Cumberland: Potential crypto liquidations are 'hanging over the market like a cloud'

Quick Take

  • Crypto market recovery will be determined by the speed with which assets are transferred from insolvent to solvent firms, according to Cumberland.
  • Large market maker, QCP Digital, has similar concerns about potential liquidations.

Crypto trading firm Cumberland said that the speed of the crypto market's recovery will depend on how quickly distressed assets can be transferred from troubled companies to more secure ones.

The firm noted that the assets belonging to these companies will have to be liquidated in order to offset outstanding liabilities — and this is having a big impact on crypto prices.

“Uncertainty around the size and timing of these asset sales is hanging over the market like a cloud,” the firm said on Twitter

As a result of the constrained market outcomes, a host of crypto companies have come under severe pressure. On June 12, a month to the day after Terra’s collapse began, crypto lending platform Celsius halted withdrawals for its customers. Other lenders have since followed suit in limiting services. 

Market conditions then deteriorated further when crypto hedge fund Three Arrows Capital (3AC) was liquidated by several lenders, including BlockFi and Voyager Digital — the latter lent $650 million to 3AC, which it plans to pursue.

Last week it was revealed that BlockFi may be acquired by FTX US. Sam Bankman-Fried’s firm had previously stepped in to stabilize the company with a $250 million revolving credit line, but a path to acquisition was eventually revealed on Friday. The exchange said it would provide the firm with a $400 million revolving credit line, which, subject to shareholder approvals, would give it an option to acquire the firm at a price up to $240 million.

Any market recovery hinges on how these insolvent firms' assets are handled, according to Cumberland. "As large and opaque off-chain liquidation flows are looming in the backdrop, participants will be hesitant to commit capital. This reduces liquidity and increases volatility,” it said.

Cumberland, which is within the DRW family of companies, is an established principal trading firm with over 25 years of experience working in traditional financial markets, and offices around the globe. 

Market maker QCP echoes a similar sentiment

QCP Capital, a crypto trading firm in Singapore, shared similar concerns in a market update on Sunday. The firm said the crypto credit crisis is not over yet, with more potential liquidations on the horizon.

It went on to say that details of Babel’s insolvency have yet to come to the fore. Miners make up a large portion of Babel’s clientele and they would face significant strain if details showed that their loans to Babel and other borrowers are in default. According to QCP, miners would be forced to reduce inventory for working capital in this scenario. 

Meanwhile, large blocks of GBTC continue to be sold in the market as the trust’s discount widens below -30% again. These sales could be the last of 3AC's collateral with Blockfi and Genesis being liquidated, according to QCP.

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