What happened
After a few days of recovery, cryptocurrency markets have collapsed again on Wednesday, with many major cryptocurrencies falling double digits. More liquidations seem to be in store for big investors, and risks keep being uncovered in the ecosystem.
As of 9:00 a.m. ET, Bitcoin (BTC -4.25%) has fallen 4.6% in the last 24 hours, Ethereum (ETH -5.54%) is down 9.6%, and Solana (SOL -9.84%) is down 12.8%.
So what
The biggest news of the day is a conflict between derivatives exchange CoinFlex and Roger Ver. CoinFlex claims Ver owes the company $47 million, and Ver has said in fact he is owed money from a counterparty, although he didn't specifically name CoinFlex as that party. The big problem is that Ver has a non-liquidation recourse account with CoinFlex, so the company is scrambling to fund the business. It may even offer a new token in order to have enough liquidity to fund other customers' withdrawals.
This follows news on Monday that hedge fund Three Arrows Capital had defaulted on a $670 million loan to brokerage Voyager Digital. A court in the British Virgin Islands has even ordered the liquidation of the fund.
The problem is that as liquidations take place we have an excess of sellers compared to buyers of cryptocurrencies. That's causing the price pressure we see today, and there's no clear bottom, especially if the most bullish Bitcoin investors are getting liquidated.
Now what
The market continues to uncover more and more risk that wasn't immediately clear as cryptocurrency values fall. What's shocking is that billions of dollars were lent out to leveraged bets on cryptocurrencies and that as those positions unwind it's effectively causing a run on crypto exchanges. The ones left holding the bag are smaller investors, who have had withdrawals frozen by multiple exchanges.
It's not clear when the risks will end, either. Big investors are unwinding bullish positions, and someone will need to buy those positions to hold valuations up. But we may be heading into a recession, and interest rates are on the rise, so it's not clear who will step in.
As bullish as I am on the future of cryptocurrency and Web3 broadly, I think there may be significant price pressure on cryptocurrencies across the board over the next year or two. The investors who who were buying on the way up were apparently using more leverage than the market knew about, and there was much more speculation than most investors would like to admit. Today is just another example of how quickly that unwinding can take place, but it's not over for the crypto market.
