Cryptocurrency lending platform Celsius‘ (CEL) move to halt withdrawals has rocked the already bearish cryptocurrency markets, but Cathie Wood‘s Ark Investment Management sees a silver lining in this cloud for patient investors.
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Celsius’ Working: Ark analyst Frank Downing in a newsletter said that Celsius’ yield is generated through institutional lending, mining, and decentralized finance (DeFi) lending.
The analyst pointed out that nearly 41% of the DeFi deployments have been deposited in Lido’s liquid staked ether product (stETH), while 30% are in Ethereum’s ETH/USD proof-of-stake deposit contract.
While the PoS deposit is illiquid, according to Downing, stETH is redeemable at the ratio of 1:1 but can only be exchanged on the open market.
The Opportunity: Celsius is likely moving stETH from its main wallet to FTX-associated wallets, according to Downing. This, according to him, could be to fund withdrawal demands of the beleaguered platform’s customers.
Downing noted that because Celsius and some other market participants have been selling, stETH is trading at a nearly 6% discount to ETH, creating an arbitrage opportunity for those investors willing to hold stETH until post-merge Ethereum allows withdrawals.
Lido Staked ETH To USD/ETH — Courtesy CoinGecko
At press time, a single stETH fetched approx 0.955 ETH, according to data from CoinGecko.
The Lowdown: By pausing withdrawals, Celsius is hoping to buy time so that it can clear its outstanding debts and move out of risky positions but this could result in a worsening of market sentiment, which could dent cryptocurrency prices and invite more regulatory scrutiny, according to Downing.
This view was also echoed by GlobalBlock’s Marcus Sotiriou, who pointed out that Celsius’ biggest problem was their $1.5 billion position in stETH, which if it leads to client redemptions could cause the lender to run out of funds.
Sotiriou said Celsius was taking out massive loans to pay for redemptions but could run out of funds as early as 5 weeks.