Crypto Crash. Celsius Network Rekt.

14.06.2022

Crypto update

This is a market update. There will be a huge crypto crash on Monday, essentially because of the Celsius network. We’re going to go through the news of that and what they’re doing, but we can see that Ethereum is really suffering here, but down 30% in the last week. Altcoins are obviously coming off, as well as kind of mass liquidations that are occurring right now, so the lower things go and when you have one market participant who is kind of selling off large parts of their assets, obviously you get these liquidations and so everything really falls down. I’m going to try and explain what Celsius has done here. They’ve actually come out and stopped withdrawals. So obviously, they’re in kind of a liquidity crisis now as people are trying to get money off the platform and they’ve said obviously they have to stop withdrawals.

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Bitcoin price

So, let’s look at the bitcoin price right now. Finally enough, two markets updates ago. I said when we got the inflation number, which was June 10th last Friday. If inflation was below expectations, we would see the price rise. If it was above expectations, we’d see the price go down. And I had this level as a kind of a support level. We obviously came in above an expectation, which is really bad news for the economy and all markets as well: Stock market, Housing market. But bitcoin kind of stayed where it was, so I was surprised at that. Now we have come down to that level. Essentially, this isn’t because of bitcoin. It’s because of the blow up of Celsius and their liquidity issues. They’ve been essentially market selling some assets. One of those is bitcoin. Obviously, with Ethereum coming down, everything just follows, and so we’re hitting this support level right here at $24-25,000. Support levels go out the window during a market liquidation event. So you have market participants who essentially are liquid or, you know, just have a need to get out of a large amount of capital. Of course, if you’ve got a seller in the market, you’re not going to bid up very high, so it’s not really about price levels here. It’s about when the de-leveraging and the de-risking actually finish. That’s when you would see prices actually try and stabilize.

The downside here is that the economy is so bad right now. The real economy is so bad and inflation is just still going up. 8.6% was the official figure, but you know, honestly, it’s more like 15%-20% plus because of oil. The only way that this actually stops is essentially a massive demand destruction, which is a recession, lost jobs, businesses going bust. So we’re seeing it, crypto is going to be first in because it’s new, it’s unregulated, but it’s going to happen in the real economy as well, because that’s the only way we get oil down. So this is happening.

Celsius Network

Let’s get on to what Celsius basically said right here. So, Celsius is a lending network that lends and borrows, so people can borrow US dollars against their bitcoin, and then people can put bitcoin, you know, a bunch of other assets on the platform, and Celsius gives them returns. So, what do they do with those assets? They lend them out on DeFi. They lend them out to hedge funds and institutions that trade them and then pay interest on them. Now, what we don’t know is, you know, what Celsius’s balance sheet looks like and kind of how much they were paying out to their customers versus, how much they were actually earning. So there were lots of rumour’s surrounding Celsius and what was going on in terms of basically, they didn’t have enough liquidity to pay the people that wanted to withdraw, right? So this is at best a liquidity issue and at worst just a balance sheet issue for the business.

So, you can see what Celsius has said here, “Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swaps, and transfers between accounts”. So, stop all transfers out and Swaps and trades on their platform. Now this comes after because you can look at the chain, so you can see what Celsius is doing in their DeFi wallets. They’ve been putting a bunch of staked eth and other assets over to the FTX exchange. Essentially, this is going to be over-the-counter stuff. So, they’re force sellers. Alameda or FTX have taken this seller onto their books and they’re working the order for the seller, which essentially means they’re going to be trading. They’re going to take the risk on. So either Alameda or FTX will act as a market maker in this situation. They’ll take the risk on at a way lower price, way below current prices, and then just dump the market and trade it out. That’s what we’re seeing right now. They say we are working with a singular focus to protect and preserve assets to meet our obligations to our customers. This is obviously just jargon right here. Our ultimate objective is to stabilize liquidity and restore withdrawal swaps and transfers between accounts as quickly as possible.

So what’s the issue here? Well, essentially, Nexo came out right here and said that they’re in a very strong position financially and they’ve basically offered to buy Celsius’s loan book, okay. So buy out that part of the business. So, obviously, Celsius has loans that they give out to people in US dollars that are backed by bitcoin, as Nexo has said that they’re willing to kind of buy that part of the business. And I guess we’ll see if Celsius has to go through with that.

What you can see here is that they sent $320 million worth of crypto into FTX. This is the slightly worrying bit because if it’s a liquidity issue, like if you have, let’s say, a billion dollars’ worth of ether that you’re lending out, people want. So let’s say you have 10% of that liquid in your wallet and the rest is lent out. If 20% people want to withdraw, then you don’t have the liquidity to pay them because you’re lending that out to institutions that might have it and don’t want to give it back. That’s just a liquidity issue. That’s not a big deal. But obviously, what we see now is them, you know, putting in hundreds of millions of crypto into FTX and basically selling that off. And that’s slightly more worrying, because you’re thinking, why do they have to sell assets, and it may possibly be because they’ve over leveraged their book.

They’ve got assets that they were given as collateral for loans and they may be overleveraging that, so they may be putting that into DeFi borrowing against that and then they’ve got themselves basically an over leveraged situation. The only thing you can do in that situation is stop withdrawals. Because everyone was saying, essentially, we want to get our assets off and they just don’t have the assets there to actually pay back. I’d say best case scenario. Actually, it’s a liquidity issue. The worst case they are going to have is to take massive losses on their balance sheet, essentially.

So that is obviously a worry. Can they actually take those losses on? Do they have to sell the business? Do they have to raise funds or are they just selling everything? And potentially, just having to not, you know, not meet the obligations that they have when people want to withdraw. So there are a lot of questions here. I don’t know the answer to this. I don’t know Celsius’s balance sheet, but there are a few scenarios that can happen here. You can see what’s happening here. Essentially, this is a Celsius position in RV, so there’s a lending platform. You can see they basically took a load of ETH and wrapped bitcoin out and put it over to FTX, essentially to either give liquidity for a leveraged position or basically to sell those assets. We don’t know what’s happening because obviously that’s centralized, and so we can’t see that like this account says they’re either borrowing from FTX, but putting collateral on and borrowing dollars against FTX or maybe they’re just selling out.

Where is the bottom?

When it comes to potential prices for bitcoin underneath, it’s not really about technical right now. It’s really about where the leveraged seller ends up. You know, when that seller eventually gets out of the position and takes the loss. So what do you see right here? This position here is the Luna Blow up that was big enough and then we’ve seen what’s happening with Celsius right now, which is maybe around the same, so they both had billions and billions of dollars’ worth of assets, so this is what has to happen essentially with bitcoin. When you’re getting out of a position, it’s a market sale and it will stop being sold off when the position has finished being sold off essentially, and we don’t know when that is. ETH is obviously taking a big brunt of this, because most of the liquidity that was stuck on Celsius was basically state teeth. So Celsius was giving withdrawals for ETH, but they were invested, apparently, in a lot of steak teeth. And steak teeth are locked into the ETH contract until it’s 2.0.

So that may be the like the CRUX, the matter for Celsius is that they were allowing withdrawals of ETH, but they had a lot of money in steak teeth, which is locked, so that may have been the liquidity issue. As I said, I don’t know what’s going on at Celsius, but that may have been it. So this red line here was, you know, kind of my bottom support level. We’ve broken through that again.