June 13, 2022
Crypto Drops on Worries of Celsius Liquidity Crisis
Dear Secret BTC Agent,
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| By Marija Matic |
Bitcoin (BTC, Tech/Adoption “A-”) closed last week below $28,800 and crashed to $23,000 today, dragging down the whole crypto market with it.
While the bearish macroeconomic climate — which includes record-high inflation and expected rate hikes — has certainly put sustained downside pressure on the broad market, the latest round of fear, uncertainty and doubt (FUD) was dramatically triggered by the potential insolvency of the largest crypto lender, Celsius (CEL, Tech/Adoption Grade “C-”).
Celsius announced today that it’s pausing all withdrawals, swaps and transfers between accounts. This action is “to put Celsius in a better position to honor, over time, its withdrawal obligations.”
In plain English? This means Celsius isn’t liquid enough and will struggle to fulfill its obligations. In response, the price of its token, CEL, immediately dropped, falling over 50%.
A more immediate concern for Celsius users is that the announcement didn’t clarify whether margin calls and liquidations were also frozen. If they aren’t, Celsius will liquidate the collateral of many users due to the drop in prices.
This means that those who are able and eager to pay off their loans won’t be allowed to due to the freeze, and they’ll lose their collateral over a situation outside of their control.
Adding to the frustration, users can’t withdraw their stablecoins from the platform to purchase crypto during the dip. This once again reminds us of the mantra related to centralized platforms:
Not your keys, not your coins.
There is always some risk when you give a third party custodianship of your crypto.
Meanwhile, Nexo, a competing centralized platform, has offered to buy its beleaguered rival’s assets. Nexo said it’s "in а solid liquidity and equity position to readily acquire any remaining qualifying assets of Celsius, mainly their collateralized loan portfolio." The situation is ongoing as the offer is open until June 20.
The magnitude of Celsius’ collapse could be far-fetched. It serves 1.7 million customers, whose $12 billion funds it’s been using in various DeFi protocols.
Bitcoin already broke out of its month-old trading channel on the downside before Celsius’s announcement. Over the weekend, it slipped below support and fell to $23,500, as you can see in the BTC/USDT daily TradingView chart below.
This action was in expectation of a bearish two-day Federal Open Market Committee meeting, which starts tomorrow. Many are worried that the Federal Reserve might hike rates by as much as 0.75% to combat record-high inflation.
Meanwhile, altcoins are bleeding, with those belonging to DeFi categories such as Farming-as-a-Service taking the largest beating.
Ethereum (ETH, Tech/Adoption Grade “A”) led the way down, losing 30% in the past seven days. Its price crash started a few days ago with rumors of Celsius liquidating their stETH positions due to insolvency issues. stETH is a liquid variant of ETH staked long term in ETH2.0.
But the heavy blow came when news that stETH had de-pegged from ETH. Losing pegs of course reminds people of the TerraUSD (UST, Stablecoin) collapse, and that panic pushed ETH’s price down to $1,180.
Let me be clear here, however, that this situation is a bit different from UST. stETH doesn’t really have to be pegged to ETH the same way UST needed to maintain a peg to the U.S. dollar. Its value can be whatever market decides, and right now it’s at 0.95 ETH due to the focus on risks. And, in the end, 1 stETH should be redeemable for 1 ETH sometime after the merge. stETH is still collecting staking yield in the meantime, as well.
The biggest problem with the stETH situation though is people that people have used it as collateral for loans. The drop in value can cause cascade liquidations, which, as I mentioned before, is already a concern for Celsius users.
Meanwhile, weaker stablecoins like Tron’s USDD (USDD) have struggled today. The algorithmic stablecoin Neutrino USD (USDN) is currently trading at roughly97 cents. However, it’s relatively small and doesn’t pose a systemic risk to the system.
Still, the failure of any stablecoin, no matter how small, would add to the fear on the market as the trauma from the UST collapse is still fresh in investors’ minds.
Fortunately, the larger stablecoins — Tether (USDT), Dai (DAI) and Near’s USN (USN) — are holding their $1 peg well. USD Coin (USDC) had a brief wick to just over 97 cents but has quickly pegged back to exactly $1.
Notable News, Notes and Tweets
What’s Next?
Crypto crashed on the fears of Celsius insolvency, coupled with unfavorable market conditions. $1 billion of long positions were liquidated in the past three days.
On top of that, tomorrow’s FOMC meeting looms over the market as new rate hikes are expected to be announced. If the raise is as high as 75 basis points, there will be little to cheer for in the short term.
In case of such news, there is little doubt that BTC will fall past support at $23,500. We may even see a test of the 2017 top.
Of course, it’s difficult to view BTC outside of the broader market since the correlation with stocks jumped again, with Bitcoin remaining correlated to the Nasdaq and S&P 500 Index. Those markets have also been feeling the pain of the Fed’s quantitative tightening (QT) policy.
We can’t really tell if BTC will be able to decouple since it’s still a relatively young asset, one which hasn’t existed in a true stock bear market or gone through a period of QT before.
This will be a big test for Bitcoin.
And it’ll be a test for all investors. Navigating this reality of high inflation and desperate Fed action is tricky. That’s why Weiss Ratings founder, Dr. Martin Weiss, is holding a series of emergency briefings this week exclusively for you. In them, he’ll map out what’s likely to happen next, recommend seven urgent steps for portfolio protection and reveal a breakthrough strategy for profit in times of crisis.
These briefings are free to attend, but the deadline to register is tonight. I suggest you save your seat now before it’s too late.
Best,
Marija Matić
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