Shark traders can earn a 10-15% liquidation fee by targeting overly-leveraged crypto investors.
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Having gained 13% since this time yesterday to trade at US$1,084, the Ethereum price still remains down 22% over the past seven days. And itâs down a painful 78% from its 16 November record high.
So, whatâs going on?
Why is the Ethereum price falling sharply?
Ethereum has come under pressure, along with the vast majority of cryptos, as investors adjust their weightings of risk assets amid fast-rising interest rates.
But itâs not just rising rates battering cryptos and the Ethereum price.
The spectacular failure of the TerraUSD stablecoin and its supporting token Luna last month shook confidence in the entire industry. And last week news emerged that crypto lender Celsius, which offered exceptionally high yields, might not be able to meet its obligations. Celsius has halted withdrawals.
Crypto sharks circle the weakest, leveraged hands
If youâve invested in Ethereum, you likely have little to fear from crypto sharks, though their actions may in the medium term depress the broader market and the Ethereum price.
Shark traders, as theyâre known, use their own computer networks to search blockchains for traders who are holding highly-leveraged and potentially weak positions.
According to Omakase, an anonymous contributor to the Sushi decentralised exchange (as quoted by Bloomberg):
In a downtrend environment, where yields are harder to access, what we are going to see is some actors utilise some more aggressive strategies, and that may not be necessarily good for the community… The environment has become more player versus player…
Most protocols offer a 10-15% liquidation fee. Triggering enough liquidations would cause a liquidation cascade where a motivated actor could simply hold a short position in order to profit for the subsequent secondary decrease.
If you bought Ethereum outright, the sharks wonât be circling your holdings.
Instead, theyâre looking for leveraged traders in the decentralised finance (DeFi) space. Thatâs where people can borrow and lend cryptos from other traders without going through traditional banks.
The collateral used is other cryptos, like Ethereum. That means if the Ethereum price falls, so too does the value of their collateral. Should their collateral value fall enough, this triggers a liquidation, for which the successful shark trader receives a fee.
Blockchain analytics firm Nansen said that similar shark trading behaviour may have âcontributed to the collapse of the TerraUSD stablecoinâ.
However, Nathan Worsley, who searches for crypto traders on the verge of liquidation to earn the commission for liquidating them, defends the practice.
According to Worsley (courtesy of Bloomberg):
I would push back on classifying this as an attack. The reason is because without liquidations, you canât have a lending market. So even though no one enjoys being liquidated, itâs essential that people do get liquidated in order to make the market and protect the protocol from insolvency.
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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Ethereum. The Motley Fool Australia has positions in and has recommended Ethereum. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.