RekTimes Weekly Markets
10 June 2022: A liquidity crisis brewing in the cryptocurrency market due to the major crypto exchange Celsius Network (CEL). The exchange has recently had its Ethereum position become insolvent and is lacking liquidity to cover interest, customer withdrawals, and make up for lost funds via hacks. The key here is Celsius is having to sell out of Lido Finance's stETH token, a token that is pegged 1:1 with ETH but is illiquid awaiting The Merge.
We will provide analysis on the situation and help sift through the noise as to where attention should be directed. As always, the bottom section will provide brief updates on market fundamentals.
Key Takeaway - Celsius is bleeding and the market knows it
How Celsius Could Trigger Liquidations
Celsius has only 27% of its position in ETH actually liquid. The remaining 73% is locked up in staked ETH awaiting the successful implementation of The Merge. So - currently Celsius is withdrawing an estimated 50,000 ETH per week, a withdrawal rate that will have them run out of liquidity in just five weeks. Two things at this point could fastrack Celsius from insolvency to bankruptcy / default:
- A delay in Ethereum's move to PoS
- A significant "de-pegging" of stETH
The stETH Token
It is important to clarify immediately that stETH cannot actually depeg. This is nothing at all like the Terra UST crisis that unfolded. Staked ETH (stETH) is issued directly by Lido Finance at a 1:1 with staked ETH deposits. The exchange rate between stETH and ETH is a secondary market that is unrelated to the value backing the actual staked ETH.
Lido is essentially allowing participants to have the benefits of staking ETH while also having the ability to find liquidity faster for a fee. This creates an arbitrage opportunity on stETH as the market prices in these exchanges. So, if stETH falls below ETH - investors betting on long term redemptions can scoop up stETH at a discount. This is assuming Lido Finance is actually holding all of the required ETH. By all definitions - stETH is a form of derivative. However, this is NOT a risk-free trade.
The Celsius Liquidity Problem
With Celsius due to run out of liquidity in just five weeks, the exchange can leverage assets they hold in wallets as emergency liquidity. Celsius holds 445,000 stETH tokens on Aave as well as a number of other assets summarized here:
Celsius could utilize this major stETH position in two ways: sell stETH in exchange for ETH or borrow against their stETH position to repay customers. The problem Celsius will face with the first option is a lack of redeemable liquidity on-chain. For instance, at the time of this writing, Curve only has 156 million ETH versus 559 million stETH. Celsius would have to pay a premium to move out of its stETH position early.
The second option is inherently dangerous. Crypto as collateral within this market is only losing value and creating a higher risk of liquidation. Borrowing is becoming increasingly expensive against falling valuations. Other major players also know this, such as Alameda Capital allegedly selling off 50,000 stETH to put more pressure on Celsius.
What to Actually Watch For
There are large enough players involved with stETH to create an artificial bank run and sink Celsius outright. Currently, due to market conditions, participants are fearful and irrational. If entities like Alameda put pressure on the stETH:ETH "peg", this could further damage value that Celsius could utilize for collateral AND destroy any arbitrage traders using leverage to pick up cheap stETH in what should be a "no brainer trade" long term.
Leverage and the lack of liquidity are the problems here and could create increased market pressure should Celsius get liquidated or default. In this scenario, they would be forced to sell out of their assets that includes everything from ETH & LINK to WBTC.
For more information on this topic, check out these two in-depth threads from Twitter users @otteroooo and @SmallCapScience that we used as groundwork for this situation:
Further Reading - In the Know
- Chainlink (LINK) Releases New Road Map, Staking (Chainlink)
- Ethereum Completes Successful Proof-of-Stake Merge with Ropsten Testnet (Blockworks)
- US Inflation Continues to Rise at 8.6% YoY for May 2022 (NY Times)
Crypto-Economy & Markets
The recent inflation data coupled with a loss in retail purchasing power has continually put downward pressure on the market. There have been small rallies since the beginning of May, but none of them have amounted to anything significant yet. The market still looks to be heading towards a significant capitulation period in the coming weeks to months.
Market sentiment sank slightly compared to last week, down one point to 13 and remaining in a state of 'Extreme Fear'.
The full Fear & Greed Index chart is shown below:
Total Market
The Total Crypto Market managed to turn the previous weekly candle into a green one - the first one in eight consecutive weeks. The market has since sunken lower to $1.9 trillion - down 60.34% from all time highs. This area has amounted to relatively strong support, aligning with the July 2021 bottom. A break here would undoubtedly send the market below $1 trillion in total value.
The 200 MA is approximately down 28% from current levels.
The Total Crypto Market Cap is shown below:
Bitcoin (BTC)
Bitcoin's small gains last week have already been entirely erased after the latest US inflation data dropped June 10, 2022. Bitcoin is hovering around a valuation of $29,500 - down 57% from all time highs with the potential to go as low as $22,500 before hitting major long term support.
A short term reversal on Bitcoin is still a probability, though it entirely depends on the sentiment and risk allocation of high caliber investors.
The Bitcoin/USD Weekly chart is shown below:
Ethereum (ETH)
Ethereum has faced far more selling pressure over the past two weeks than that of Bitcoin. ETH underperformed the market last week and remains in a downward slope this week. It does not help the fact that large scale investors like Celsius are having to liquidate positions to remain solvent. Despite The Merge growing ever closer, the market is pricing in further capitulation.
If Ethereum does indeed implement PoS in summer 2022, it has the potential to reverse the market entirely - especially for altcoins within the Ethereum ecosystem. At this point though, a timeline on The Merge is purely speculation.
Ethereum is down 64% over the past seven months and has potentially another 30% down to go prior to reaching the 200 MA.
The Ethereum/USD Weekly Chart is shown below:
True Total Altcoin Market (excludes Bitcoin, Ethereum)
Selling momentum on altcoins has slowed the past few weeks against the USD, BTC, & ETH. Still, altcoins have posted what will now be 10 consecutive red weekly candles should this week also finish down.
The True Total Altcoin Market is down nearly 63% since November with another $134 billion loss (-30%) to go before the 200 MA.
The True Total Altcoin Market Cap is shown below:
Markets Analysis
As the market continues to face selling pressure week after week, many web3 companies, projects, and protocols are struggling for liquidity. Coinbase has demonstrated it has issues with its recent hiring freeze, and the collapse of Terra Luna brought down what was previously a $40 billion project.
Now, the crypto exchange Celsius is showing considerable weakness and will more than likely not be the last through this cryptoeconomic recession. The narrative that crypto could be a suitable inflation hedge has been all but negated as the market declined once again on bad inflation data. Outside of risk-on institutions, capital is slim for the market to accumulate and grow with.
For instance, Americans are all but tapped out as household debt has surged to record levels. With inflation now jumping up to 8.6% YoY in the US, retail traders are facing an immense price squeeze. This takes disposable income out of the equation and can even lead to individuals cashing in assets for cash.
Expect the market to make a sizable move within the coming weeks, whether to the upside or downside, and out of its current zone. Long term probability suggests lower prices in the market over the medium to long term - depending on your definition.
As always, this is not professional financial advice but free digestible analysis on week-to-week market conditions. Please do your own due diligence when managing a portfolio or making investment decisions. Best of luck over the next week.
RekTimes Updates
There is a lot brewing under the hood for RekTimes in Q3 2022. For all the followers of the author page here, there will be a big surprise coming soon. Additionally, both the team itself and our partnerships are expanding for Q3! Expect an update by the end of the month.
As far as content goes, it will slowly be scaled back up over the next several weeks. Expect more research reports, educational content, and broader macro pieces as we look into the future.
Coming RekTimes Articles:
- Chainlink's New Roadmap: Staking LINK - JUNE 13 RELEASE
- Proposal Report Update (Ampleforth) - JUNE 15 RELEASE
- RekTimes Weekly Markets 1.37 - JUNE 17 RELEASE
Long Term Projects
- Q2 Summary Report - JULY 1 RELEASE
- The Emerging Cryptoeconomy: Overview of Cryptoeconomics & Real World Applications - Q3 2022
- Investigation on MOBI - Q3 2022
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