Dear subscribers,
Bitcoin shattered our previous support level around $29k noted in Uncharted #17. A combination of systematic and idiosyncratic risks tumbled the price to the low $20ks where it currently trades under great pressure.
Let’s dig in!
TL;DR
Bitcoin dropped to the lower $20k range following an alarming CPI print last Friday.
The Fed increased rates by 75bps, and the market is pricing in two subsequent expeditious hikes.
Selling pressure continued to pressure risk-on assets as investors sought safer plays in a volatile market.
Increased realized losses led to a cascading effect of idiosyncratic risks concerning insolvency risks for key players: Celsius and Three Arrows Capital.
Higher inflation flooring prices
This week was set to be a volatile one. The FOMC meeting had investors shaking following a higher-than-expected CPI print late Friday, June 10. All asset classes were pushed down. US equities fell to bear market territory while US bonds were fiercely sold. Bitcoin underperformed as the shaky market paved the way for systematic and idiosyncratic risks.
Figure 1: Risk-on assets selloff
A 75bps rate hike was priced in for the last FOMC meeting, and fear turned into panic selling. Investors began to materialize losses by converting bitcoin into cash, decreasing the healthy spread between unrealized and realized losses (Figure 2) and increasing the buying power for bitcoin.
Figure 2: Investors materialized losses converting bitcoin to cash
In a high crypto-margined environment (Figure 3, blue line), the increase in realized losses was due to trigger liquidations, especially considering the Bitfinex margined long position all-time high noted in Uncharted #16. Over $1 billion in positions were liquidated, with longs taking the biggest hit, accelerating the price decline (Figure 3, black line).
Figure 3: Leverage structure
For a brief moment, excessive negative funding rates incentivized long positions, but as the market processed the looming and expeditious rate hike, the price rebounded and triggered short liquidations. Notice how the decrease in long liquidations decreased while the funding rates plummeted (Figure 4).
Figure 4: Long and short liquidations
Nevertheless, the market collapse had already taken its toll on key players like Celsius, MicroStrategy, and the hedge fund Three Arrows Capital, and idiosyncratic risks pressured bitcoin once again.
Celsius (Figure 5B) and Three Arrows Capital (Figure 5A) faced a looming insolvency risk as they had committed substantial capital to stETH, locking up their coins until the PoS merge and facing $400 plus liquidations. In a low liquidity environment, Three Arrows Capital materialized losses to meet current obligations, while Celsius suspended withdrawals. In short, an excessive risk was taken, undermining the increasing tail risk as they tried to push yields higher.
Figure 5A: Three Arrows Capital stETH balance
Figure 5B: Celsius liquidation price
MicroStrategy had similar problems. On March 29, they took a $205mn loan, backed with bitcoin, to continue their digital asset-purchase strategy. The lending agreement stipulated that MicroStrategy had to maintain a 25% LTV ratio considering an $800 million collateral, yet as the price came tumbling, the firm faced a margin call of around $21k. The covenant was to trigger a margin call if the LTV ratio hit 50% (around $21k). MicroStrategy avoided the margin call as they have 95,600 BTC unpledged and unencumbered bitcoin to post incremental collateral.
Figure 6: MicroStrategy debt structure
What’s next?
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