Cumberland Says Financially Burdened Crypto Firms Are 'Hanging Over the Market Like a Cloud'

Following the over-the-counter (OTC) firm’s Twitter thread on June 14, Cumberland explained on July 5 that “​​rangebound price action belies a volatile picture below the surface,” while crypto markets consolidated during the past week. Cumberland stressed there’s a growing number of crypto companies feeling financial burdens, and “uncertainty” tied to stressed entities is “hanging over the market like a cloud.”

OTC Firm Cumberland Says Markets Will Return to a Healthy State Once Distressed Assets Are Transferred From the Insolvent to the Solvent

In mid-June, the cryptocurrency OTC trading desk Cumberland, a subsidiary of DRW, explained how it witnessed significant volume on June 13. In fact, the company recorded a previous year-to-date high on May 13, and the volume on June 13 outpaced the mid-May high by 30%. In recent times, Cumberland wrote about the Securities and Exchange Commission (SEC) rejecting Grayscale’s spot exchange-traded fund (ETF) bid. Cumberland also spoke about the Federal Reserve, Fed chair Jerome Powell, inflation, a recession, and today’s macroeconomic backdrop.

The following day, DRW partner and the global head of Cumberland, Chris Zuehlke, appeared on CNBC and detailed why he thinks the downturn is a sign of a maturing market. A few days later, Cumberland published a thread that discusses the recent financial hardships spreading across crypto companies. Cumberland noted that while markets are quiet, things could get volatile again due to burdened crypto companies “halting withdrawals, reducing headcount, and hiring restructuring firms.” Cumberland added:

The assets of these companies will, at some point, need to be liquidated in order to partially offset their outstanding liabilities. Uncertainty around the size and timing of these asset sales is hanging over the market like a cloud.

Cumberland: ‘Excessively Levered Finance Companies Have Been Punished in Bear Markets for Hundreds of Years’

In 2022, thousands of crypto employees have been let go from a slew of well known crypto-asset and blockchain companies. Firms that have reduced staff include Coinbase, Gemini, Etoro, Robinhood, Bitso, Crypto.com, 2TM, and Buenbit. The crypto lender Celsius halted withdrawals on June 12, and Voyager just recently paused withdrawals on the platform as well. The crypto firm Vauld has stopped withdrawals, and a few companies are contemplating working with restructuring firms. Moreover, the billion-dollar crypto hedge fund Three Arrows Capital (3AC) has filed for Chapter 15 bankruptcy after various sources detail that 3AC faced massive liquidations.

“This is hardly a novel phenomenon,” Cumberland said. “Excessively levered finance companies have been punished in bear markets for hundreds of years. While this current cycle raises eyebrows because the assets are digital, the underlying economics are no different than the examples in textbooks.”

Cumberland’s Twitter thread explains that behind the scenes and off-chain, the financial hardships are not very transparent. The OTC firm’s statement is similar to the commentary FTX CEO Sam Bankman-Fried made on June 19, when he said issues like 3AC’s meltdown “couldn’t have happened with an on-chain protocol that was transparent.” Cumberland remarked that “as long 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.” Cumberland concluded by stating:

Meanwhile on-chain, liquidation levels are transparent and comfortably distant from spot. In this sense, [decentralized finance] is fulfilling its promise – forced asset transfers are algorithmic, predictable, orderly, and visible to all.