Crypto’s Endgame
Crypto Winter or Correction - Where Are We Now?
DeFi, CeFi & TradFi
Since our last update in May, the crypto and Defi world have seen a lot of change. Bitcoin dropped from around $30,000 per coin, to just under $18,000 in mid-June, and it is currently settled around $20,000. We have also seen a number of well-known crypto companies run into rough liquidity issues.
Looking at the market as whole, one of the key drivers of interest in crypto has been the meteoric rise in value of coins like Bitcoin. Since 2020, we have seen many of these coins rally to stratospheric levels only to see much of this value dissipate as the Fed began rising rates. One of the ways the market measures the size of the Defi space is the total value locked (TVL), which peaked in Nov 2021 at $254 Bio (According to DefiLlama), and now sits at $73 Bio, a 71% fall in less than 7 months.
We see the market split into three distinct spaces: Traditional Finance (TradFi), Centralized Finance (CeFi) and Decentralized Finance (DeFi). To us, the most interesting area of growth is in decentralized finance which utilizes smart contracts to offer speed, efficiency and cost advantages in both making and receiving payments, and to lend and to borrow.
Throughout the past few months, as coin prices have sold off, Defi continues to operate smoothly. Traditional finance has also largely avoided the boom in crypto as well as the pullback.
The area which has seen the greatest impact of the sell-off has been the CeFi space where there have been a number of bankruptcies and firms that are in liquidation. The most high-profile victim of this sell-off was Celsius. In Nov 2021, Celsius was valued at 3.5 Bio and as of last week, stopped all of its estimated 500,000 users from withdrawing their money because of “extreme market conditions,”. According to press statements, as much as $8 billion in deposits are frozen.
Although companies like Celsius took ‘deposits’ and made loans, they were not regulated as a bank and their depositors have no protection from the Fed or any other bank regulator. Another victim has been Blockfi, which was valued at $3 Bio in its D round fundraise in 2021, but has recently accepted a $250 Mio line of credit to support its business.
As major crypto currencies sold-off, it appears that there were a number of leveraged funds that could not meet margin calls and as banks like Celsius are being forced to liquidate client collateral, the high volatility resulted in significant capital losses.
As interest rates look to head higher still, crypto currencies which many would argue that they have no intrinsic value and no yield (unless staked) could come under additional selling pressure putting further pressure on key lenders and market makers in the CeFi space. We remain cautious on the value of these crypto currencies but continue to see opportunities of growth in the Defi space. Key platforms such as Aave and Compound have seen limited impact from the volatility in crypto markets and lending and borrowing on these platforms has not been disrupted. Much of this is due to their reliance on smart contracts and higher collateral requirements. We continue to look for value in how we utilize aspects of DeFi such as smart contracts to offer investors value.
