Leverage & Interconnectedness Are Blowing Up Crypto & DeFi

Estimated Reading Time: 3 minutes

That’s what’s different this time: Stuff blows up because of leverage and cascades through the crypto space because everything’s interconnected.


Crypto lender and broker Voyager Digital, which also took deposits and offered yield products with huge interest rates of up to 12%, said in a series of tweets today that it is, “actively pursuing a series of strategic alternatives” and that it is “focused on protecting assets and maximizing value for all customers as quickly as possible.” That’s horrifying language for people who have their cryptos on deposit at Voyager and now cannot get their cryptos or anything else out.


What’s different this time about the collapse of cryptos, compared to last time in 2018, are two huge factors that were barely in their infancy back then: massive leverage and interconnectedness.

All these crypto firms lent to each other and borrowed from each other in cryptos, to speculate in cryptos with borrowed cryptos, they lent out borrowed cryptos, and they posted cryptos as collateral with each other for more leverage, which is now triggering margin calls, forced selling, and wipeouts cascading through the space. This interconnectedness created huge systemic risks within the crypto space that are now coming home to roost.

On Friday, Voyager Digital suspended trading and withdrawals. In other words, depositors cannot get their cryptos and collateral out. And they cannot get any fiat out either.


These people are unsecured creditors if Voyager files for bankruptcy. Voyager has already hired restructuring and bankruptcy lawyers and consultants.

Voyager got taken down by the crypto hedge fund, Three Arrows Capital, which blew up amid huge leverage when cryptos plunged.

Three Arrows Capital, which was said to have managed about $10 billion of cryptos as of March, was ordered into liquidation by a court in the British Virgin Islands, where it’s legally headquartered. On Friday, it filed for Chapter 15 bankruptcy in the US.


Voyager had lent 15,250 bitcoins and 350 million USD Coins, a stablecoin, to the hedge fund. Combined, that loan amounts to about $650 million at current prices. And Three Arrows had defaulted on that loan.

Three Arrows ran into trouble when cryptos dropped below a certain level and when Luna, in which it was heavily invested, collapsed by 100%, at which point it received margin calls that demanded more collateral, and when that wasn’t forthcoming, its leveraged positions were liquidated by crypto exchanges including BitMEX and Deribit.

Voyager said in the series of tweets today, Sunday, that it has $1.3 billion worth of cryptos left on its platform – presumably put there by depositors – who are now locked out, and that it has $650 million in claims against Three Arrows Capital, which Three Arrows has defaulted on.

Voyager trades on the Toronto stock exchange. On Friday, July 1st, when it announced that it had locked out its depositors, the Toronto Stock Exchange was closed in observance of Canada Day. In the US, where Voyager trades over the counter, its shares plunged 31% on Friday, to 30 cents.

Voyager was founded in 2018 and started trading in Canada in September 2021 at around 16 Canadian dollars a share, and amid immense crypto hype and hoopla rose to over $21 by peak crypto-mania in November 2021. The stock has now collapsed by nearly 100% in 10 months. So that wipeout was fast.

Companies like Voyager are in the space called Decentralized Finance. DeFi is doing what the hated and despised fiat banks are doing, except they’re doing it in cryptos instead of fiat, and there is no deposit insurance, and there is no regulation, and everything goes, and there is no central bank for them, and no protections for depositors. In addition, they lured customers into depositing their cryptos there by promising to pay huge interest rates of up to 20% a year. Which is totally nuts.

And now the two concepts of leverage and interconnectedness are tearing up the cryptos, crypto exchanges, DeFi outfits, crypto stocks, and crypto hedge funds.

The leverage is mostly hidden and tangled up with other crypto firms, and parts of it surface only when something blows up. And the interconnectedness causes the blow-ups to cascade through the crypto space.

So now this is an entirely different game of margin calls, forced selling, bankruptcies and liquidations, and preparations for potential future bankruptcies, the total annihilation of some cryptos, including TerraUSD and Luna, and leaving customers with deposits at crypto exchanges and crypto lending platforms twisting in the wind…..


Continue reading this article at Wolf Street.



Are you fed up? Are you worried that America in rapidly sliding into a neo-Marxist state by the radical left in control of Washington with historically narrow majorities in the U.S. House and Senate and an Executive controlled by unnamed far leftists in place of a clinically incompetent President Biden? They are desperate to keep power and complete their radical progressive agenda that will change America and our liberty forever.

Americans just witnessed the passage of the Inflation Reduction Act of 2022 without one Republican vote in the U.S. Senate and House (just as Obamacare was passed in 2010). The IRS  will be hiring 87,000 new agents, many armed, to terrorize American taxpayers.

Americans witnessed the FBI raid at the Trump Mar-A-Lago home and property of President Trump, truly a first in all of American history. We know what that is about. 

It is undeniable that the Democrat Party and the administrative state (the executive branches of the DOJ, FBI, IRS, et al) are clear and present dangers to our Republic and our liberty as they increasingly veer further away from the rule of law and the Constitution. What is the solution? At this critical juncture, there is only one action we can all take.

The only viable and timely solution at this critical point is to vote – yes, vote correctly and smartly to retake the U.S. House and Senate on November 8th and to prepare the way to retake the White House in two years. Vote and help everyone you know to vote. Please click the TAKE ACTION link below – we must vote correctly and in great numbers to be sure our votes are counted to diminish the potential for the left to rig and steal the midterms and the 2024 elections as they are clearly intending to do after their success in 2020.



Print Friendly, PDF & Email