Not Pretty...

There's no beating around the bush here, so let's get right to it: the crypto markets are getting whacked.

As if the Terra/Luna crash wasn't enough, the selling cascade continued this week with the probable implosion of Celsius (covered more in detail below). Today, we were also met with news that the Fed has lifted interest rates by .75 points, the largest increase since 1994, pushing crypto businesses and investors further into uncharted territory.

Making matters worse, at least at this point in time, it's increasingly becoming more obvious that gold is kicking bitcoin's a** as both a store of value and as a hedge against inflation – two narratives that millions of investors, even guys like Paul Tudor Jones, have relied upon in recent months.

To sum it up, in conjunction with the greater economy and rising inflation, it's not looking pretty right now – not one bit. And that's just us being brutally honest.

All the gains bitcoin and Ethereum made in the 2020-2021 bull run are officially gone. Bitcoin, which has dropped more than 24% in the last week, is trading at $22,400 at the time of writing. That’s the same level it was at in mid-December 2020. Ethereum, on the other hand, which has slipped 31% in the last week, has fallen to $1,200. Last time it was at that level was January 2021. Even more jarring, earlier this week, Ethereum slipped below its all-time high during the rally of early 2018.

The latest market downfall, as you can imagine, isn't only affecting ordinary investors like us either...

Crypto firms like Coinbase and BlockFi are slashing jobs left and right, laying off ~20% of their staff
On-chain data has prompted speculation that Three Arrows Capital, a crypto-focused, Singapore-based hedge fund, is insolvent and may become the latest high-flying company to crash in the bear market
Tron's USDD – another algorithmic stablecoin we warned people about weeks ago – has dipped below 96 cents, entering it's fourth day trading below $1
And then there's MicroStrategy (MSTR), which is now faced with a possible margin call that investors fear could force the company to liquidate its bitcoin holdings

It happens in every bear market – total capitulation.

All things considered, hold on to your hats... because things might get worse not only in crypto, but in traditional markets as well. Stay away from leverage. Diversify away from second-tier altcoins if you haven't already. Adopt a go-slow, buy-and-hold approach, and only add to your positions on big down days.

Regardless, through the thick and thin, we'll still be here delivering insights on the market every week. Prices aside, bear markets are for building. And that's really when things get interesting.

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DEEP DIVES

The Celsius Debacle

The crypto space, already reeling from poor macro conditions and the Terra collapse, might be in store for some more pain.

On June 12th, Celsius, a leader among Centralized DeFi (CeDeFi) companies, paused all withdrawals, swaps, and transfers between accounts, sparking fears that they are insolvent.

In this segment, we’ll be talking about what Celsius is, what went wrong, and what the implications of it going under would be.

An Overview of Celsius
There is a large population of people attracted to the yields in DeFi, but don’t know how to go about obtaining it. This is where CeDeFi companies come into play, and they have recently exploded in popularity.

What is a CeDeFi company? In essence, it is a crypto bank. These companies take users' money and deposit it into DeFi, earning customers a yield while pocketing some for themselves. This has turned into quite a lucrative business, with major players Nexo, BlockFi, and Celsius all receiving valuations over $1 billion.

Even though CeDeFi companies have not been immune to the hard times currently affecting us all, Celsius still had $12 billion in assets under management as of May. Although that is down from a high of $24 billion in December, it is still a significant amount by any means, and does not on its own point to a company bordering on insolvency.

Naturally, this all leads to the question of “what went wrong”?

A Chain of Unfortunate Events
As most people in crypto know, DeFi yields are great but risky. During a bull run, it can feel like you are printing money at will. Double and even triple digit Annual Percentage Yields (APYs) are a dime a dozen. However, during a bear market, these opportunities dry up considerably. Combine that with the inherent risks of hacks and smart contract failures in DeFi, and it’s easy to see how, without the utmost care, a fund can lose money very quickly.

Unfortunately, it looks like Celsius has learned this the hard way.

To start, Celsius has lost hundreds of millions of dollars in hacks and protocol failures. Although not deadly by themselves, it is definitely not ideal.

Next, Celsius had exposure to the Terra debacle. Anchor protocol on Terra promised 20% APY on UST stablecoins. This is a really attractive yield, which showed through the $20 billion of capital locked in the protocol before its collapse. It appears that Celsius was also allured by the yield in Anchor, reportedly to the tune of $500 million.

Finally, Celsius is currently facing a liquidity crisis.

A core source of yield for Celsius has been stETH deposits in Lido. For those unaware, Lido is an Ethereum liquid staking protocol. Users deposit ETH and get back stETH, which then earns interest from the deposited ETH. Although stETH is fully backed, as each stETH is minted from 1 ETH, it is also illiquid, as users can not redeem their stETH for ETH until the Ethereum Merge later this year.

Until recently, this has not been a problem, as the stETH<->ETH Liquidity Pool on Curve has facilitated smooth transfers, ensuring that 1 stETH is redeemable for 1 ETH. However, because the bear market has forced people to sell assets in search of liquidity, this pool has recently become imbalanced, with stETH now composing 78% of the pool. Because there is much more stETH than ETH in the pool, stETH now trades at a discount to ETH, with 1 stETH only worth 0.9528 ETH at the time of this writing.

This is bad news for Celsius. In good times when everyone wants to deposit money, their massive stETH position ($500 million worth) earns a steady and considerable yield. However, during these tough times when everyone wants to withdraw, this illiquid position just becomes a liability. Because Celsius has ~300k more stETH than ETH in the Curve pool, it is going to be almost impossible for them to sell their position. Even if they are able to, they will have to deal with massive slippage, meaning that they are going to have to eat millions of dollars in losses. A bad situation any way you slice it.

However, the bad news for Celsius doesn’t end with stETH. Celsius has also used MakerDAO to take out a loan on their $532 million WBTC (Wrapped Bitcoin) position. This debt is currently a massive $235 million, and should bitcoin fall to ~$15k, this position will be liquidated, which would result in devastating losses for Celsius depositors.

Ultimately, the ills currently afflicting Celsius can be explained from bull-market greed, poor risk management, and overexposure to illiquid positions.

The Implications
One of the really sad things about the Terra collapse was that it affected a bunch of regular people. It burned a lot of people new to the space just trying to earn a steady yield, which is really what DeFi’s about.

A collapse for Celsius would affect many of the same people.

People who use services like Celsius aren’t the traditional crypto gambler looking to make it rich quick. They are people who are much further down the risk curve, and just want to safely earn yields higher than the horrendous rates that a savings account gives.

Attracting these people to crypto is super important for the future of the space, and will likely determine if it is able to evolve past its current iteration and into something more mainstream and appealing to the general public.

If Celsius were to go under, however, the damage to the reputation of crypto would be immeasurable. If people feel like they can’t trust a ‘safe’ service like Celsius, it’s going to be awfully difficult to get them to use DeFi in its entirety.

That’s not even mentioning the potential regulatory ramifications, which are sure to come should Celsius ultimately goes under.

Celsius is in trouble, and by extension, they have endangered both the money of all of their users and the future of crypto as a whole. Should they survive, let us hope that they learn from this and make better decisions in the future. We would all be much better off for it.

Web2 + Web3 = Web5?

Jack Dorsey’s Bitcoin-focused TBD, a subsidiary of Block, announced that it is building a new decentralized web: Web5.

Web5 takes a different approach than Web3. While Web3 aims to “blockchain” and “tokenize” all things, Web5 uses just one blockchain – Bitcoin – for one specific use-case: identity.

And unlike the Web3 apps that make use of smart contract networks such as Ethereum, Web5 will not involve the creation and sale of new tokens.

Many folks in the web3 community see Dorsey’s announcement as a slap in the face, potentially mocking the work that has been done in web3 and on other non-Bitcoin blockchains.

Jack's proposal, however, is certainly well thought out.

The deck, outlined by Bitcoin Magazine, breaks down the core ideas of Web5, leading up to new concepts called progressive web apps (PWAs), decentralized identifiers (DIDs), decentralized web nodes (DWNs), self-sovereign identity services (SSIS) and a self-sovereign identity software development kit (ssi-sdk). Now, how's that for another crypto rabbit hole?

While the new project from TBD was announced Friday, it is still under open-source development and does not have an official release date.

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REGULATORY FRONT

Coin Center Sues Treasury and IRS

Coin Center, a Washington, DC-based crypto think-tank, on Friday filed a lawsuit in federal district court against the Treasury Department and the Internal Revenue Service (IRS) claiming that a new crypto tax-reporting requirement in the Infrastructure Investment and Jobs Act, which passed last summer, is unconstitutional.

The so-called 6050I amendment hidden in the infrastructure bill is "unconstitutional on its face, and simply can’t be fixed through regulation... If the amendment is allowed to go into effect, it will impose a mass surveillance regime on ordinary Americans," Coin Center stated in its latest blog post.

The amendment, to the surprise of many today, apparently will require individuals and businesses who receive $10,000 or more in crypto to report to the government not just the name of who sent them the funds, but that person’s date of birth and Social Security number as well.

"Are you an artist who sells a painting or an NFT for $15K? You have to file a form informing the government on your client’s personal information. Are you a nonprofit who receives anonymous donations for your humanitarian work? No longer. You may have to give the government a list of your donors. This is an affront to our civil liberties that must be challenged the only way they can at this point: in court."

All of today's entrepreneurs and developers within the crypto ecosystem deserve credit for creating innovative products and boosting awareness to public about the benefits of crypto. That's for certain.

But we cannot forget those who take it one step further, by battling regulatory bodies and unfair public policies head-on in court. They are arguably just as important.

That said, props to Peter Van Valkenburgh and the team Coin Center for consistently delivering.

TWEET OF THE WEEK