Curve DAO’s governance token CRV fell 12% on June 15 after reports emerged of risky loans taken on Aave by its founder, Michael Egorov. The token recorded a trading low against ether (ETH) at 0.00035010 ETH on June 15.
According to the on-chain analytics outlet LookOnChainEgorov deposited 431 million CRV (worth about $246 million) via multiple decentralized lending protocols and borrowed $101.5 million in stablecoins across multiple platforms. Deposits by Egorov account for 50.5% of the circulating CRV supply.
DeFiLlama data shows that CRV faces a $107 million liquidation threat on Aave if its value falls below $0.37. After the liquidation is initiated, the CRV tokens will be locked into Aave smart contracts until an interested buyer settles and liquidates the collateral. A proposal was made to freeze Egorov’s loans on Aave and block further CRV loans to avoid a catastrophe.
While the volume of Egorov’s loans is putting the token under massive pressure, negative bets on CRV have skyrocketed, providing fuel for a potential rapid upward move.
Is a short CRV compression in the making?
The volume of open interest for CRV perpetual swap contracts increased from $35.5 million to $46.3 million after the revelations about Egorov’s loans.
The funding rate of the CRV token on centralized derivatives exchanges such as Binance and OKX has fallen to an all-time low of close to 81% annually, Coinglass data. A negative funding rate indicates that most of these new traders are betting on a further decline in prices.
When the sell side gets crowded, it creates an opportunity for buyers to look for stop losses. This phenomenon is known as short squeeze. It occurs when the price of an asset quickly moves in the opposite direction to short players as they rush to protect their positions or buy the asset to close out their positions.
Technically, the CRV/USD pair could find support around the 2022 low between $0.53 and $0.40. Given the possibility of a quick recovery from the short squeeze, the price could locate the 50-day moving average at $0.82.
On the downside, a breakdown of this support level could extend the sell-off towards the 2021 low near $0.32. At the time of publication, CRV was last trading at around $0.59.
The CRV/ETH token pair looks particularly vulnerable as the pair hit a new all-time low. The pair appears to be following a bearish pattern, which indicates a possible rebound from the 0.0032 ETH level.
However, the long-term trend remains negative as it sinks in a downward channel, especially with the ETH market structure looking particularly bearish below the 0.0042 ETH support level from the 2022 lows.
CRV’s long-term projection looks bleak
Curve’s revenue stats are also not favorable to buyers. The platform’s fees dropped dramatically after the FTX crash in November 2022, which reduced CRV’s yield over time. CRV Providers receive 50% of Curve’s revenue from trading fees.
While the decentralized exchange saw a temporary spike in activity in March 2023, fees have remained near two-year lows in recent months.
Another way CRV token holders earn money is through bribes earned from voting to direct rewards towards specific groups. Similar to trading fees, earnings through kickbacks remained near a one-year low.
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Curve’s liquidity has dropped significantly over recent months, making CRV vulnerable to violent price swings. Kaiko cryptographic research company is found That CRV’s liquidity has declined significantly over the year, to the point where an $800,000 order can move prices by 2%.
There is a lot of uncertainty around CRV as it faces liquidation risk from a $264 million CRV-secured DeFi loan on Aave. However, the possibility of a quick rally in the short term is brewing as futures traders crowd the short side of the trade. The decrease in the liquidity of the CRV market increases the risks for traders as the token is exposed to high volatility.
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