Crypto's selloff is so bad even the 'HODL' firm just sold all its bitcoin

They say bad things come in threes. For crypto during the month of June, just suffering three blows would look like a miracle. It's also, frankly, maybe too rosy to expect.

That's because we're still fully in the throes of a "Too Big to Fail" moment for crypto, as centralized crypto lenders that've been acting like digital banks, continue to run into insolvency issues.

If Terra's $40 billion collapse was the first blow in crypto's trio of doom, then surely the second would be centralized crypto lending platform Celsius having to lock its users' deposits in order to keep its head above water. As I write this newsletter, it's been more than two weeks since Celsius took that drastic step, and since, the Wall Street Journal reported the company has initiated talks with bankruptcy advisors.

A slew of other crypto lending platforms who later echoed the pangs of Celsius proved that a lot of the liquidity issues stemmed from exposure all tracing back to at least one large crypto trading firm, Three Arrows Capital. A couple months ago, Three Arrows was hailed as a prop shop that was one of the smartest in existence. They were known for their big bets that hit massively in the bull market (including one of their biggest bets on Terra.) All in all, that record likely played a role in why lenders entertained such large loans to Three Arrows.

What a difference a couple of weeks makes.

Now, Three Arrows has officially defaulted on the $675 million it owes to centralized crypto broker Voyager Digital. And if it wasn't obvious, that's a lot of money. Enough money, it turns out, to also raise serious issues about Voyager Digital being able to stay afloat as well. Luckily for them, Voyager was able to secure a loan from Alameda Research, the fund of FTX CEO and crypto billionaire Sam Bankman-Fried.

Crypto Uncomplicated author Zack Guzman (left) interviews FTX CEO Sam Bankman-Fried (right) on Yahoo Finance.

In some ways, that's a dream scenario for crypto. Unlike the traditional banking system, crypto always prided itself on the fact it doesn't need a government agency like the Federal Reserve to save the day when the kind of "Wall Street greed" that fueled the leverage that led to the Great Financial Crisis hits a breaking point. But what happens when that greed takes the form of over-leveraged crypto lending platforms that sucked in billions from retail investors who were unaware of the risks that their deposits could be frozen and potentially liquidated? Well, there isn't a "crypto Fed" to turn to. But, a crypto billionaire who has a vested interest in seeing some of the retail platforms survive is probably your next best option.

Not only does it look like SBF will save Voyager (if all goes well) but FTX also appears to be looking to ink a deal that would support BlockFi, another centralized lender who had exposure to Three Arrows. BlockFi put out a statement that it moved quickly to mitigate its exposure -- a point SBF echoed on Twitter in announcing a $250 million loan.

Big picture: SBF bailing out embattled crypto "banks" is probably far better than the alternative, writ-large. Yes, you can raise issues with the FTX/Alameda/SBF contingent now getting their hooks into even more of all the major crypto on-ramps. But if the alternative is more retail investors getting deposits wiped out as more crypto banks go insolvent, then it's not really an argument to be had.

Also, it's worth flagging that even with the injections thus far, maybe more platforms still go bankrupt! And as those dominos fall, there's still a lot of concern about what happens when the likes of SBF, or others, decide saving someone else just isn't worth it.

So what does that mean for prices? Well, barring any significant improvements in macroeconomic sentiment, the overhang of fears around other crypto banks failing isn't a positive for any crypto out there. Bitcoin falling even slightly to test new lows could trigger even more liquidations or more "bailouts." Thus, the takeaway would still be to protect yourself, either by taking a hard look at whether it makes sense to have your digital assets controlled by a centralized lender, or by selling to live to fight another day.

For one of Canada's publicly traded crypto-focused funds, the answer this week was definitively the latter. CypherPunk Holdings (whose ticker is literally "HODL") announced it had sold its entire bitcoin and ether stashes to ride out the volatility ahead. The company sold about $227,000 worth of ether and $4.7 million in bitcoin. In the company's announcement, Cypherpunk President and CEO Jeff Gao predicted that Celsius might not be the last actor to freeze withdrawals.

“We believe that the most prudent approach is to sit on the sidelines as we wait for the volatility and illiquidity contagion to come to its logical conclusion,” Gao said. “On the balance of probabilities, we see weaker price action opening the way to lower levels to come as reports of the number of chains imposing 'temporary' suspension on withdrawals increases."

When even HODL ain't HODLing, it might be worth paying attention.

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