As markets rise, cryptoassets become more familiar with trusted third parties. This includes centralized trading platforms and lending platforms. The promises of increasing returns are becoming increasingly attractive. However, the good times don’t last forever. Companies that have overleveraged during the rise in markets and tightening monetary policies are exposed to liquidity risk. Your assets could be exposed if you have cryptoassets that were deposited into such products without realizing the risks.
Do not trust your keys!
This phrase is familiar to most crypto users. In today’s market climate, this phrase is especially relevant. Both traditional and crypto markets are experiencing contractions at the moment. High-leveraged businesses are more likely to fail during any contraction in traditional or crypto markets. There have been many stories about unscrupulous entrepreneurs. companies reaching for their customers’ fundsYou can cover the cracks with paper.
People should move their funds away from central services to self-custodial accounts (sometimes known as non-custodial). Make sure it’s truly self-custodial, or you still don’t have complete control over your assets. Learn more about how self-custodial and custodial wallets differ Click here.
Failure of Crypto Products can expose you to risk
Self-custody doesn’t completely protect from risks associated with failing projects. This was evident with LUNA/UST a few months ago. But, custodial and non-custodial projects are different. Many were able see the dangers of LUNA/UST because it was transparent, open-source and easily accessible. Despite that, plenty of participants, both retail and “sophisticated” institutional users were wiped out.
Worse, centralized crypto products have their finances shrouded with mystery. This prevents them from knowing the impending dangers before they happen. It is happening now.
Celsius Network, a crypto-based centralized borrow/lend platform announced that it was freezing their customer assets on June 13. This was especially shocking given their CEO’s tweet responding to rumors of freezing customer withdrawals the day before.
Mike, do you even know of anyone who struggles with withdrawing from Celsius
Why spread misinformation and FUD.
If you are paid for this then let everyone know you are picking sides otherwise our job is to fight Tradfi together…
— Alex Mashinsky (@Mashinsky) June 11, 2022
.@CelsiusNetworkis putting a halt to all withdrawals, Swap, or transfers between accounts. We are committed to serving the community’s best interest. We are continuing to operate and will share more information with our community. More here: https://t.co/CvjORUICs2
— Celsius (@CelsiusNetwork) June 13, 2022
This caused a market wide sell-off, during which centralized exchange Binance, the world’s largest crypto exchange, announced the “temporary pause of bitcoin withdrawals.”
Temporary suspension $BTCWithdrawals #BinanceBecause of a blocked transaction, causing backlog. This should be rectified in 30 minutes. We will update.
All funds are SAF.
— CZ 🔶 Binance (@cz_binance) June 13, 2022
Seitdem, there has been alleged storiesCelsius customers saw their collateral being liquidated, despite the fact that they had sufficient assets to recollateralize loans. The account freezing prevented them from doing so. On June 15, The Wall Street Journal reported that Celsius had hired restructuring lawyers to “advise on possible solutions for its mounting financial problems.” For Celsius’ customers, the Conditions of useYou could lose your funds if they don’t respond.
In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.
On June 14, rumors started to circulate that Three Arrows Capital (a crypto hedge fund) had gone bankrupt. 3AC also had large sums of Ethereum in stETH, just like Celsius. ETH has a much lower liquidity than stETH. There is a secondary market that can trade the staking derivative. Celsius tried to sell stETH in order to get liquidity, but 3AC was much more successful. On June 15, rumors of 3AC solvency problems were confirmed with co-founder Su Zhu’s tweet.
We have begun to communicate with all relevant parties.
— Zhu Su 🔺 (@zhusu) June 15, 2022
Self-Custody Is Insurance
While it’s impossible to know if there will be contagion or how far it could spread (hopefully we’ve already seen the worst of it!One thing is certain, however: self-custodial crypto will give you greater control of your funds during down and up times.
While self-custody may be more than just insurance, its importance as insurance is crucial. This is insurance against financial institutions and governments. Every insurance policy comes with a premium. Self-custody is no exception. This premium is in the form personal responsibility. The benefit, however, is peace-of-mind.
Bitcoin.com’s missionIt is our goal to achieve economic freedom. This is why most of our resources are devoted to developing fully self-custodial households.Bitcoin.com WalletOther self-custodial products such as the Verse DEX. These tokens can be used to manage your Bitcoin Cash, Ethereum and ERC-20 tokens. (Support for even more chains is in the works!).
Dennis Jarvis is the CEO of Bitcoin.com
Credits for the imageShutterstock. Pixabay. Wiki Commons