under $20,000 this week, the corporation is holding an unrealized loss of close to $1.4 billion on its Bitcoin investments.

The company’s CEO, Michael Saylor, has been vocal about his stance toward Bitcoin, and he’s not backing down despite the current market downturn. Earlier this month, he informed his 2.5 million Twitter followers that the company intends to "HODL through hardship" and has no plans to sell its position. The positive statement came amid concerns that the business ran the possibility of receiving a margin call if the price of Bitcoin dropped below $21,000. Saylor claims that the rumor about the margin call is "nothing to worry about."

Hacked Ronin Bridge to Reopen Better and More Decentralized

Three months after it was breached for more than $600 million, Sky Mavis, the creators of the well-known play-to-earn (P2E) nonfungible token (NFT) game Axie Infinity, announced that the Ronin bridge is back online.

Source: Twitter

The bridge was emptied of over $620 million (173,600 ETH and 25.5 million USDC) on March 29 after hackers were able to get private validator keys, and after three audits, a revamped layout, and full restitution of users’ stolen assets, the Sky Mavis team announced the Ronin bridge is now active once more.

Sky Mavis has updated the smart contract as part of the updated bridge architecture to allow validators to establish daily withdrawal limitations, with the initial amount set at $50 million. The group also implemented a circuit-breaker system that divides the amount of withdrawals into three categories.

  • Tier 1 for withdrawals less than $1 million.
  • Tier 2 for amounts greater than $1 million.
  • Tier 3 for withdrawals greater than $10 million.

The tier will also determine the percentage of validators needed to approve a withdrawal. The first tier will need 70% validators, the second will need 90% validators, and the third tier will require 90% validators and a 7-day review process.

The new Ronin bridge will also move to be more decentralized, with a planned increase in the number of validators. Sky Mavis explained they look to surpass 100 nodes soon and include a circuit-breaker system to halt suspicious withdrawals.

Big-4 Accounting Firm Invests $30M in Metaverse and Web 3 Employee Training

To assist its staff and clients in pursuing growth prospects in the digital age, KPMG, one of the Big Four accountancy firms in Canada and the United States, has announced the creation of its first metaverse collaboration hub.

With a new collaborative hub that uses Web3 to connect staff, clients, and others, KPMG is stepping into the metaverse. The metaverse center is the "signature element" of the company's $30 million investment in Web3 experiences this year.

The hub, which will be centered on education, collaboration, training, events, and workshops, according to a Tuesday report by Fortune, is already being used for these purposes, but KPMG plans to hire people to build it and expand it over time. Cliff Justice, the US leader of enterprise innovation at KPMG, claimed this is the case.

The company's long-term goal is to investigate more potential metaverse use cases in industries like health care, consumer goods, retail, media, and financial services.

According to the company's chief operating officer, it will continue to investigate opportunities in the crypto and Web 3.0 arena as it capitalizes on the covid pandemic's spark of interest in the metaverse.

Grayscale vs. SEC: The Fight for the First Bitcoin Spot ETF

In a letter to investors on Monday, Grayscale claimed that as of June 9, "99.96% of those comment letters were supportive of Grayscale's case" out of the over 11,400 letters the US Securities and Exchange Commission, or SEC, had received concerning its proposed Bitcoin (BTC) investment vehicle.

According to Grayscale, the lack of a spot BTC ETF in the United States was questioned in about 33% of the letters, considering that the SEC has already approved investment vehicles related to Bitcoin futures, as was the case for ProShares and Valkyrie.

The CEO Michael Sonnenshein said, "the SEC's actions over the past eight months have suggested an improved acknowledgment of and comfort with the maturity of the underlying Bitcoin market." Accepting every Bitcoin-linked investment product supports our claims that the U.S. market merits a Bitcoin ETF.

However, the Securities and Exchange Commission (SEC) still rejected Grayscale's request to turn its flagship product into an exchange-traded fund that would invest in spot Bitcoin (ETF). The basis of the rejection is that its national securities should be designed to prevent fraudulent acts, and the Grayscale spot ETF has not sufficiently proven it can.

Grayscale clapped back at the SEC by saying the regulator might breach the Administrative Procedures Act by approving a futures product but rejecting spot offerings. Grayscale and other supporters contend it is illogical to reject a spot product because of inadequate protection against market manipulation when the authorized products are priced based on the underlying market because a futures product is based on the underlying market.

Hours after responding to the SEC, Grayscale formally launched a lawsuit against the SEC for rejecting its spot ETF.

Genesis Faces ‘Hundreds of Millions’ in Losses as 3AC Exposure Swamps Crypto Lenders

Insider information from cryptocurrency market maker and lending firm Genesis Trading revealed that the firm might suffer losses in the “hundreds of millions” due to 3AC liquidation.

One of the people stated that the losses at Genesis were in the neighborhood of "a few hundred million dollars," and that they were partly caused by exposure to the highly leveraged hedge fund Three Arrows Capital and the Hong Kong-based cryptocurrency lender Babel Finance.

The demise of Three Arrows Capital has shocked the Bitcoin lending industry, and as a result, numerous companies have suffered large losses because of their exposure to the fund.

The people stated that because Genesis is pursuing at least partial reimbursement from its counterparties and some of the losses might have been mitigated by hedging, the exact amount of the company's losses may not be known for some time. According to a fourth market source, Genesis has been removing credit lines from counterparties left and right amid this unpredictability.

Nothing has been heard from either Babel Finance or Three Arrows Capital on the revelations.

Following the high-profile collapse of crypto companies like Terraform Labs, Celsius, and Three Arrows Capital, which was aided by a crypto market downturn, there have been a number of liquidations at many lending and trading platforms.

Source: Twitter

Without providing specific figures, Genesis has already admitted to suffering losses during the bear market. CEO Moro tweeted in the middle of June that the company had "seriously and thoughtfully minimized losses with a significant counterparty who failed to make a margin call to us."

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