Crypto sharks circling as battle looms

Crypto markets are facing a rough patch as the digital asset class struggles to maintain its footing. When market conditions weaken, the underlying vulnerabilities in a financial system often become impossible to ignore. Regulators and opportunistic investors have begun circling these areas, targeting specific sectors of the industry that appear most exposed to risk. The current downturn is revealing cracks in the foundation of several high-profile segments, including lending platforms and stablecoins.

Crypto lending was a popular strategy for the past few years, promising investors healthy returns and new capital sources. As the value of major cryptocurrencies like Bitcoin and Ether has fallen, the assets held by these lenders have lost significant value. This drop has cast doubt on the viability of the entire business model. Florida-based Celsius Network, which claimed to service 1.7 million customers, was among the first to face severe pressure. The company recently announced it was pausing all withdrawals, swaps, and transfers between accounts to better honor its obligations.

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The trouble is spreading beyond Celsius. Hong Kong-based Babel Finance and Singapore-based Vauld have also faced liquidity issues, with Vauld freezing withdrawals on Monday. The situation escalated further when the crypto hedge fund Three Arrows Capital filed for bankruptcy last week and entered liquidation. Sam Bankman-Fried, the richest person in crypto, has been attempting to rescue other faltering lenders like BlockFi and Voyager Digital. While his actions draw comparisons to historical financial figures, the broader setting suggests many DeFi stories will not end well.

Stablecoins lose their footing

Stablecoins were introduced as a stable alternative to the extreme volatility of the broader market. However, several of these assets have recently depegged from their target values. Neutrino USD, also known as USDN, dropped 20% in April following allegations of price manipulation on the Waves blockchain. The damage rippled outward to include TerraUSD, which caused significant disruption throughout the crypto markets.

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Currently, the spotlight is on Tether, the world’s largest stablecoin with a market cap of $84.2 billion in May. Tether has slipped below its $1 peg, raising fears that it could be the next domino to fall. Given the damage Terra caused earlier this year, a failure here would be catastrophic. Tether officials claim they hold ample reserves to back the currency, but the loss of confidence in the sector is palpable.