Why is crypto crazy right now?
Bear markets are scary things. However, the best antidote to fear is knowledge. There’s a bunch of crazy stuff that has been happening in crypto for the past weeks/months and most of it is essentially rippling into other potentially apocalyptic scenarios. Here is a short snippet on each, designed to help you navigate this current downtrend and to easier spot bad projects in the future:
1- Terra and the UST depeg: No, I am not late to the party on this one, it’s just that we are still feeling the consequences of Terra ‘s collapse. If you want to understand what happened with Terra, here is a 2 part article series I have written on the topic: Terra and Anchor were so widely used by the market and by supposedly responsible and serious TradFi originating funds that many whales, institutional and otherwise alike, are still trying to cover or justify their losses from Anchor. UST was also used as collateral in many other stablecoins and money markets, thus further propagating the illiquidity contagion.
2- Lido and the stETH depeg: Lido Finance is a liquid staking provider offering stETH as a reward when users stake ETH on their platform. stETH is supposed to be pegged on a 1:1 ratio to ETH. Many of its institutional clients, due to their exposure to UST + the current bear market, have started redeeming their ETH on a large enough scale (and therefore putting sell pressure on stETH) that stETH is currently depegged by 5%. If this gets worse, the amount if liquidity moving away from ETH would cause big and unforeseen consequences in the market.
Another risk would be that of a potential centralized attack on the PoS consensus once Ethereum upgrades to 2.0, due to the sheer staking dominance that Lido has. With its existing underlying liquidity issues, this could mean trouble on a big scale.
3- Celsius and its liquidity issues: Yeah so, the institutional investors from the point above about Lido? One of the largest are these guys. Celsius offers interest bearing savings accounts, borrowing and payments. Its savings interest comes from DeFi investments, like Lido. Celsius gets stETH and then against the ETH it deposited, the stETH generates rewards, Celsius gives part of those rewards to their customers and keeps the rest. As stETH is currently depegged, Celsius still needs to pay its customer’s 6%-10% fixed rate and thus it exchanges it at a strong discount, further exacerbating the underlying depeg
Celsius seems to have further exposure issues, as it apparently is also borrowing against assets like LINK that users deposit on their platform, effectively shorting their own customers. The liquidity issues that Celsius has been having since the Terra debacle seem quite bad, as some addresses reportedly owned by Celsius total under $2 billion, when they should be at around $10 billion, as per this wallet bundle.
4- Solend, liquidity and a whale: Solend is a money market on Solana, just like Aave and Geist on other chains. Users borrow and lend assets on it. Solend faces the same bear market, illiquidity and depeg risk as the rest of the market. On top of that, a whale has recently deposited 5.7 million SOL, accounting for 95% of the supply deposits on the platform and 88% of its USDC borrow. If SOL went down to $22.30, the protocol would automatically liquidate up to 20% of the whale’s collateral. SOL’s price has rebounded to about $36 and the liquidation never came.
Backlash was massive however, due to the fact that Solend proposed to vote on taking control of the whale’s wallet. There apparently was even a DAO created specifically for this vote, with the largest wallet in it, accounting for >1% of the voting power. However, the vote did not pass and the problematic wallet has remained untouched. Not the most successful of whale hunts.
5- Three Arrows Capital and its lost bet: 3AC is one of the most important and visible crypto funds. They are also a prime example of an institution that bet bit off much more than it could have responsibly chewed, having recently admitted the losses it incurred when the Terra ecosystem imploded. The fund is currently exploring asset sale solutions, including even eing acquired by another company. Essentially, 3AC now owes a lot of capital in many places, such as BitMEX according to research done by The Block. It also has a number of other assets in many other prominent blockchains and crypto projects that it essentially will have to sell at a loss, putting further whale-level sell pressure on the market.
Crypto is not a very big world (yet) and catastrophes can have ripple effects. Bear markets are usually violent, sudden and people around panic. Having some piece of mind and basic understanding of what is happening around can give the composure needed to survive rough markets in order to strive in prosperous ones.