Bitcoin appeared to be on the cusp of a Lehman moment on Saturday as the world’s largest cryptocurrency tumbled below its previous bullish peak of $19,511, something that had never happened before. Add to that the cascading liquidations emanating from various corners of the crypto sphere, and the sentiment around Bitcoin could not have been more grim. However, at the time of writing, Bitcoin appears to have recovered handsomely, posting gains of nearly 10% from the low of $17,663.8 recorded by BTC a few hours ago.
Some analysts continued to speculate that Bitcoin’s latest downturn was spurred by the desire of some whale-sized investors to trigger another high-profile margin call, this time targeting wBTC held by Celsius in a vault. Before discussing this aspect, let’s elaborate on the threat of cascading margin calls and liquidations that remain very much alive in the crypto sphere.
Bitcoin Lehman Moment: Cascading Liquidations Across the Crypto Sphere
Readers would recall that the current downturn in Bitcoin and the rest of the crypto sphere has accelerated following the spectacular crash of the stablecoin UST da Terra and its counterpart LUNA. This drop exposed not only the cryptocurrency industry’s weak point and associated vulnerabilities of algorithmic stablecoins, but also laid the groundwork for the current turnaround.
Cryptocurrency lending company Celsius is believed to have suffered a major blow when Earth’s UST and LUNA coins collapsed. With its liquidity already in a precarious position, Celsius was forced to stop all withdrawals from its platform a few days ago when Lido bet on Ethereum (stETH), a decentralized finance (DeFi) variant of Ethereum that is issued against currencies. Ethereum staked, and which can be redeemed by Ethereum on a 1:1 basis, but only after the Ethereum 2 transition occurs after the merger event in late 2022 or early 2023, unlinked from its theoretical parity with Ethereum. As stETH is widely used as collateral in the DeFi space to underwrite loans, Celsius faced a liquidity crisis when investors started to redeem large amounts of stETH for Ethereum when the theoretical 1:1 ratio was broken. Keep in mind that the market for buying Ethereum using stETH is not that big. Consequently, Celsius was forced to stop all withdrawals as it was unable to meet the demand for Ethereum.
Similarly, Hong Kong-based crypto lending company Babel Finance has also frozen withdrawals amid worsening liquidity across the DeFi space.
Of course, high-profile hedge funds have also been hurt by this ongoing cascading failure. Namely, Three Arrows Capital (3AC), a hedge fund that has been particularly active in the crypto sphere recently, invested around $200 million in Earth earlier this year. However, with the fall of Terra’s UST and LUNA currencies, the hedge fund lost almost all of its investment, precipitating a liquidity crisis at the company, which has since worsened in light of the broad wave of liquidation that is currently spreading. by the market. the entire crypto industry. According to the Wall Street Journal report, 3AC is now considering a sale of its assets, as well as a bailout by another as-yet-unnamed financial participant. If a fiery sell occurs, it will likely further dampen sentiment around Bitcoin and other crypto assets.
Furthermore, MakerDAO, the decentralized entity behind the DAI stablecoin, has stopped the process of minting and depositing the stablecoin on Aave’s cryptocurrency lending platform.
According to a tabulation by Dune Analytics, more than $250 million in liquidations occurred at Aave, Compound and MakerDAO in the last 7 days.
As if things weren’t quite hectic, Tether also confirmed a DDoS attack against tether.io, the native website of the entity behind the biggest stablecoin on the market today.
Are Crypto Whales Trying to Project Celsius Drop?
This brings us to the heart of the matter. A few days ago we noticed that Celsius was not only in suspense for stETH, but also Wrapped Bitcoin on Ethereum (wBTC), a derivative product that allows Bitcoin holders access to the Ethereum DeFi ecosystem. Basically, it is an ERC-20 token fully backed by Bitcoin and managed by the wBTC Decentralized Autonomous Organization (DAO). wBTC can be exchanged for Bitcoin at a price ratio of 1:1.
Namely, Celsius holds around 17,900 wBTC in a dedicated vault. If the price of Bitcoin drops to a predefined threshold, the contents of the vault will be liquidated on a margin call. This scenario is quite profitable for individuals who flag these positions, as they can receive between 10 and 15 percent of the collateral sale cut.
A few days ago, Celsius’ wBTC vault would have been liquidated if the Bitcoin price dropped below $20,272. However, the company has frantically deposited additional collateral, thus lowering the price at which the margin call is triggered.
As things stand, the margin call trigger is around Bitcoin’s $13,000 price level.
Celsius settlement has been updated to 16.8k for Bitcoin.
Whales have been selling a lot to get there.
You can see what the whales are doing at https://t.co/0lA4JMczvQ.
— uncommon_whales (@unusual_whales) June 18, 2022
Some analysts continue to speculate that the recent drop in Bitcoin was, at least in part, driven by the desire of some actors to trigger a margin call on Celsius’ wBTC holdings. However, as the company continued to find additional reassurance, the immediate threat has been averted for the time being. This likely played an important role in stabilizing the general sentiment around Bitcoin.
However, readers should remember that Bitcoin is certainly not out of the woods just yet. After all, it has not yet completed the usual 80% reduction from the recent all-time high that is typical of the Bitcoin bear market.