Interconnectedness and Leverage are Getting a Hold of Crypto 

Yves Smith has once again taken to her blog, Naked Capitalism, to talk about crypto. This time, the podcaster and author recalled her warning against the usage of crypto. She went ahead into an I-told-you-so discussion at the risk of sounding like an old fart.

The Antecedents of Cryptocurrencies

Smith said that crypto is like a. momentous trade. Those who started quite early and got out fast did exceptionally well. But a lot more people are left behind holding the bag now.

Smith called her audience to remember that the use cases of cryptocurrencies were criminal. She said they were used for money laundering, tax evasions, and speculations. It is impossible for crypto to displace fiat currencies as a payment system, the author said.

Parts of the obstacles of cryptocurrencies are inherent in their nature. They have a slow processing speed. Bitcoin is becoming slower than it used to be since the blockchain is getting longer.  

The cost attached to foreign exchange is said to be another obstacle, according to Smith. It cost additional fees to trade cryptocurrencies in and out of fiat currencies.

Smith delved into the travail of Voyager Digital and its clients. The crypto lender took crypto deposits on the promise of returning a 12% yield. But things have not gone as planned and the firm has run aground.

Voyager Digital took to Twitter to tell depositors and other investors it is seeking strategic alternatives. The firm said it is fixated on protecting its assets and increasing value for customers.

Smith refers to the Voyager announcement as horrifying language. She said those who have their cryptos deposited and can’t get it out are horrified.

What the Current Collapse Says

There is, however, a difference between this crypto collapse and that of 2018 for Smith. She said the attendant factors now were in their infancy then: interconnectedness and leverage.

Crypto firms would lend to each other in cryptocurrencies to speculate in cryptocurrencies. They lent out borrowed cryptocurrencies and used the same as collateral for additional leverage. These activities are now causing a margin call and several wipeouts in the space. 

According to Smith, the interconnectedness established a big systemic risk in the cryptocurrency space. They have all now come home to roost.

Voyager Digital halted trading and withdrawals on its platform on Friday. Depositors cannot cryptocurrencies or collateral out. They can’t get any fiat currencies out either.

The depositors become unsecured creditors just in case Voyager declares bankruptcy. The firm has already enlisted the service of bankruptcy and restructuring lawyers and agencies.

Voyager was brought down by Three Arrows Capital, a crypto hedge fund. Three Arrows Capital ceased leverages when cryptocurrencies were plunging. 

Three Arrows Capital itself has been ordered into liquidation by a British Virgin Island court. It went on to officially file for bankruptcy in the US on Friday. Despite the fact that it managed up to $10 billion worth of cryptocurrencies as of March.