Threats of Insolvency Spook Investors
|By Alex Benfield|
The recent sell-off in the crypto market has put some big players in deep trouble as they've found themselves to be overleveraged.
Obviously, Celsius' hot-water situation is well known. In addition to its potential insolvency status, Celsius is also at risk of liquidation on a large loan from Maker. It's had to deploy a ton of capital in the past 24 hours to pay down that debt and reduce its risk of liquidation, buying themselves a solid safety cushion.
Now, rumors are swirling that another big crypto name, Three Arrows Capital, is potentially in a similar situation. Like Celsius, Three Arrows was also heavily invested in Terra (LUNA) — to the tune of nine figures. After the collapse, Three Arrows moved money into stETH — a liquid variant of ETH staked long term in ETH 2.0 — just like Celsius.
Now that position is at risk, and there are worries that Three Arrows could declare bankruptcy.
If even large, sophisticated firms like Celsius and Three Arrows can get blown up using leverage, that means leverage can be dangerous for anybody.
Only ever use leverage with extreme caution!
Especially as the Federal Reserve is looking to continue tightening the economy. Just today, the Fed confirmed a 75 basis-point hike following the Federal Open Market Committee (FOMC) meeting.
This is the largest interest rate hike since 1994, which goes to show just how seriously they are taking this situation.
It's safe to say rising inflation is a serious threat to the American economy. However, it's up for debate if markets have already factored in such a large hike … or if it'll send markets into a further tailspin.
Bitcoin (BTC, Tech/Adoption Grade "A-") is trying to find support near the $20,000 level, but as the eight red daily candles in a row show, it's so far come up empty-handed. A close south of $22,000 today would make nine down days in a row.
BTC is severely undersold at the moment … and has been for some time. There's some support near the $20,000 level, but not much. It's still far too early to guess at what level that support might come in, but how BTC reacts to the rate hike could give us an indication of where the dust might settle.
Likewise, Ethereum (ETH, Tech/Adoption Grade "A") has been incredibly vulnerable since breaking below support at $1,750 last Friday. ETH is in fact already trading below its previous bull market high near $1,400. It's possible that $1,400 could act as a support level should the markets bounce following the FOMC meeting.
Conversely, if things drop further, ETH bulls will need to defend the $1,000 mark and keep ETH a four-digit asset because if they can't, it could fall as far as $750 on the next move.
Here's ETH in U.S. dollar terms via Coinbase (COIN):
Notable News, Notes and Tweets
- Fidelity agrees that Bitcoin is very oversold at the moment.
- Ryan Sean Adams of Bankless thinks this bear market could be different from previous ones given the newfound maturity of the space.
- Sentiment has shifted to become very negative in recent days, and that's typically been a bottom signal in the past.
There's no reason to examine altcoin charts right now. As long as both Bitcoin and Ethereum remain drastically oversold and struggle to find support, we won't see any meaningful moves in the altcoin space.
The trend is your friend in crypto, and right now everything is trending downward. Until the two market leaders can find some relief, there's no sense in overcomplicating your trading strategy or searching for altcoin moon shots.