What is going on with Vauld? Are your Crypto Investments Safe?
“Aaaj mai apke samne ek bhut hi bada khulasa karne wala hu, ek aesi FD hai jisme apko 12% interest mil skta hai, ji haa apne sahi sunna FD mai 12% interest.”
This was the introductory statement by a Finfluencer promoting Vauld.
This statement intrigued a lot of its viewers, he then went on to explain that Vauld is a platform, wherein you can deposit your cryptocurrency and earn interest up to 12% on it.
For people, whose FD returns weren’t even beating the inflation, this app was like a blessing.
But then a few days ago, Vauld stopped withdrawals, trading, and deposits on its app.
There was panic among its customers and people started questioning the integrity of Finfluencers who promoted the product.
What exactly went wrong with Vauld ?
To know that we need to a bit about its business how it really makes money.
So Vauld operates mostly like a bank. Say you are someone who has cryptocurrency worth $1000, and you aren’t really willing to trade it, so vauld offers you to deposit your cryptocurrency and it provides you a whopping 12% return on it.
The question is, how the hell can they provide a 12% return & What if the value of your investments goes down, because, unlike fiat currency, crypto is a highly volatile asset?
So, just like a bank, they convert your crypto-assets into cash, or stablecoins, which are pegged to the US dollar, and lend it to people who are looking to borrow.
Now, whenever banks give a loan, they need some collateral so that if a borrower defaults on the loan they can sell the collateral and recover the money.
In case of Vauld, if a borrower wants money, they are required to keep their crypto assets as collateral, say you took a loan worth $100, you would have to keep crypto assets worth $150 as collateral with Vauld.
This is where the problem starts, you see Crypto is a highly volatile asset, the value of the collateral can plunge to $0 in just a day, so these loans were very risky because there weren’t any real assets to back these loans.
Another problem is the borrowers. So, if Vauld is providing 12% returns on deposits, naturally to make a profit from it, they have to lend the money at a higher interest.
Now, why would someone borrow from Vauld at a ridiculously high interest of 18% - 20%?
Maybe these are people who can’t get money from banks, which again makes these loans risky.
Generally, people borrowing from these platforms are individual crypto traders and institutions, which trade in crypto. So what they do is instead of selling their crypto, they keep it as collateral and use that money to trade.
For example, Three Arrows Capital is a crypto hedge fund that trades on borrowed money from lenders like Vauld, Voyager digital, etc.
The hedge fund made a lot of overleveraged bets on cryptos, it had a lot of exposure to Terra USD and Luna which collapsed in May this year, and due to that, the company lost 70% of AUM.
This led to a cascading effect in the over-leveraged Crypto ecosystem. The company started defaulting on payments to its lenders and eventually applied for bankruptcy.
Three Arrows Capital defaulted on loans worth $670 million extended to it by Voyager Digital, a lender just like Vauld.
Although Vauld clarified that it has no exposure to 3AC, but soon after 3AC filed for bankruptcy, Vauld laid off 30% of its workforce and stopped the withdrawals.
The collapse of most cryptocurrencies has caused a contagion effect in the entire crypto ecosystem, like, Celsius Network another crypto lender halted all swaps, transfers, and withdrawals between accounts for its 1.7 million customers last month.
So, crypto platforms extended loans worth billions, backed by what? A crypto-asset whose value can plunge to 0 in no time. And when this happens, and depositors ask for their money back, they have no option but to shell out money from their own pockets and when they are out of that as well, they stop the withdrawals.
The next time an influencer tells you a sure-shot way to make a lot of money, don’t invest blindly. They are paid to sell you the products. Do your own homework, before investing.
DisclaimerInvestment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial. Also, The
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