Forex in this article
• Celsius’ interest rate halt accelerated cryptocurrency sales
• ARK Invest sees the possibility of arbitrage
• Spread between Lido Stakes Ethereum (stETH) and Ethereum (ETH) could promise gains
Arbitrage profits were the order of the day in past stock market history. But the global capital market has become so liquid and information-rich in recent years that many economists consider risk-free profit almost impossible for the average retail investor. However, Cathie Woods investment house ARK sees an interesting exception to this rule – namely in the crypto market, in the haze of the latest Celsius shock.
The drama surrounding the cryptocurrency lending platform Celsius
On June 13, Celsius announced that it would at least temporarily stop paying interest. Since then, customers have not been able to withdraw their cryptocurrencies from the platform. By doing so, Celsius wants to gain much-needed time to pay off outstanding debts and close positions that are too risky. GlobalBlocks’ Marcus Sotiriou reckons Celsius will borrow heavily to pay for the redemptions, but could run out of funds in as little as five weeks. Even the head of the US Securities and Exchange Commission (SEC), Gary Gensler, explicitly warns against promises of excessive returns in the crypto market, which apparently alludes to the crisis-stricken crypto-lending platform Celsius.
Celsius also cited the difficult crypto market situation as the official reason for the difficult move. Thousands of investors who had hoped to earn up to 17 percent (6.2 percent on average for Bitcoin) by storing their cryptocurrencies in the long run, fear for their crypto deposits. But the news went much further: Celsius’ temporary capitulation, like Coinbase’s announcement that it would lay off 18 percent of its workforce, was interpreted by crypto investors as a sign of a crypto winter that had already arrived. The result: Bitcoin, Ether and Co. was sold off galore. Despite the weak overall crypto market, you can currently make real profits in this segment – at least that is the opinion of analyst Frank Downing, who works at Cathie Wood’s firm ARK Investment.
Celsius has undoubtedly invested 41 percent of DeFi shares in stETH
Downing sees an interesting opportunity for arbitrage profits thanks to the Celsius debacle, that is, a profitable trade made without risk thanks to the exploitation of interest rate, interest rate or price differences at the same time between two similar products. To understand this correctly, one must understand Celsius’ business model.
Celsius promises both institutional and private investors an interest payment when they hold their respective cryptocurrencies. Celsius can pay this interest because the bank-like company extracts cryptocurrencies and lends cryptocurrencies itself. As reported by “Benzinga”, according to Downings, nearly 41 percent of DeFi’s efforts are deposited in Lido’s liquid staked ether (stETH) product, while 30 percent are deposited in Ethereum’s (ETH) proof-of-stake (PoS). In this context, GlobalBlocks ‘Marcus Sotiriou points out that Celsius’ biggest problem is its $ 1.5 billion position in stETH, which if it leads to customer redemptions could result in the lender being robbed of the funds, goes out. But what exactly is a stETH?
As “Block Builders” explains, stETH is an artificially generated token that reflects set Ethereum. When investing in Ethereum 2.0, billions are invested, which in fact only become available again when ETH implements an update in the mainnet to version 2.0. Until then, investors with stETH have a very useful currency whose price should theoretically be close to ETH’s. However, many DeFi companies like Celsius are in deep crisis, forcing them to sell stETH massively. As a result, the lower demand for stETH results in a lower stETH price compared to ETH.
ARK Investment sees the possibility of arbitrage with stETH / ETH
And now comes the crux: While the PoS repository is illiquid, stETH can be exchanged at parity 1: 1 to ETH on the open market – but only after Fusion 2.0, which should take place in six to twelve months. Downing notes in a report that stETH is trading at a discount of almost 6 percent to ETH due to sales from Celsius and some other market participants. This, he says, creates an arbitrage opportunity for those investors willing to hold stETH until Ethereum allows for post-merger withdrawals. In fact, the price of a stETH according to CoinMarketCap is only $ 1,087.67 (as of June 21, 2022), while an ETH costs $ 1,147.70. According to Lido, the company behind stETH, the parity between stETH and ETH is still secure, as each issued stETH is covered 1: 1 by ETH in the bet pool.
Whether an arbitrage merit between stETH and ETH is really risk-free does not seem to be a given given the huge crypto upheavals of the last few months. Investors who believed in Terra’s statements suffered a total loss of their capital invested in Terra UST stablecoin and the associated Terra LUNA coins. Like Celsius, Lido will still have to prove that their business model is more sustainable than Terras’.
Image sources: Pasuwan / Shutterstock.com, Hi my name is Jacco / shutterstock.com