Crypto prices could be volatile over the weekend and taking off some risk or buying some protection might not hurt
As our clients know, we are long term bullish on crypto. As recent as this Wednesday, we held our Mid-Year 2021 Crypto Outlook call and discussed macro factors that lean towards medium term bullishness as well.
But, over the coming weekend, we might be inclined to take some risk off the table or buy some protection.
We think it’s possible that the selling we’ve seen over the last day or so is related to concerns over leverage and counterparty risk of some lenders.
Below is a Tweet made yesterday by Barry Silbert, the founder and CEO of Digital Currency Group:
Source: https://twitter.com/barrysilbert/status/1408191462324441092?s=21
We’ve since seen a large short position start building again on the crypto exchange Bitfinex. The last time a short of this level started building, we had negative news out of China that took us lower.
Source: Tradingview
Reports have surfaced in crypto media outlets about the crypto lender Celsius losing its custodian provider due to “endlessly re-hypothecating asset”.
Source: https://www.coindesk.com/custodian-prime-trust-cuts-ties-with-crypto-lender-celsius
According to a March 2021 press release by the company, the lender at the time had ~$10B in digital assets.
Source: https://www.prnewswire.com/news-releases/celsius-confirms-over-10b-in-digital-assets-301244864.html
We are not here to spread unsubstantiated rumors. We want to point out that the CEO of Celsius has denied the reports published by CoinDesk.
Source: https://www.thestreet.com/crypto/news/celsius-ceo-alex-mashinsky-denies-rumors-of-aggressive-rehypothecation
We don’t know if the reports are true or not, but we do think it’s possible that some investors get spooked over the uncertainty.
We’re concerned that investors with deposits on crypto lending platforms may start pulling their assets.
We want to remind clients that crypto lenders are not regulated and insured in the same way as banks are with the FDIC. Depositors have counterparty risk to the lenders and if they go insolvent, they could lose their funds.
If these, again unverified, rumors start gaining further traction and sparking depositors pulling funds, those lenders will have to start selling assets to meet redemptions.
At a minimum, that selling could push prices down.
At very worst, we get a run on the banks that causes asset prices fall too far, otherwise good lenders could go underwater. We are not expecting this.
But we don’t think it’s a bad idea to take some risk off the table over the weekend.
We wouldn’t go net short here or anything due to the risk of getting liquidated if prices move to the upside. But we might be inclined to reduce some position sizes or buy some put protection just in case things get choppy over the weekend.
