How Would Celsius' Liquidation Impact the Crypto Market?

This Week in Crypto

What happened in crypto this week? A speculative report about a spot Bitcoin ETF caused some volatility, but that was not the only factor. To pay back its creditors, Celsius has requested to unstake almost 1% of all staked ETH; how will the market respond? Let's dig in.

A Bitcoin-dominated Newscycle

On January 3, crypto-focused financial services platform MatrixPort published a report speculating that the Securities and Exchange Commission (SEC) could reject applications for a spot Bitcoin ETF this month and approve them later in the year because of political headwinds within the agency. Although Bitcoin dropped by 4.8% following the report, the soaring open interest combined with the high funding rate, whose spike can be seen below in Figure 1, also contributed to the short-lived decline. This implied the market was overleveraged and required a corrective flush.

Figure 1: BTC Funding Rate

Source: Glassnode

Conversely, progress seems to prevail as Goldman Sachs is aiming to be an authorized participant for Blackrock and Grayscale, while the SEC met with the NYSE, Nasdaq, and CBOE to discuss amendments triggered in the 11th hour. In addition, multiple asset issuers have also filed 8A forms last week, which could imply that applicants have overcome significant hurdles from the agency’s view. In summary, the outlook for Bitcoin appears robust, with long-term investors—those who have held the asset for over a year—reaching the highest levels (~67%) in Bitcoin's 15-year history, as seen below in Figure 2. This underscores the strong conviction in the asset over the long term

Figure 2: Percentage of BTC supply moved over a year ago

Source: Glassnode

Celsius Begins its Liquidation Procedure

The bankrupt lender submitted a request to unstake 206K ETH, as part of its efforts to pay back creditors. Representing 0.7% of the total staked ETH ($450M), the request could add some selling pressure over the coming weeks. However, it’s worth noting that Celsius will allow in-kind redemptions, meaning that it’ll distribute BTC and ETH holdings to users directly, which means the company won’t have to sell the underlying to meet its obligations. Finally, the decision is also causing a significant surge in the ETH exit validator queue, as shown in Figure 3, which would close to 14 days to fully exit and withdraw now while contributing to an increase in staking yield, bringing it up from ~3.088% to ~3.117%.

Figure 3: Ethereum Validator Queue

Source: Ethereum Validator Queue

Arbitrum Enhancing Customization Options

Arbitrum has announced that its custom blockchain development solution, Orbit, will allow networks building on top of it to designate their tokens as gas currencies instead of ETH, once they meet specific criteria. The upgrade ensures that networks built on top of Orbit can create utility for their token while offering advanced features like gas subsidy. This level of flexibility puts Arbitrum on par with Cosmos, which makes it a more favorable option amongst developers. However, with the announcement of Arbitrum's optimized architecture and the forthcoming implementation of Ethereum's Dencun upgrade expected in February, there has been a resurgence of interest in Arbitrum, as well as other high-beta plays on the Ethereum network, such as Optimism and Lido, seen below in figure 4. Thus, we expect the aforementioned assets to perform well leading into the upgrade.

Figure 4: Price Action of ETH vs ETH Beta(s) vs SOL

Source: TradingView

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