Cryptocurrency exchange Coinbase has suggested that firms that recently filed for bankruptcy protection failed to consider the basic elements of risk management.
The exchange stated that companies like Celsius, Three Arrows Capital (3AC), and Voyager Digital were carried away with the crypto bull market and deployed measures that led to a high-risk concentration, Coinbase said in a blog post published on July 20.
“We believe these market participants were caught up in the frenzy of a crypto bull market and forgot the basics of risk management. Unhedged bets, huge investments in the Terra ecosystem, and massive leverage provided to and deployed by 3AC meant that risk was too high and too concentrated,” the exchange said.
Coinbase stated that the bankruptcy filing resulting from the recent crypto market meltdown would likely leave a permanent mark on the sector. The market meltdown was accelerated by factors like regulatory pressure, high inflation and the Terra (LUNA) ecosystem crash.
Impact of crypto meltdown predicted
Interestingly, Coinbase acknowledged that the impact on the firm was predictable with a lack of risk control measures. For instance, the exchange noted that some companies were overleveraged with short-term liabilities.
Furthermore, Coinbase maintained that inadequate risk management measures might hinder the inflow of capital into the crypto market hence barring expansion.
“A healthy and well functioning financing market is essential to the expansion and sustainability of any economy. We believe well-designed risk management programs will help usher in new waves of capital and fuel the next expansion,” Coinbase added.
Coinbase reaction to market meltdown
Notably, Coinbase is among the companies impacted by the market meltdown that resulted in restructuring of its operations. The exchange has since imposed a hiring freeze alongside laying off a section of its staff.
In the blog post, the exchange assured users it had taken necessary measures to avoid going the insolvency way. Coinbase stated that some of its mitigation approaches entail conducting rigorous due diligence and being ready for external surprises.
Overall, the cryptocurrency market has made minor gains recently, regaining the $1 trillion capitalisation led by Bitcoin, which has stabilised above the $20,000 level.