Down and Out or Fuel for the Fire? A Month in Crypto
Current Market State
Early in the week, we saw a large sell off of Bitcoin and other assets, plunging down the markets. From Ethereum to alt-coins, most assets have tumbled down into areas of uncertainty. Events of companies becoming insolvent and facing financial burdens have begun accumulating, and it might be setting the norm for what this bear market has in store for crypto gurus.
The fall was unprecedented, as big news broke out on Sunday night about Celsius as spoken about earlier. With the further worries, the movement of BTC has yet to be defined as “bottomed” and through time has caused prominent investors to shoot for an even lower target price before the markets move in a positive direction. These moves to $20,000 will prove to be significant as they will create immense buying opportunities for people.
On June 15th, another Federal Reserve meeting was held. On this occasion, the likely occurred. After many investors and institutions called for a 75 point hike, the Fed delivered. In the afternoon after, the markets reacted with a positive outlook. The S&P 500 closed about 1.50% up after a week of consecutive downfall.
Rebounding after days of such turbulence can be seen as a sigh of relief, but the morning after has typically resulted in further bleeding for investors. Such a big interest rate hike has not been seen in the markets since November of 1994. While back then such a big interest rate hike saved the markets from a bear market, this time the factors that are taken into account are grimmer than before. It will be some time before the effects of these interest rate hikes can prove to save the market, but for now, it has given investors signs of hope.
As the weekend passed, as of June 21st, the price of BTC was near $21531. The weekend saw BTC sitting as low as $17,614 but the increase in price can be seen as a healthy movement. After so many weeks of slaughter for Bitcoin, some news has calmed down with many institutional investors continuing to pursue their interests in cryptocurrencies.
On the other side of the market, many numbers have come out from the government. In the United States, the median existing home sale price shot above $400,000 in the month of May. The increase in median has also been faced with a slow down in home sales. A once hot housing market showing signs of slowing down go hand in hand with the current events ongoing around the world. Consumers know that these times of uncertainty will call for them to rely on keeping cash if the United States economy were to enter an official recession. If these events are to happen, historically, cash is king during those times. Keeping cash handy for investors will be the best way to tread through those hazardous times, and moving forward will allow investors to have life changing opportunities in markets. Overall, consumers are less likely to continue to purchase as CPI has increased by 1% in May. A clear indicator of how it is becoming more expensive to purchase items across our country.
Market Wide Liquidations
Celsius
On a late Sunday night on June 7th, Celsius, a retail exchange and lending platform, announced that it would be pausing all withdrawals, swaps, and transfers between their accounts. This action taken by Celcius was able to be done by a clause in their Terms of Use, and in a way to help survive these “extreme market conditions.”
Shortly after this announcement, a rival company, Nexo, offered to acquire their qualifying assets. Nexo, being backed through various years of experience, has stated that they could take on “all or part of Celsius’ qualifying, outstanding collateralized loan receivables will go a long way in providing immediate liquidity to @CelsiusNetwork clients” which can be a way out for Celsius during this time of hardship. While no comment has been made yet by Clesius executives, it will only be a matter of time until a decision is reached. Having Nexo acquire these receivables may be in the best interest for Celsius, so they can reduce the stress that is being put on them after halting all activity on their protocol.
3 Arrows Capital
Through these liquidations, no one has been safe. Three Arrows Capital (3AC), who became one of the most prominent crypto hedge funds of our time with the influence of Zhu Su, one of the co-founders also had extreme selloffs as they had much exposure to LUNA. As reported, Three Arrows capital liquidated $40 million in Ether. This news came abruptly in the night and has taken a toll on the way people are looking at one of the most popular firms in the industry.
Soon after news came out, people are beginning to wonder if the liquidations are a sign of 3AC becoming insolvent. The depeg of stETH has caused for a fire sale to occur, but at the same time has caused Three Arrows to suffer major losses in their investments as shown in the tweet by @MoonOverlord.
Having so many margin calls across different exchanges meant that 3AC had payables all across the board, with some suffering extreme losses. Risk management in treacherous times like these is most important and raises the question on why they would not have reduced their positions as the market made its move downwards.
Debt Spiral
The image shows how much debt Celcius still has on their vault, and the lifetime profit speaks for itself. Furthermore, the activity on this vault has shown that they have kept on liquidating assets to pay this back and adding collateral to lower their liquidation price. Currently, their liquidation price is much healthier and has been sitting at $13,604 for Bitcoin.
This is one of the different vaults that Celsius had invested in, and now is a matter of time before they get liquidated, or cut their losses. Most markets are feeling the pain right now, but the unencumbered support for LUNA while the fundamentals were lacking has left the majority of investors overleveraged and undercollateralized across the space.
stETH Fire Sale
First and foremost, what is stETH? This token represents “staked ether” which means that a single stETH token is equal to 1 ethereum that is staked inside of Lido. Lido is the largest staking service on the Ethereum Network, and allows owners to stake their ETH for as long as they would like while providing liquidity and yields through their derivative stETH.
Both Three Arrows Capital and Celsius also held substantial holdings of stETH and were forced to liquidate and cut their losses.
Around the same time that rumors ramped up about the insolvency of Three Arrows Capital and Celsius blocking withdrawals, the stETH/ETH price began to dwindle down and depeg from the expected 1:1 in the Curve pool. At worst stETH has traded at a discount -6% or more to the price of ETH causing any loan using stETH as collateral to suffer.
Anticipating this event, Alameda research swapped out their stETH for ETH, and then proceeded to short the market price of Ethereum at $1800. Afterwards, we saw the price of ETH swiftly drop to $849 USD at it’s lowest with many being liquidated once it fell below $1000 USD. The sale of stETH may serve as a sign of how institutional investors are looking at the market, and while on June 21st there has been an upwards trend, having these shorts open from the firms will be a clear indicator that they further unwinding before any consolidation occurs.
The importance of having stETH stay pegged relies on security for investors during a time of uncertainty. While Lido had agreed to provide high APR on staked ether, having yet another depeg compared to UST and Anchor will once again be a negative look for the markets. Crypto suffers a significant reputation blow when these projects have not been able to “defend the peg”, however there is a lack of understanding in the difference between the UST depeg and stETH. UST was an uncollateralized (un-backed) “stable” asset relying on an algorithmic price setting mechanism, while stETH is fully backed 1-for-1 with staked Ethereum, however any Ethereum staked today is not claimable until the merge occurs. This results in an inordinate amount of pressure on the limited amount of liquidity in the stETH/ETH pool on Curve in the short term, but provides a huge opportunity for long term holders who are looking to purchase today.
As large amounts of liquidity are still locked in stETH, this could produce a sell off that further pushes down the prices and ratio of 1:1. This will be upcoming in the next 2–3 weeks and will be an important aspect to pay attention to as it could be a defining movement that shifts the market into a downwards turn with new local lows.
Merging the Bullish Case for stETH with Market Sentiment
The great Ethereum merge is upon us in 2022. The process has taken a few years but once it occurs, Ethereum will move from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS) mechanism by “Merging” the current Ethereum Mainnet (ETH1) with the new Beacon Chain (ETH2) to create a single blockchain in a “go-no-go” fashion.
In recent news, the harmful effects of Bitcoin mining have been studied and has angered many people who have tried to bring down crypto with cities like New York even moving to ban it outright. As crypto mining on PoW tends to give users the block if they have more computing power, it always incentivizes miners to have the most innovative and high producing machinery to get the rights to the block. This is solved by PoS as it will assign the block to the one with a majority stake instead of the one computer that can solve an intricate mathematical problem the fastest.
What does this mean for the Ethereum Network?
Using this PoS mechanism will allow for Ethereum to be created with less energy consumption than before. Changing the network to an eco-friendly model will not only allow for ETH to become an ESG investor asset, but will also create a model that many companies will want to continue to follow.
How about liquid ETH today?
The upcoming merge will drastically reduce the circulating supply of Ethereum as the majority of it will be locked up in use by validators to perform consensus over the network. This will leave a gap in the market today since the majority of liquidity pairs on decentralized exchanges like Uniswap are built with Ethereum on one side of the equation. This gap is starting to be filled by the likes of Liquid staking token alternatives like stETH which is a 1 to 1 derivative representing 1 staked Ethereum token. Holders of stETH earn their rewards in stETH instead of ether which are claimable on the Lido website.
Implications of the Merge on ETH Revenues
Total revenues from Ethereum annualized have been in excess of $10B usd annualized, with expectations that activity will only increase as more people come back to Ethereum after the merge. The total transaction volume for the year averages out to about $23/transaction on the current network with transaction cost expected to decrease with a sharp increase in volume. With the merge, the current miners will be rendered useless as the validation of blocks will be done by staking validators. The APR received once the merge occurs is expected to be elevated significantly given the volume of transactions that will come over with just over 10% of the circulating Ethereum being staked. Couple that with the burn mechanics from EIP1559 and we should see a significant decrease in the circulating supply of ETH as the amount burned with each transaction will go up post merge.
Crouching Tiger, Hidden Dragon
On May 25th, a16z, also known as Andreessen Horowitz, raised $4.5 billion for crypto ventures with a specific focus on the Ethereum network and any and all project categories built on top. This money will be split into two different funds, about $1.5 billion for seed deals and the remaining $3 billion for venture deals. This has become a record amount in funding raised by a Web3 focused company, beating out top funds like Paradigm ($2.5B raised) and Binance ($500M raised).
The fund has held a conviction on remaining focused on the long term investment they are making, and have not been sweating too much after the recent drops in the market. On the other side, this means a great deal for companies who are starting up in the crypto space. As funding is something harder to come by, companies can now offer their services and display why they would make a difference in the Web3 space, and receive these funds to help push them into a greater space.
A16z will be able to make a difference in the Web3 space, and help push along companies who hold true value in creating a better industry. While a16z has already been a prime investor in larger projects like OpenSea, Avalanche, and many others, using these funds to support a variety of projects will enable growth and profits for not just them, but for the rest of the industry.
Some of the likely areas that the $4.5 billion in funds may go to are a variety in the cryptocurrency space. A16z sees real promise in the industry, and can sense that the future is within cryptocurrency in a variety of different topics. Companies like Helium who are pushing for worldwide network coverage can clearly be seen as a target for a16z as they fit their requirements. Other projects like Spruce are changing the way that social media will be handled, and hope to rival competitors like Instagram and Facebook by taking away the middle man that has access to all of the users data.
Two other popular areas that have risen through the past few years has been how to make crypto more eco-friendly, and bring down this common objection. Flowcarbon is a company that has already begun working towards this solution. Mitigating climate change is a solution they offer, and not only to bigger corporations, but also individuals are able to create a change by using their technologies. Lastly, companies like Coinbase themselves, who are leading the way in the exchange services are primary targets for the funds of a16z because of the growth they are able to promise to consumers. Coinbase has allowed to bring in new investors year over year with their simple design and promise growth to new customers through their learning documents. Having their user numbers increase year over year can create an opportunity that shifts a16z to support and fund even more.
The large sum of money that has been raised will serve the goal of creating a better industry for the world. A16z hopes to support leaders in this up and coming industry, and supporting companies that meet their criteria but are also for the community will help them become leaders as the projects receive funding and attention.
The Bottom Line
The market has been in crisis ever since the LUNA crash in mid May. It is during times like these that participants have the opportunity to reevaluate their theses and builders are able to rethink the value they are bringing to the market. There is a reason the phoenix rises from the ashes, because everything has to burn down first before we are able to produce something beautiful. Heads down as usual for the strongest participants and for many others, this type of price action is to be expected. Looking for people making tangible differences in the world today is a good lead to follow in any market.
