Ethereum Faces Liquidation Threat Amid Market Decline
An enormous ether (ETH) position valued at over $126 million came perilously close to being liquidated, as the cryptocurrency market experienced a significant downturn on Tuesday. Ethereum has retraced all of the gains made during Sunday’s rally, plummeting by 22% in just 48 hours and currently trading at $2,080.
Fortunately, a rebound at the $2,000 mark helped safeguard Ethereum’s decentralized finance (DeFi) ecosystem from a wave of liquidations on the collateralized debt platform MakerDAO. The initial liquidation level was set at $1,929, with two more positions poised for liquidation at $1,844 and $1,796. Collectively, these three positions amount to a staggering $349 million.
Price movements often gravitate towards liquidation levels, as trading firms actively target these supply zones. When a liquidation occurs on MakerDAO, the ETH collateral is either sold or auctioned off, with a portion of the generated fees benefiting the protocol. In many cases, the liquidated ETH is acquired at a discount and subsequently sold on the broader market for profit, potentially leading to further price declines.
ETH Liquidation Levels (Data from DefiLlama) indicate that liquidations in the DeFi space tend to have a more significant impact than those in futures markets, as they involve spot assets rather than derivatives, which typically exhibit greater liquidity due to high leverage. In this scenario, it becomes strategically advantageous for trading firms to focus on these liquidation levels, as triggering a liquidation can induce short-term volatility and may even result in a cascade effect—where one liquidation prompts a series of additional liquidations.
Once the cascade concludes and buyers have absorbed the newly available supply, prices generally recover, which might entice the liquidated traders to re-enter the market and buy back their long positions.
According to data from DefiLlama, there is approximately $1.3 billion worth of ether that is liquidatable, with around $427 million of that amount sitting within 20% of the current price. This situation has led to ETH underperforming against bitcoin (BTC) during the recent bullish market, with its ratio slumping to 0.0235 compared to previous cycle highs of 0.156 and 0.088. This decline is attributed to institutional inflows into various spot BTC ETFs and the emergence of rival blockchains like Solana and Base, which have begun to capture market share.
