Bitcoin

Voyager Digital cuts withdrawal amount as 3AC contagion ripples through DeFi and CeFi

Published

4 days ago

June 23, 2022

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The Singapore-based crypto venture firm Three Arrows Capital (3AC) failed to meet its financial obligations on June 15 and this caused severe impairments among centralized lending providers like Babel Finance and staking providers like Celsius.

On June 22, Voyager Digital, a New York-based digital assets lending and yield company listed on the Toronto Stock exchange, saw its shares drop nearly 60% after revealing a $655 million exposure to Three Arrows Capital.

Voyager offers crypto trading and staking and had about $5.8 billion of assets on its platform in March, according to Bloomberg. Voyager’s website mentions that the firm offers a Mastercard debit card with cashback and allegedly pays up to 12% annualized rewards on crypto deposits with no lockups.

More recently, on June 23, Voyager Digital lowered its daily withdrawal limit to $10,000, as reported by Reuters.

The contagion risk spread to derivatives contracts

It remains unknown how Voyager shouldered so much liability to a single counterparty, but the firm is willing to pursue legal action to recover its funds from 3AC. To remain solvent, Voyager borrowed 15,000 Bitcoin (BTC) from Alameda Research, the crypto trading firm spearheaded by Sam Bankman-Fried.

Voyager has also secured a $200 million cash loan and another 350 million USDC Coin (USDC) revolver credit to safeguard customer redemption requests. Compass Point Research & Trading LLC analysts noted that the event “raises survivability questions” for Voyager, hence, crypto investors question whether further market participants could face a similar outcome.

– Unsecured derivatives and options trading on Deribit
– $650 million of unsecured debt with Voyager
– Offering protocols/portfolio companies 8-10% APY on their cash balances
What else?
— Dylan LeClair (@DylanLeClair_) June 22, 2022

Even though there is no way to know how centralized crypto lending and yield firms operate, it is important to understand that a single derivatives contract counterparty cannot create contagion risk.

A crypto derivatives exchange could be insolvent, and users would only notice it when trying to withdraw. That risk is not exclusive to cryptocurrency markets, but is exponentially increased by the lack of regulation and weak reporting practices.

How do crypto futures contracts work?

The typical futures contract offered by the Chicago Mercantile Exchange (CME) and most crypto derivatives exchanges, including FTX, OKX and Deribit, allow a trader to leverage its position by depositing margin. This means trading a larger position versus the original deposit, but there’s a catch.

Instead of trading Bitcoin or Ether (ETH), these exchanges offer derivatives contracts, which tend to track the underlying asset price but are far from being the same asset. So, for instance, there is no way to withdraw your futures contracts, let alone transfer those between different exchanges.

Moreover, there’s a risk of this derivatives contract depegging from the actual cryptocurrency price at regular spot exchanges like Coinbase, Bitstamp or Kraken. In short, derivatives are a financial bet between two entities, so if a buyer lacks margin (deposits) to cover it, the seller will not take the profits home.

How do exchanges handle derivatives risk?

There are two ways an exchange can handle the risk of insufficient margin. A “clawback” means taking the profits away from the winning side to cover the losses. That was the standard until BitMEX introduced the insurance fund, which chips away from every forced liquidation to handle those unexpected events.

However, one must note that the exchange acts as an intermediary because every futures market trade needs a buyer and seller of the same size and price. Regardless of being a monthly contract, or a perpetual future (inverse swap), both buyer and seller are required to deposit a margin.

Crypto investors are now asking themselves whether or not a crypto exchange could become insolvent, and the answer is yes.

If an exchange incorrectly handles the forced liquidations, it might impact every trader and business involved. A similar risk exists for spot exchanges when the actual cryptocurrencies in their wallets are shorter than the number of coins reported to their clients.

Cointelegraph has no knowledge of anything abnormal regarding Deribit’s liquidity or solvency. Deribit, along with other crypto derivatives exchanges, is a centralized entity. Thus, the information available to the general public is less than ideal.

History shows that the centralized crypto industry lacks reporting and auditing practices. This practice is potentially harmful to every individual and business involved, but as far as futures contracts go, contagion risk is limited to the participants’ exposure to each derivatives exchange.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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Bitcoin

What are Bitcoin covenants, and how do they work?

Published

7 hours ago

June 27, 2022

Urban Moolah

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Various prominent Bitcoin experts, including Adam Back, Jimmy Song and Andreas Antonopoulos, have raised some concerns over the implementation of restrictive covenants, in particular with the BIP119.

In particular, Antonopoulos has voiced concerns over “recursive covenants” that the new update could convey, thereby deteriorating the network. A recursive covenant occurs when a programmer restricts a transaction, but he does it in a way that restricts another transaction after that, starting a domino effect resulting in future limitless recursive covenants.

Blacklisting and risks of censorship and confiscation

While locking up where a Bitcoin can be spent is advantageous to ensure more security, it also provides grounds for censorship, and control by governments, which would hinder the very existence of Bitcoin. Authorities could potentially force exchanges to withdraw only to covenants with some control over the coin.

While this same risk already exists, since governments can ask exchanges to send only to addresses with a taproot spend path or multi-sig controlled by them, could the implementation of covenants facilitate malicious purposes where it would make it easier for governments to enforce a sort of on-chain KYC? 

Fungibility threats

Covenants might interfere with Bitcoin’s fungibility — the ability of each Bitcoin to be identical in function and quality.

While useful for security and scalability, covenants would change the properties of specific Bitcoin units, essentially creating different types of digital currency, distinct according to what could be spent or where it could be sent. 

As a result, those who oppose the change argued that limiting how you can spend your Bitcoin would ultimately limit Bitcoin’s use as a digital currency, with inevitable consequences in its value.

There are strong opinions on covenants’ pros and cons; however, debates are healthy and necessary to improve a decentralized and leaderless network. Ultimately, the final decision will be down to the users and node operators who will download the software that better reflects their viewpoint.

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Bitcoin

BTC price tops 10-day highs as Bitcoin whale demand sees ‘huge spike’

Published

16 hours ago

June 26, 2022

Urban Moolah

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Bitcoin (BTC) made the most of weekend volatility on June 26 as a squeeze saw BTC/USD reach its highest in over a week.

BTC/USD 1-hour candle chart (Bitstamp). Source: TradingView

“Unusual whale activity” flagged

Data from Cointelegraph Markets Pro and TradingView followed the largest cryptocurrency as it hit $21,868 on Bitstamp.

Just hours from the weekly close, a reversal then set in under $21,500, Bitcoin still in line to seal its first “green” weekly candle since May.

The event followed warnings that volatile conditions both up and down could return during low-liquidity weekend trading. On-chain data nonetheless fixed what appeared to be buying by Bitcoin’s largest-volume investor cohort prior to the uptick.

“Unusual whale activity detected in Bitcoin,” popular analytics resource Game of Trades observed.

“The supply held by entities with balance 1k-10k BTC just saw a huge spike in demand. Let’s watch if the trend confirms.”

An accompanying chart from on-chain analytics firm Glassnode showed shifting up markedly from around the time BTC/USD hit lows of $17,600 this month.

*BTC supply held by entities with 1,000-10,000 BTC annotated chart. Source: Games of Trades/ Twitter*

As Cointelegraph reported, whales had eagerly purchased BTC below $20,000, forming new support clusters in the process.

CME futures gap looms large

For others, however, conservative views on price action remained the norm.

Cointelegraph contributor Michaël van de Poppe eyed the need to crack $21,600 definitively in order to secure the chances of further upside. Additionally, last week’s closing price of $21,100 on CME Group’s Bitcoin futures could provide a short-term target.

“Standard weekend fake-outs happening and probably ending at CME close at $21.1K for Bitcoin,” he forecast on the day.

“No clear breakout above $21.6K at this point, yet.”

*CME Bitcoin futures 1-hour candle chart. Source: TradingView*

The monthly close was still on course to cement Bitcoin’s worst June on record with monthly losses of almost 33%.

Along with May 2021, this would also be the worst-performing month since before the 2018 bear market bottom, data from on-chain monitoring resource Coinglass confirms.

*Bitcoin monthly returns chart (screenshot). Source: Coinglass*

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

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Bitcoin

Small-time investors achieve the 1 BTC dream as Bitcoin holds $20k range

Published

1 day ago

June 26, 2022

Urban Moolah

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Ever since early Bitcoin (BTC) investors woke up millionaires as the ecosystem gained tremendous popularity alongside the mainstreaming of the internet, investors across the globe have been in the rush to accumulate as many of the 21 million BTC — one Satoshi at a time.

With BTC recently trading at the $20,000 range for the first time since 2020, small-time investors found a small window of opportunity to achieve their dream of owning at least 1 BTC. On June 20, Cointelegraph reported that the number of Bitcoin wallet addresses containing one BTC or more increased by 13,091 in just 7 days.

While the total number of addresses holding 1 BTC saw an immediate reduction in days to come, the crypto community on Reddit continues to welcome new crypto investors that hodled their way into becoming a wholecoiner.

A Reddit post announcing the procurement of 1 Bitcoin. Source: Reddit

Redditor arbalest_22, who shared the above screenshot, revealed that it took him around $35k in total to accumulate 1 BTC over several months since February 14, 2021. Showing further support for the Bitcoin ecosystem, the Redditor aims to continue procuring Satoshis or sats until he accumulates over 2 BTC.

Arbalest_22 started purchasing BTC from crypto exchange Coinbase but later started using Strike owing to lower fees. Sharing a peek into his future plans, they stated:

“I’m hoping in the future I can treat it more like rich people treat real estate and take loans out against it. Then as it appreciates just pay off the old loan with a new one. Boom, tax-free income.”

Following suit, another Reddit user Evening-Main-5860, too, posted about being able to 1 BTC after largely following a dollar-cost averaging (DCA) strategy, wherein they regularly bought smaller amounts of BTC over a long period of time, stating:

“I was able to catch the falling knife and buy enough to get me over the finish line. This was no easy feat. I’m just an ordinary guy with an ordinary life.”

Data on number of wallet addresses with at least 1 BTC. Source: Glassnode

Between June 15 to June 25, the total number of Bitcoin wallet addresses holding more than 1 BTC grew by 873, according to Glassnode data.

While falling BTC prices are seen by many as an investment opportunity, Google search trends highlight the tendency of other investors to speculate about its demise.