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Bitcoin seemed to be on the verge of a Lehman moment on Saturday as the world’s largest cryptocurrency tumbled below its previous bull cycle peak of $19,511, something that had never happened before. Add to this the cascading liquidations emanating from various corners of the crypto sphere, and the sentiment around Bitcoin could not have been gloomier. Yet, at the time of writing, Bitcoin seems to have recovered handsomely, clocking in gains of nearly 10 percent relative to the low of $17,663.8 recorded by BTC a few hours back.

Some analysts have continued to speculate that the latest downturn in Bitcoin was spurred by the desire of a few whale-sized investors to unleash another high-profile margin call, this time targeting the wBTC held by Celsius in a vault. Before discussing this aspect, let’s elaborate on the threat of cascading margin calls and liquidations that remains very much alive in the crypto sphere.

Bitcoin’s Lehman Moment: Cascading Liquidations Across the Crypto Sphere

Readers would remember that the current downturn in Bitcoin and the rest of the crypto sphere accelerated in the aftermath of the spectacular downfall of Terra’s UST stablecoin and its counterpart LUNA. That downfall exposed not only the crypto sector’s underbelly and the associated vulnerabilities of algorithmic stablecoins but also laid the foundation for the current upheaval.

The crypto lending firm Celsius is widely believed to have taken a major hit when Terra’s UST and LUNA coins collapsed. With its liquidity already in a precarious position, Celsius was forced to halt all withdrawals from its platform a few days back when Lido-staked Ethereum (stETH), a Decentralized Finance (DeFi) variant of Ethereum that is issued against staked Ethereum coins, and which 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, de-pegged from its theoretical parity with Ethereum. Since stETH is widely used as collateral in the DeFi space to underwrite loans, Celsius faced a liquidity crisis as investors started redeeming large quantities of stETH for Ethereum when the 1:1 theoretical peg was broken. Bear in mind that the market to buy Ethereum using stETH is not nearly as large. Consequently, Celsius was compelled to halt all withdrawals as it could not meet the demand for Ethereum.

Similarly, the Hong Kong-based crypto lending firm, Babel Finance, has also now frozen withdrawals amid worsening liquidity in the entire DeFi space.

Of course, high-profile hedge funds have also been scathed by this ongoing cascade failure. To wit, Three Arrows Capital (3AC), a hedge fund that has been particularly active in the crypto sphere lately, had invested around $200 million in Terra earlier this year. However, with the downfall of Terra’s UST and LUNA coins, the hedge fund lost almost all of its investment, precipitating a liquidity crisis at the firm, which has since then aggravated in light of the broad-based liquidation wave that is currently rippling through the entire crypto sector. As per the reporting by Wall Street Journal, 3AC is now pondering over a fire sale of its assets as well as a bailout by another as-yet-unnamed financial player. If a fire sale does occur, it will likely further dampen the sentiment around Bitcoin and other crypto assets.

Moreover, MakerDAO, the decentralized entity behind the DAI stablecoin, has now halted the process of minting and depositing the stablecoin on Aave’s crypto lending platform.

As per a tabulation by Dune Analytics, over $250 million of liquidations have taken place across Aave, Compound, and MakerDAO over the last 7 days.

As if things weren’t jittery enough, Tether has also confirmed a DDoS attack against tether.io, the native website of the entity behind the largest stablecoin in the market currently.

Are Crypto Whales Trying to Engineer the Downfall of Celsius?

This brings us to the crux of the matter. We had noted a few days back that Celsius was not only on tenterhooks for stETH but also Wrapped Bitcoin on Ethereum (wBTC), a derivative product that allows Bitcoin holders access to the Ethereum DeFi ecosystem. Basically, it is an ERC-20 token that is fully backed by Bitcoin and managed by the wBTC Decentralized Autonomous Organization (DAO). wBTC can be exchanged with Bitcoin at a 1:1 price ratio.

To wit, Celsius holds around 17,900 wBTC in a dedicated vault. If the price of Bitcoin plummets to a pre-defined threshold, the vault’s contents would be liquidated in a margin call. This scenario is quite profitable for the individuals who flag such positions as they then stand to receive between 10 and 15 percent of the cut from the collateral sale.

A few days back, Celsius’ wBTC vault would have been liquidated if the price of Bitcoin tumbled beneath $20,272. However, the firm has been frantically depositing additional collateral, thereby lowering the price at which the margin call is triggered.

Source: https://oasis.app/25977#Overview

As things stand, the margin call trigger is around the $13,000 Bitcoin price level.

The liquidation of Celsius has been updated to 16.8k for Bitcoin.

Whales have been selling hard to get there.

Can see what the whales are doing at https://t.co/0lA4JMczvQ.

— unusual_whales (@unusual_whales) June 18, 2022

Some analysts continue to speculate that the recent leg lower in Bitcoin was at least in part motivated by the desire of a few actors to trigger a margin call on Celsius’ wBTC holdings. However, as the firm has continued to find additional collateral, the immediate threat has been staved off for now. This has likely played an important part in stabilizing the overall sentiment around Bitcoin.

Nonetheless, readers should remember that Bitcoin is certainly not out of the woods just yet. After all, it has yet to complete the customary 80 percent drawdown from the recent all-time high that is typical of Bitcoin’s bear market.