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HEALTH, WEALTH, AND HAPPINESS

June 15, 2022

Hi everyone,

Why can't we just stick together? I am not switching to a personal advice column; I am talking about a market phenomenon behind some of the biggest news this week.

I am talking about de-coupling. In this column, we explore what the heck is going on and why this is connected to recent crypto market problems.

It's no secret that crypto-exchange Celsius is having some issues currently. After weeks of insolvency rumors swirled around on Twitter, Celsius sent out an email announcing they were "temporarily pausing" swaps and withdrawals. While this might make sense to stop the bleeding in the short term, this essentially confirmed their insolvency issues. The exchange basically closed the bank during a bank run.

As of May 17, Celsius claimed they hold $11.7 billion AUM per Forbes, so no doubt there are a few folks out there having sleepless nights. There is some hope, as Nexo actually tendered an offer to purchase Celsius's assets and honor all their customer's deposits. 

While it's not their only issue, part of Celsius' current problems is the de-coupling of staked Ether that is locked in preparation for ETH 2.0 and Ethereum itself.

And they are not the only ones. Three Arrows Capital, a crypto hedge found founded by Kyle Davies and Zhu Su sold over $40 million in staked ETH for Ether yesterday.

Staked ETH

As covered by CoinDesk earlier today, Celsius has about $500 million in staked ETH on Lido Protocol. Priced in terms of two weeks ago, that is about $1 billion. One little problem, staked ETH is currently trading 7% below Ether.

So what's this all about?

stETH is an Ethereum-based token one gets for staking ETH on Ethereum’s proof-of-stake Beacon Chain. This provides yield, but an individual needs 32 ETH to set up their own node.

Lido allows users to stake their ETH and receive stETH. These users can then use stETH with other DeFi services while their staked ETH generates rewards. Lido claims that stETH is backed one for one with ETH staking deposits, and I've seen no data to the contrary.

Lido offers that when Ethereum’s merge is complete, it will enable withdrawals and that those withdrawals will be provided at a 1:1 rate regardless of market prices.

However, the merge hasn't happened yet. So while one asset is backed by another 1:1, since it cannot currently be redeemed 1:1, it is possible that selling pressure in a secondary market "de-pegs" or "de-couples" ETH and stETH. Here's a thread from Lido.

Looking at the math, 7% of $500 million is $35 million. Not great news for a company facing apparent insolvency and a liquidity crisis as users seek to withdraw their funds.  

Still bullish?

It seems my short-term optimism was incorrect. The carnage continues as bitcoin wavers in the $20,000 - $21,000 zone and Ether is around $1,000. 

Inflation was hotter than expected, and the Federal Reserve raised rates by 0.75% today.

That being said, I am still long-term bullish about bitcoin and Ethereum. As for the rest of the 19,000 crypto projects out there, it's a casino.

If you have financial issues right now, it's not the time to invest. I continue to encourage all my friends and followers to accumulate bitcoin. If you don't have the funds to do so, I recommend faucets like Lolli and Choice, and cashback cards like Gemini and Fold. 

In the meantime, remember there is more to life than markets. Go spend some time with your friends, family and pets!

Sincerely, 

Alexandre Lores

Opportunity Analyst

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