Ugly days beget ugly days. In a normal situation, bulls would have been ecstatic about the possibility of rip-roaring gains in the days and weeks ahead given that Bitcoin is drawing close to very sturdy support levels. Unfortunately, the level of pessimism that is pervasive throughout the entire world of finance is such that a fundamental shift in the psychology of the market seems to be a very long way off, like it is buried deep inside the verdant valleys of the collective psyche of investors.
We have been focusing a lot of attention on the underlying factors that are responsible for the present malaise that is impacting growth-oriented, high-beta US equities in addition to Bitcoin and the rest of the crypto realm. We are going to refrain from stating all of those arguments here so that we don’t come off sounding like a broken cuckoo clock. Instead, readers interested in further context might investigate this link, which will take them there.
The price of Bitcoin has finally found support at a level that has been consistent in the past, as demonstrated by the fact that it has fallen to the $20,000 price handle today. Bitcoin is the most widely used cryptocurrency in the world. Let’s elaborate.
Bitcoin Has Regained Its Position Above the 200-Week Moving Average
Rekt Capital has only recently determined that the 200-week moving average is the crucial support level that has reversed every single significant decline in Bitcoin’s price since the cryptocurrency’s introduction.
As was indicated in the tweet that was just above this one, before Bitcoin bottoms out and resumes its upward trend, it has a tendency to penetrate the 200-week MA by anywhere from 14 percent to 28 percent. The moving average for the past 200 weeks is at $22,364. If we assume that bitcoin will continue to penetrate the market at a maximum rate of 28 percent beyond this level, the resulting price will be $16,102.
The chart that follows presents Bitcoin’s 200-day moving average along with the cryptocurrency’s all-time high, which was reached in 2018. It is anticipated that this level will serve as a support for the bottoming-out process that is currently underway.
Another indicator that we are getting close to capitulation is the recent discovery by CNBC that when Bitcoin is in a negative phase, the price often falls by approximately 80 percent in comparison to the previous all-time high. In light of the fact that Bitcoin reached its all-time high of approximately $69,000 in November 2021, we can assume that the present negative phase will end somewhere in the range of $14,000 to $15,000 if it corrects itself by approximately 80 percent.
In a nutshell, Bitcoin has reached or is extremely close to reaching a hard capitulation level as a result of the following developments:
- The support level established by the 200-week moving average has already been reached.
- Support for 2018’s all-time high is very close at hand
- As the cryptocurrency passes through the final remnants of a broad-based surrender, a typical fall of 80 percent in bearish phases is going to be realized.
Despite this, we do not believe that investors should anticipate roaring profits in Bitcoin or the rest of the cryptocurrency industry in the near future. First, prior to entering a full-fledged bullish mode, Rekt Capital explains that Bitcoin will often form a double-bottom pattern. This occurs before the price begins to rise.
Second, the flood of anticipated high-profile margin calls is likely to muddy the proverbial seas surrounding Bitcoin, which will result in disorderly liquidation activities that will further aggravate the already terrible sentiment. This indicates that the entire cryptocurrency industry is still in a precarious position for the time being.
The entire cryptocurrency industry will likely experience much more weakness in the near future as a result of upcoming margin calls.
The whole cryptocurrency industry almost always conforms to the requirements set out by Bitcoin. Because of this, we place a significant amount of weight on the cryptocurrency that is considered to be the best in the world. Even though we went over the theory that supports an eventual phase transition in Bitcoin in the section before this one, that theory is still susceptible to being disproved by the possibility of a cascade of margin calls. Let’s dive further.
First, as we mentioned in a dedicated post that we published the day before, MicroStrategy had announced back in May that it would be subject to a margin call on a $205 million Bitcoin-collateralized loan from Silvergate Bank if the price of Bitcoin were to fall below $21,000. The loan was secured by Bitcoin. The price of the cryptocurrency did drop below that crucial barrier a few hours ago, which has led to rampant speculation regarding whether or not the margin call has now been activated or not.
Even though MicroStrategy has a sufficient stockpile of unencumbered Bitcoin to meet this margin call’s requirements, the blow to the sentiment surrounding the cryptocurrency is likely to be severe.
Bitcoin bulls, on the other hand, are in for more suffering on this front than they might have anticipated. We explained yesterday that the Lido-staked Ethereum (stETH), a Decentralized Finance (DeFi) variant of Ethereum that is issued against staked Ethereum coins, can be redeemed for Ethereum on a 1:1 basis but only after the Ethereum 2 transition takes place following the merge event in late 2022 or early 2023. This was something that we explained in more detail yesterday. Importantly, stETH is frequently utilized as a form of collateral in the DeFi market when loans are being underwritten. However, as of the middle of last week, stETH began to de-peg from its allegedly convergent pricing with Ethereum. This development came about as a result of Alameda Capital selling their whole holding in this derivative product. The de-peg, which has not yet been restored, caused acute liquidity constraints for cryptocurrency lending companies like Celsius (CEL).
To review, Celsius promotes itself as a cryptocurrency lending platform that is underpinned by an open ledger technology (also known as blockchain). Users are needed to purchase the native token of the blockchain, which is denoted by the symbol CEL. Doing so enables them to join the network and gain access to the customer wallets offered by the platform.
As a result of Celsius’s significant holdings in stETH, the company was forced to contend with worsening liquidity problems as investors began exchanging substantial sums of their stETH for Ethereum after the notional 1:1 peg was broken the previous week. Celsius was forced to cease all withdrawals after realizing that the market for purchasing Ethereum using stETH was not nearly as large as it had been.
However, this is not the end of the narrative. Wrapped Bitcoin on Ethereum (wBTC), which operates in a manner analogous to that of stETH, is a derivative product that grants Bitcoin owners access to the Ethereum DeFi ecosystem. In its most basic form, it is an ERC-20 token that is wholly supported by Bitcoin and is governed by the wBTC Decentralized Autonomous Organization (DAO). Bitcoin and wBTC can be traded for one another at a price ratio of 1:1.
Importantly, Celsius has approximately 17,900 wBTC stored away in a separate vault. In the event that the price of Bitcoin falls below $16,852 per coin, it will be subject to a margin call (as per the current tabulation). It is important to keep in mind that the price level of $20,272 served as the margin call trigger yesterday. However, Celsius is currently increasing the amount of collateral in order to lower the probability of a chaotic margin call.
This brings up the most important aspect of the problem. Our readers are aware that the infamous collapse of Terra’s LUNA coin was caused by a deliberate attack by a few actors who achieved tremendous gains when the platform’s stablecoin TerraUSD disintegrated. This information is common knowledge among our audience members. At this same moment, there seems to be action taking place that is comparable versus Celsius.
To illustrate, there were approximately 1.5 million people interested in buying or selling the CEL perpetual futures contract on FTX a week ago. At the moment, it is quite close to 30 million. In addition, the majority of the holdings appear to be betting against CEL, as shown by the negative funding rate in the chart that was previously presented.
To review, a negative financing rate means that short bets are taking up the majority of the market. This indicates that a large number of experienced traders are betting against Celsius in the hopes that it would experience a chaotic margin call.
It is said that Celsius suffered a significant loss as a result of the Terra saga. The platform’s liquidity position appears to have been undermined, which has led to an increase in the number of bets placed against it. However, if the margin call does take place, it would not only significantly restrict the market for wBTC, but it will also weaken the already fragile sentiment surrounding Bitcoin, which will lead to additional losses.
Michael Saylor, CEO of MicroStrategy, has stated that the company does not anticipate receiving a margin call.
It would appear that MicroStrategy has provided an adequate amount of collateral to prevent a margin call on the $205 million Bitcoin-collaterized loan it took out. At the time of writing, the stock price had increased by around 5 percent. Shares of MicroStrategy have lost more than 70 percent of their value so far this year.