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Is this the Collapse of CeFi?
CeFi’s Capacity for Opacity
The past two months of 2022 have been a tumultuous time for crypto enthusiasts. As the Terra Luna UST collapse was unfolding, I asked myself, “Would this create a domino effect, resulting in the collapse of major players in the crypto space?” What transpired was worse than what I could possibly imagine.
3 Arrows Capital (3AC) held a leveraged position in Luna and UST and saw $200 million of capital evaporate in less than 36 hours. The leverage was brought about by lending from BitMex, FTX, and Deribit. Soon after, BitMex, FTX, and Deribit were forced to liquidate 3AC’s leveraged positions after they could not make their margin calls. These liquidations resulted in extended selling pressure in the crypto market, resulting in further margin calls.
After the dust settled (or has it?), Vauld, Babel Finance, CoinFlex, CoinDCX, Celsius and Voyager had all halted withdrawals from their exchanges. Hedge funds like Uprise lost millions of capital from their books.
It has become obvious that the inherent transparency that is built into blockchain technology was successfully obscured by centralized institutions. Highly leveraged positions grew outside of the purview of blockchain analysts. If anyone was aware of this situation, they were either silent or their warning cries were muted.
It is important to learn the lessons that are being taught by the failures of these major players.
Lesson #1: Not your keys, not your crypto!
If your crypto is being held on an exchange, it is not yours! You just own an IOU from the exchange. If they declare bankruptcy, your assets could be distributed as part of the bankruptcy settlement. You can read the Terms and Conditions of the exchange for the details.
Sanctuary Dex™ offers both a mobile wallet solution for smartphones as well as crypto gift cards that can be used as cold storage for your digital assets. Link: https://sanctuarydex.com/products/
Lesson #2: Don’t pick up pennies in front of a steamroller!
Cryptocurrency is a highly volatile market. Fortunately, the volatility is mostly to the upside. After all, bitcoin has risen from pennies to over $60,000 per bitcoin. If you send your bitcoin or other cryptocurrencies to an exchange to earn yield, you are picking up pennies in front of a steamroller!
Lesson #3: “Bitcoin is the apex predator of finance!” – Dan Hedl (Bitcoin OG)
Due to bitcoin’s fixed supply, leveraged players live on borrowed time as there is no “lender of last resort”.
Lesson #4: Don’t forget lesson #1!
Store your crypto on your own wallet and safely protect your private keys. Do not share them with anyone! For tips on how to secure your cryptocurrency, you can read my previous article: https://sanctuarydex.com/ways-to-secure-your-cryptocurrency/
I predict the recent events and their impact will fade into history and be repeated again and again as bitcoin continues to reach to all-time highs.
Voyager Bankruptcy filing: https://cases.stretto.com/public/x193/11753/PLEADINGS/1175307062280000000036.pdf
June 22 Alameda Research LOC announcement – https://www.newswire.ca/news-releases/voyager-digital-provides-update-on-asset-and-risk-management-822816646.html
June 28 Tweet from Voyager – Lacking transparency: https://twitter.com/investvoyager/status/1541880392755691521