Bitcoin appeared on the verge of a Lehman moment on Saturday as the world’s largest cryptocurrency fell below its previous bull cycle top of $19,511, something that had never happened before. Add to this the cascading liquidations coming from different corners of the crypto sphere, and the mood surrounding Bitcoin could not have been more gloomy. However, at the time of writing, Bitcoin appears to have recovered well, posting gains of almost 10 percent from the $17,663.8 low that BTC recorded a few hours ago.
Some analysts continue to speculate that Bitcoin’s recent downturn was prompted by a desire from a few whale-sized investors to launch another high-profile margin call, this time against Celsius-vaulted wBTC. Before discussing this aspect, let us address the threat of cascading margin calls and liquidations that remains very much alive in the crypto sphere.
Bitcoin’s Lehman Moment: Cascading Liquidations Across the Crypto Sphere
Readers will recall that the current downturn in Bitcoin and the rest of the crypto-sphere has accelerated following the spectacular demise of Terra’s UST stablecoin and its counterpart LUNA. This sinking not only revealed the dark side of the crypto sector and the associated weaknesses of algorithmic stablecoins, but also laid the foundation for the current upheaval.
It is widely believed that crypto lending company Celsius took a major hit when Terra’s UST and LUNA coins collapsed. With its liquidity already in a precarious position, Celsius was forced to halt all withdrawals from its platform a few days ago when Lido Ethereum (stETH), a decentralized finance (DeFi) variant of Ethereum issued against staked Ethereum coins , and which can be redeemed against Ethereum on a 1:1 basis, but only after the transition to Ethereum 2 occurs after the merger event in late 2022 or early 2023, separated from its theoretical parity with Ethereum. With stETH being widely used in the DeFi space as collateral for underwriting loans, Celsius faced a liquidity crisis as investors began redeeming large amounts of stETH for Ethereum when the theoretical peg of 1:1 was broken. Keep in mind that the market for buying Ethereum with stETH isn’t nearly as big. Consequently, Celsius was forced to halt all withdrawals as it could not meet the demand for Ethereum.
Similarly, Hong Kong-based crypto lending firm Babel Finance has now frozen withdrawals as liquidity deteriorates across the DeFi space.
Of course, high-profile hedge funds have also been hit by this ongoing cascading failure. Three Arrows Capital (3AC), a hedge fund that has been particularly active in crypto lately, had invested around $200 million in Terra earlier this year. However, with the demise of Terra’s UST and LUNA coins, the hedge fund lost almost all of its investment, sparking a liquidity crisis at the firm that has since worsened amid the broad-based wave of liquidations currently sweeping the entire crypto- Sector. According to Wall Street Journal reporting, 3AC is now considering a fire sale of its assets as well as a bailout by another unnamed financial player. If there is a distress sale, it will likely further dampen sentiment towards Bitcoin and other crypto assets.
Additionally, MakerDAO, the decentralized entity behind the DAI stablecoin, has now halted the process of minting and escrowing the stablecoin on Aave’s crypto lending platform.
According to a breakdown by Dune Analytics, over $250 million worth of liquidations have been completed across Aave, Compound and MakerDAO in the last 7 days.
As if things weren’t nervous enough, Tether has also confirmed a DDoS attack on tether.io, the company’s native website behind the largest stablecoin on the market right now.
Are crypto whales trying to cause Celsius to sink?
This brings us to the heart of the matter. We had noticed a few days ago that Celsius was not only in full swing for stETH, but also for Wrapped Bitcoin on Ethereum (wBTC), a derivative product that gives Bitcoin holders access to Ethereum’s 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 with Bitcoin at a price ratio of 1:1.
Celsius holds around 17,900 wBTC in its own vault. If the price of bitcoin falls to a predefined threshold, the contents of the vault would be liquidated in a margin call. This scenario is quite profitable for the people who flag such positions as they then receive between 10 and 15 percent of the cut from the collateral sale.
A few days ago, Celsius’s wBTC vault would have been liquidated if the price of Bitcoin had fallen below $20,272. However, the company has frantically deposited additional collateral, thereby lowering the price at which the margin call is triggered.
As of today, the margin call trigger is around the $13,000 bitcoin price level.
Celsius resolution updated to 16.8k for Bitcoin.
Whales traded hard to get there.
You can see what the whales are doing at https://t.co/0lA4JMczvQ.
— unusual_whales (@unusual_whales) June 18, 2022
Some analysts continue to speculate that Bitcoin’s recent downtrend was at least partially motivated by a desire by a few players to trigger a margin call on Celsius’s wBTC holdings. However, as the company has continued to find additional collateral, the immediate threat has been averted for now. This likely played an important role in stabilizing the overall mood surrounding Bitcoin.
Nonetheless, readers should remember that Bitcoin is certainly not out of the woods just yet. Finally, the 80 percent drawdown from the recent all-time high that is typical of Bitcoin’s bear market has yet to be completed.