Badly Beaten Bitcoin Rebounds as Crypto Whales Fail to Trigger Margin Call for Celsius-Held wBTC
Bitcoin looked set to have a Lehman moment on Saturday as the world’s largest cryptocurrency fell below its previous bull cycle peak of $19,511, something that had never happened before. Add to that the cascading selloffs emanating from various corners of the crypto sphere, and the sentiment around Bitcoin couldn’t have been gloomier. Still, as of this writing, Bitcoin appears to have recovered well, recording gains of almost 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 a few whale-sized investors to trigger another high-level margin call, this time targeting Celsius-owned wBTC. in a safe. Before addressing this aspect, let’s elaborate on the threat of margin calls and cascading liquidations which remains very present in the crypto sphere.
Bitcoin’s Lehman Moment: Cascading Liquidations in the Crypto Sphere
Readers will recall that the current downturn in Bitcoin and the rest of the crypto sphere accelerated following the dramatic fall of Terra’s UST stablecoin and its counterpart LUNA. This fall not only exposed the underbelly of the crypto sector and the associated vulnerabilities of algorithmic stablecoins, but also laid the groundwork for the current upheaval.
Crypto lending firm Celsius is widely believed to have suffered a major blow when Terra’s UST and LUNA coins crashed. With its liquidity already in a precarious position, Celsius was forced to halt all withdrawals from its platform a few days ago when Lido staked Ethereum (stETH), a decentralized finance (DeFi) variant of Ethereum that is issued against staked Ethereum coins, and which can be exchanged for Ethereum on a 1:1 basis, but only after the Ethereum 2 transition after the merger event in late 2022 or early 2023, detached from its theoretical parity with Ethereum. Since stETH is widely used as collateral in the DeFi space to underwrite loans, Celsius faced a liquidity crunch as investors began redeeming large amounts of stETH against Ethereum when the theoretical peg 1 : 1 was broken. Keep in mind that the market for buying Ethereum using stETH is not as big. Consequently, Celsius was forced to stop all withdrawals as it could not meet Ethereum’s demand.
Similarly, Hong Kong-based crypto lending firm Babel Finance also froze withdrawals amid worsening liquidity across the DeFi space.
Of course, high profile hedge funds have also been affected by this ongoing cascading failure. Namely, Three Arrows Capital (3AC), a hedge fund that has been particularly active in the crypto sphere lately, had invested around $200 million in Terra earlier this year. However, with the fall of Terra’s UST and LUNA coins, the hedge fund lost almost all of its investment, precipitating a liquidity crisis within the company, which has since worsened in light of the surge. large-scale liquidation that is currently spreading across the entire crypto industry. According to information from the Wall Street Journal, 3AC is now considering a discount sale of its assets as well as a bailout by another as yet unknown financial player. If a fire sell occurs, it will likely dampen sentiment around Bitcoin and other crypto assets further.
Additionally, MakerDAO, the decentralized entity behind the DAI stablecoin, has now halted the process of minting and depositing the stablecoin on Aave’s crypto lending platform.
According to a chart from Dune Analytics, over $250 million in liquidations have taken place in Aave, Compound, and MakerDAO in the last 7 days.
As if things weren’t edgy enough, Tether also confirmed a DDoS attack against tether.io, the entity’s native website behind the largest stablecoin on the market today.
Are crypto whales trying to cause Celsius to fall?
This brings us to the crux of the problem. We had noted a few days ago that Celsius was not only in line 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 operated by the wBTC Decentralized Autonomous Organization (DAO). wBTC can be traded with Bitcoin at a price ratio of 1:1.
Namely, Celsius holds around 17,900 wBTC in a dedicated vault. If the price of Bitcoin falls to a predefined threshold, the contents of the vault would be liquidated during a margin call. This scenario is quite profitable for people who report such positions, as they will then receive between 10 and 15% of the reduction in the collateral sale.
A few days ago, Celsius’ wBTC vault would have been liquidated if the price of Bitcoin fell below $20,272. However, the company frantically posted additional collateral, thereby lowering the price at which the margin call is triggered.
As it stands, the margin call trigger is around the $13,000 Bitcoin price level.
The Celsius liquidation has been updated to 16.8k for Bitcoin.
Whales sold hard to get there.
Can see what whales are doing at https://t.co/0lA4JMczvQ.
– unusual_whales (@unusual_whales) June 18, 2022
Some analysts continue to speculate that Bitcoin’s recent decline was at least partly driven by a few players’ desire to trigger a margin call on Celsius’ wBTC holdings. However, as the company continued to find additional collateral, the immediate threat has been dismissed for the time being. This probably played an important role in stabilizing the general sentiment around Bitcoin.
Nonetheless, readers should remember that Bitcoin is definitely not out of the woods yet. After all, it has yet to complete the usual 80% drawdown from the recent all-time high typical of Bitcoin’s bear market.