Many have speculated that the fallout of the Terra blockchain, its native token and its algorithmic stablecoin are the major reason for the massive price declines and participation seen in the cryptocurrency space during the second quarter. However, we finally have proof of this as research firm Arcane Research, revealed that 236,237 BTC were sold by known institutional investors from the 10th of May 2022, just after the troubles of the Terra Blockchain started.
The 236,237 BTC number is derived from massive institutional blow-ups and other large known selling seen during the market stress in the last two months. The number does not account for other natural capitulation and hedging activity that usually occurs during crypto bear markets. Using today’s price, this is worth approximately $5.34 billion in dollar terms and it signals the deleveraging of institutional investors from the cryptocurrency space as prices, valuations and participation continue to plummet to lows not seen since the COVID-19 pandemic.
This data shows the extent to which institutional investors lost confidence in the crypto market. This ultimately led to Bitcoin, the top crypto asset to fall below the $20,000 trading zone, a price point not traded since December 2020. As the market sold off, the market capitalization of the entire space fell below $1 trillion, indicating that the market lost its trillion-dollar status as the entire market ranked below legacy organizations like Apple, Saudi Aramco, Microsoft, Alphabet and Amazon.
The LFG sell-off in a bid to defend the Peg
- The Luna Foundation Guard (LFG) led the selloff seen by institutional investors in the market as they sold a little over 80,000 BTC. Recall that the LFG accumulated these Bitcoin as it wanted its stablecoin to be backed by Bitcoin. It pledged to buy $10 billion worth of Bitcoin of which $3 billion will be purchased in the short term, which it accomplished.
- In a bid to defend its lost peg, the LFG sold all of its 80,393 BTC. However, the algorithmic stablecoin, which is now dubbed USTC, in which C, represents ‘Classic’ lost the battle of maintaining its 1:1 peg to the U.S dollar, as the project has been abandoned.
Tesla and their need for liquidity
- Coming in second place is Tesla, the electric vehicle manufacturer, run by the world’s richest man, Elon Musk. Tesla announced during its second-quarter earnings call, through Elon, that it sold 75% of its Bitcoin holdings, “to boost its cash position given the uncertainty around Covid lockdowns in China.”
- Tesla, according to the report by Arcane Research, sold 29,060 BTC at an average price of $32,209, putting the total transaction in monetary terms at approximately $936 million. As at the second quarter of 2022, Tesla now holds 9,686 BTC, which as at today’s price, is worth $218 million.
- The report stated, “This estimation is based on previous VWAP estimates from their initial BTC purchase (avg price $34,841) and the sale of 10% of their BTC to “test liquidity” in Q1, 2021.” It further reads, “Assuming the 10% BTC sold in Q1 was sold at $50,000, Tesla’s new break-even price of BTC was approximately $33,325, meaning that Tesla sold at a small loss.”
- Other companies that sold include Purpose BTC ETF which sold 24,510 BTC, 3AC-related GBTC Holdings which sold 22,054 BTC, Celsius which sold 21,962 WBTC, WBTC Redemptions which sold 21,009 and so on.
Mining isn’t as profitable as it used to be
- The report explained that, due to the falling prices of cryptocurrency assets, it forced Bitcoin miners, who are people with the computing power that can solve the computational problem required to validate a block of Bitcoin transactions, to begin selling their position. The report estimated that public BTC miners sold 4,456 BTC in May and it took a massive leap in June as they sold 14,600 BTC in June.
- According to the chart, the amount sold by the public miners, reveals that they sold more than 100% of what they produced in May and nearly 400% in June, a massive increase from the usual 25-40%, which has been the threshold in the first four months of the year. This massive leap shows that the deteriorating profitability of mining, caused by the price drops seen, has forced the public miners to start liquidating their bitcoin holdings.
- Bitcoin miners are the only natural net sellers of bitcoin. They receive 900 BTC daily and seek to “hodl” as much as possible. Ironically, their “hodl” ambitions make them sell their precious bitcoins during bear markets since that is when the market forces them to sell.
- In the first four months of 2022, public mining companies sold 30% of their bitcoin production on average. The plummeting profitability of mining caused by the fall in the price of Bitcoin forced these miners to increase their selling rate to almost 400% of their output in June.
- Although public miners only make up approximately 20% of Bitcoin’s hashrate, studying their behaviour can hint at what the private miners are doing. Public miners are likely to sell a larger portion of their mined bitcoin now since they could keep a larger share of their production during the bull market by tapping into financial markets, which was more difficult for private miners.
Conclusion
The report explained that entering June which saw the release of the U.S. CPI data, caught many off-guard and this sent prices south, bankrupting several whales already under pressure post-Luna’s collapse. On June 12th specifically, Celsius halted withdrawals and rumours regarding 3AC’s meltdown.
Leaked court documents have revealed that 3AC owes lenders 18,193 BTC and a GBTC equivalent of 22,054 BTC. Following the collapse, 3AC creditors hedged and de-risked exposure in attempts to fix the balance sheet holes while liquidating 3AC, causing a proper fire sale.
The last 2 months have been an obvious capitulation. Most of the selling of the 236,237 BTC mentioned above has been forced selling, and it’s likely been worse than what this research covers with underwater retail and institutions capitulating. The report concluded stating, “The Chapter 11s, 3AC court documents, normalization of the stETH/ETH price, and the relief rally seen in the last few weeks tell me that contagion is getting resolved; less uncertain times ahead.”
