Crypto analyst Nicholas Merten says there is now a big risk of a major liquidation event that could cause Ethereum (ETH) to break down to significantly lower levels.
The host of DataDash tells his 511,000 YouTube subscribers that over-leveraged traders who deposited their ETH as collateral using decentralized finance (DeFi) protocols could be forced to close their positions if Ethereum prices start to dip.
Merten is warning that a sell-off could cascade and trigger a huge move to the downside for ETH.
“Ethereum’s price declining is going to be detrimental for these loans… The only real use case here is that people are essentially putting up their ETH into these DeFi protocols, they’re relinquishing it for the short term and they’re getting a certain amount of stablecoins, a lower amount of stablecoins, in order to go out there and maybe buy more Ethereum and speculate, then eventually pay down the loan and get their collateral back. That’s the general use case here.
What happens is if it goes the other way, if Ethereum, the collateral, goes down low enough, and the debt-to-loan ratio starts to get too exorbitant here, essentially you don’t have enough collateral to back up the debt you took out, then there’s going to be a liquidation event, unless you can refinance it. Unless you can put in more [stablecoin] and pay down that loan, which many of these players do not have.”
According to Merten, it will take more liquidity flowing into ETH to break the key $2,000 resistance level and confirm a bullish pattern of an ascending triangle. Otherwise, he predicts ETH will soon start retesting the $1,600 level in the low range, setting off a chain of liquidations and a cascade to even lower levels.
“Either we’ve got to get some buyers coming in here who feel that this is the last relative low before breakout on this technical pattern or we’re going to start rolling through, we will have failed a more than yearlong bullish pattern in price. And we will start a cascade of liquidations and sell-side pressure. And no EIP 1559. No staking reduction of inflation is going to save Ethereum from that.”
Ethereum is trading for $1,857 at time of writing, down 1% during the last 24 hours.