This is how the markets loosen up and with blockchains, savvy users can all watch it live as it goes down.
Over the past few days, crypto watchers have been captivated by two large wallets that appear to be linked, which hold $181 million in ether (ETH). They also have guarantees in the form of loans that are at the limit of solvency.
- Most of the debt is in the Aave money market (152,098.98 ETH worth $166 million at the time of writing, but the rest is in Compound (14,316.90 ETH worth $15, $6 million).
Why is it important: If the price of Ether drops further, these debts will be liquidated, releasing a flood of Ether into the market, which will further lower the price of Ether.
Driving the news: Crypto’s winter is turning increasingly frosty, with Bitcoin falling below the psychologically charged $20,000 level early on Saturday, and Ether briefly dipping below $1,000 as investors bail out digital coins. Both have lost more than 30% of their value in the past week alone.
With a whale in a dangerous place position like this, traders who believe ether will return to previous highs long-term now have an incentive to sell. If it drops enough, large loans like these will be liquidated and drive the price down even further.
- This could be their signal to buy again, increasing their total ETH holdings for free, but only after market aspirations have taken a serious hit.
- Meanwhile, liquidations are currently increasing at decentralized financial lenders, with $250.6 million in liquidations across Aave, Compound and MakerDAO in the past 7 days, according to Dune Analytics.
Details: The wallets in question are 0x493F and 0x7160. For the first wallet, scroll down to Aave v2 and see the largest loan.
- These wallets appear to be linked, as they can be seen making larger ether transfers from the first to the second here and here, before completing the compound loan collateral.
We could naturally ask ourselves: Why not just close the loans? They can’t, because the wallets are long leveraged. The owner deposited ETH, borrowed stablecoins, bought more ETH and deposited that to borrow more stablecoins to start over. Etc.
- ZoomerAnon from the team at DeFi analytics firm Uniwhales, explained that you can see the wallet repeatedly taking stablecoins like USDT and USDC, sending it to Binance, and withdrawing thousands of ethers.
- In early January, several transactions like this could be observed using Etherscan.
Be smart: Traders leverage when they believe the price of an asset will rise. If so, they can withdraw enough to pay off their loan, withdraw their collateral, and exit the trade with more of the underlying asset.
Yes, but: This only works if the price of the asset rises.
- These wallets were betting that Ether would rise further in January, when it was trading above $3,300. Today, he barely has $1,000.
- “He borrowed 96,040 ETH before borrowing money,” ZoomerAnon told Axios via Telegram.
DeFi lenders are automated. They monitor collateral prices to ensure that each loan is properly secured. As soon as the collateral becomes insufficient, these protocols automatically sell the underlying collateral on the open market.
- Every time a borrower is liquidated, he gets a painful haircut. When they have leveraged their position, this haircut is multiplied.
By the numbers: A researcher calculated that the largest position, on Aave, will be liquidated at the price of 982 ETH. Uniwhales puts its liquidation price at $870.
- ETH would need to drop $212, or nearly 20%, to trigger this price drop. That said, ETH has lost $212 in value since June 13 and nearly $900 since June 1.
The plot: These positions are assumed to be owned by a major Chinese contractor, but he could operate on his own, without the sophisticated risk modeling of trading companies and the ability to monitor positions around the clock.
- That said, if the owner has liquid capital, they can always buy stablecoins and close some of the dead positions, thus avoiding liquidation.
Thought bubble: It may look like another giant disaster coming to the crypto world, but there’s another way to look at it: as a transparent market, working as intended.