"Uh-oh, we don't have enough cash" (liquidity crises explained)
In today's edition of 'weighty terms, with oddly simple meanings', we'll be talking about liquidity crises.
(You may have heard the term being thrown around the crypto space a fair bit recently).
"Liquidity crisis" is just a fancy, 'big business' way of saying "uh-oh, we don't have enough cash," to:
A) Pay our debts.
B) Pay out our customers.
Or
C) All of the above.
There're a bunch of crypto firms that are suffering liquidity crises at the moment, including BlockFi, Celsius, Vauld, Babel Finance and CoinLoan.
The latest firm to join the list is Voyager Digital, who have just filed for Chapter 11 bankruptcy.
Righto. But why is this all happening at once, across an entire industry?
Let's start with the industry:
These firms are all in the business of giving out loans - loans that many of their users can no longer pay back.
Most of the crypto that is still accessible to each business has lost 50%+ of its value over the past year - so their cash reserves have essentially halved.
Each firm has most likely taken out debt of their own (in order to fuel growth), that they can no longer service.
Add to that, the waves of customers asking to take their remaining funds off the platform - and you have yourself a liquidity crisis.
(Not great).
The oversimplified answer to the complex question of 'why is this all happening at once?' is:
These firms over-extended themselves.
It seems they've each, to some degree, bought into the 'super cycle' theory.
The super cycle theory assumes that, as crypto becomes more broadly adopted, prices will become less volatile and the 'big moves up' will no longer be met with such harsh crashes.
The theory will (probably) come true eventually, but this time around, it hasn't proven out.
Everything crashed - and as a result, those in the industry who didn't prepare for a potential downturn are in (a liquidity) crisis.