Bitcoin plummets but is there more downside ahead?

GB Market Commentary 15/06/2022

by Marcus Sotiriou

Despite the Nasdaq bouncing 0.21% yesterday and both the S&P 500 and Nasdaq futures showing gains this morning, Bitcoin continues to plummet.

What are the factors contributing to this extreme sell off?

Systemic issues in crypto infrastructure companies such as Celsius

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.

There is clearly lots of uncertainty right now around the significant exposure Celsius has to stETH in proportion to the Curve pool size.

I think many people are awaiting for more information with their stETH position so they can have confidence to buy again – if a Celsius deal is reached and publicised this could lead to a relief rally.

Insolvency of crypto hedge funds like 3 AC (Three Arrows Capital)

This is one of the biggest crypto hedge funds whilst being 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 would 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.

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.

Unwind of liquidity in global markets due to rate hikes and QT

QE has led to global markets and crypto rising over the past couple of years, but the opposite has meant that investors are forced to unwind their positions, particularly in risk-on assets. We have the Federal Reserve interest rate decision today at 7pm UK time which will be determine how aggressive they decide to be and therefore the outlook over the next 6 months. I think a very aggressive Federal Reserve might be the best way forward for markets, so that the Federal Reserve will be in a position to resume QE sooner.