🔍 The Crypto Domino Effect
A number of crypto firms have recently stopped accepting transactions, the latest one being Vauld. Here's what is behind this new crypto phenomenon.
Cryptocurrencies and crypto exchanges have been dominating the headlines for quite some time now.
But unlike last year, when crypto prices were going sky-high taking valuations of crypto exchanges to the moon, this time the news is not so flattering.
Cryptocurrency prices have been dropping like anything, with Bitcoin going down to $19,000.
And while some crypto believers are still 'hodling' on to their beliefs and their crypto, many others have lost the option to even withdraw their holdings.
No, seriously. Several crypto exchanges have either stopped transactions or filed for bankruptcy.
Wondering what is happening? ReadOn!
👀 Let's Talk About the Elephant in the Room
If you've been reading the news or scrolled through LinkedIn, you've probably heard about the Vauld fiasco by now.
But just in case you haven't, here's the brief:
Vauld, a Singapore-based cryptocurrency exchange, has announced that it will be halting all transactions on its platform.
The reason this news has gone so viral is that Vauld was a favourite amongst crypto investors and finfluencers.
Many big names made a big deal of investing huge amounts of money, quite publicly onto the platform.
And to be honest, Vauld's proposition seemed interesting.
It was selling crypto fixed deposits that gave you approximately 12% interest rate.
Who wouldn't jump on this offer, right?
But just because you call something a fixed deposit doesn't mean it's safe.
You see, Vauld, just like any other bank, was taking deposits (in the form of crypto) from customers and lending it out.
And lending money is always a risky proposition. Even major banks like Yes Bank have gone down due to a rising amount of Non-Performing Assets (NPAs).
So, even though Vauld made its offering seem safe, it really wasn't. It was a risky investment which was made all the more risky because the underlying asset (cryptocurrency) was volatile.
But what exactly went wrong with Vauld?
Well, Vauld's fall is just part of a domino effect that is currently sweeping through the entire crypto industry.
🃏 The Domino Effect
Let's go back in time to last year.
Covid had us in its grips but two years of boredom and some easy money thanks to low interest rates (and savings because we weren't going out), got people hooked to a new asset class.
Cryptocurrencies.
Even though Bitcoin has been around since 2009, it truly reached its peak in 2020-2021.
But now that era is over.
The economy is open again, low interest rates are gone and so are the extra savings.
What we do have is inflation, with a possible recession peeking at us from the rearview mirror.
Since interest rates are high again and times uncertain, most people are no longer looking forward to gambling their savings in crypto for quick bucks.
Even Musk isn't tweeting about crypto so often.
So, people are dumping crypto left, right, centre and picking up safer and less volatile assets that can help them tide over recession.
Result? Bitcoin, Ethereum, Polygon Matic and many other cryptos are down. By a lot.
This exit from cryptos is what led to one of the year's first biggest crypto crashes: The Fall of Terra and Luna (you can read about it here).
Terra seemed like one of the safest cryptos out there because it was a stablecoin. It was backed by real assets.
And once a stablecoin crashed, people's faith in the whole crypto economy tanked further.
Bas, this one crash set forth a whole chain of dominos that is still taking down one crypto exchange after the other.
The next to fall was Celsius: again a very well-known crypto exchange.
Valued at $3.25 billion, the company was one of the biggest crypto lenders.
But after the Terra-Luna crash it too started seeing massive withdrawals, kind of like a digital version of a bank run.
And because Celsius did not have enough collateral to back each loan (you see, the company had used its crypto reserves to take loans itself), it was facing a liquidity crunch.
So, just like the RBI has to limit withdrawals to stop a bank run, Celsius had to stop all transactions to ensure it had some liquidity.
It is now paying back some of its loans to get back its crypto collateral (which is always more than the loan amount for safety purposes) to ensure it can start operations again.
But it still owes $82 million in debt.
After Celsius, Three Arrows Capital, another crypto lender, faced the same issues bringing down with it Voyager Digital, a crypto company it had borrowed from.
They have both filed for bankruptcy, further reducing investor trust, and leading Vauld users to withdraw $197.7 million since June 12.
This has now led to Vauld facing a liquidity crunch and shutting down operations.
However, we must add that a lack of investor trust is not the only reason for this massive exit from crypto. Many users, especially Indian users have also been forced to withdraw money due to the heavy taxes now applied on crypto.
You see, India is now taxing cryptos and other virtual digital assets at 30%. Plus, a 1% TDS will be deducted on crypto transactions over Rs. 10,000 from July 1. This means if you sell crypto worth Rs. 11,000, Rs. 110 will go directly to the government.
Because of this crypto exchanges have seen a 60%-87% decline in trading.
This could also have played a role in Vauld's downfall.
It is still unclear what the future holds for Vauld and its users but apparently DeFi platform Nexo is thinking of acquiring it and restructuring it.
This means there is still hope for users.
However, these fiascos raise an important question.
None of the companies that have been victims to the crypto domino effect were small.
They were major established companies with insurance and VC support.
So, shouldn't they have been a little more resilient?
Well, they could have been if they followed proper protocol and backed their crypto with enough collateral or their stablecoins with enough reserves.
But because they failed to do so, they've not just depleted customers' money but also faith in crypto as a whole.
Now, we will have to wait and watch if these companies will be able to recover any time soon.
⚡In a line: Crypto Exchanges are shutting down because investors no longer trust the asset and because of their own shady practices.
💡Quick question: Do you think the finfluencers who recommended Vauld were careless or did they make a genuine mistake?
Share this with your friends via WhatsApp or Twitter to help them declutter news from noise! See you tomorrow :)
You can also listen to our stories. Catch it on Spotify, Apple Podcast, Amazon Music, Google Podcasts, Gaana or Jio Saavn.
If you are coming here for the very first time: Don’t forget to join us on WhatsApp to get daily updates! 👇