A bloody week comes to an end. BTC$ crashed more than 30% to 20.5k, and ETH is down 40%, currently trading at 1.08k.
Nasdaq closed more than 6% lower yesterday compared to last Friday’s close.
Central banks did not disappoint this week. The FED hiked rates by 75bps. The move was priced in only since Monday, and marks the biggest increase in 28 years. Even more surprising was yesterday’s 50bps hike from the Swiss National Bank. All eyes are now on the ECB as the pressure mounts to follow their peers, but countries such as Italy are unlikely to afford much higher rates over the medium term.
Less than a month has passed since the collapse of the Terra ecosystem. While the crypto market was still in the process of digesting it, more of the same has come to surface this week. What has happened?
ETH holders who want to generate staking yield can stake only multiples of 32 ETH, and have their ETH locked until after the merge goes live.
Lido Staked ETH (stETH) was launched to solve both problems: investors are able to stake any amount of ETH and receive stETH in return, essentially a derivative with the locked-up ETH as underlying. That stETH can be used for lending, staking, and can be sold against other coins. For a long time, stETH was trading close to 1:1 with ETH. stETH only works one way: it is impossible to redeem stETH back for ETH, since they are locked on chain.
Last week, the price of stETH came under pressure and started to deviate from the ETH price. Currently, stETH is trading at a 6% discount.
However, the “de-peg” of stETH/ETH cannot be compared to the de-peg of the Terra USD. This shows that the market is functioning properly and is now pricing in a liquidity premium for the fact that the underlying is locked and also a risk premium in case the ETH merge never goes live.
The real problem that occurred this week is the business model of a company named Celsius. They promised their investors a guaranteed return on their ETH, and also allowed them to redeem their ETH back. Celsius on their side used the Lido protocol to generate the return.
When the stETH/ETH was no longer trading 1 to 1, Celsius quickly came under pressure as they were not able to fulfill their promise to always pay back clients their ETH. Celsius stopped accepting redemptions. As a result, the crypto market once again was shaken by fear, panic selling, and a liquidity crunch.
Three Arrow Capital, a Singapore-based crypto hedge fund and a major player in the cryptocurrency world, was heavily involved in stETH and is rumoured to be insolvent as a result.
Hopefully, the crypto markets will learn. If investors do not start to apply a proper due diligence, regulators will step in sooner or later to protect them.
Last but not least, you might be wondering what BTC traders have been doing over the last month. Most notably addresses with 10k+ BTC have been steadily accumulating, while wallets with 100-10k BTC have been selling heavily over the last 30 days.