GlobalBlock: Systemic Issues, Insolvency Rumblings, Unwinding Leverage Creates a Crypto Trifecta for Decline

A crypto trifecta for the decline? Seems like it.

The bad news keeps rolling in from the possibility of insolvency at crypto lender Celsius, a rapid reduction in leverage, and trouble at a large blockchain hedge fund, things aren’t so good right now.  Marcus Sotiriou, Analyst at the UK-based digital asset broker GlobalBlock, highlights the issues impacting crypto markets today.

Sotiriou starts with Celsius’ need to freeze withdrawals due to a crypto bank run:

“Celsius are one of the biggest lenders and could potentially become insolvent. The Celsius on-chain liquidity crisis has become healthier over the past 24 hours, as they have added to their collateral across the board for 3 main positions. One of these positions involving a Maker wBTC Vault now has a liquidation price of $14k, which was once around $22,500. This is because they have paid down more of their DAI debt,” says Sotiriou. “There is a clearly a high level of uncertainty right now, in regard to the significant exposure Celsius has to stETH in proportion to the Curve pool size. I think many people are waiting for more information with their stETH position, so they can have confidence to buy again – if a Celsius deal is reached and publicized this could lead to a relief rally.”

Three Arrows Capital, a blockchain-focused hedge fund, could collapse and cause a domino effect:

“This is one of the biggest crypto hedge funds, and one of the biggest borrowers. At its peak, it owned over 5 billion dollars of assets and hundreds of thousands of ETH. If they collapse, this will mean that lenders would incur drastic economic risk. The Profit-Loss difference between how much they owed versus what they get in liquidating their collateral is at risk,” Sotiriou states. “Lenders will be forced to protect themselves by withdrawing credit from the system and result in further de-leveraging of crypto assets. I think it is likely that more people need to de-lever still.”

Investors are being compelled to unwind positions in both traditional and crypto markets adding fuel to the decline. With the Fed on deck and expectations that rates may increase by 75 bps, leverage is rising in price:

“I think a very aggressive Federal Reserve might be the best way forward for markets so that the Federal Reserve will be able to resume QE sooner,” says Sotiriou.

Perhaps. But inflation has been heading higher and a recession is just around the corner. Unfortunately, the current US administration is taking a contrarian approach by talking about higher taxes, spending more money the country cannot afford, and not doing what needs to be done to drive the cost of gasoline lower… the economy could be poised for more pain, not less.

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