The cryptocurrency sector was fearful on Monday as investors worried that a contagion from problems linked to major crypto players may lead to a major shakeout if not contained.
Bitcoin, the biggest cryptocurrency, which has lost 57% this year and 37% so far in June, dipped below the psychological $20,000 mark over the weekend for the first time since December 2020. That level was the peak of the 2017 cycle.
The general decline in value of cryptocurrencies follows difficulties at several major industry players, while a further slump in prices could have a knock-on effect as other crypto investors are forced to sell their holdings to meet margin calls and cover losses.
Crypto hedge fund Three Arrows Capital is exploring its options, including the sale of assets and a bailout by another firm, its founders told the Wall Street Journal in a story published on Friday, the same day that Asia-focused crypto lender Babel Finance said it would suspend withdrawals.
US-based lender Celsius Network said last week it would suspend withdrawals, and many of the industry’s recent problems can be traced back to the spectacular collapse of so-called stablecoin TerraUSD in May.
Bitcoin Hovers Under $20,000
Bitcoin was trading either side of $20,000 on Monday, while no-2 token ether was at $1,075, having dipped below its own symbolic level of $1,000 over the weekend.
“If the market goes higher, everyone breathes a sigh of relief, things will get refinanced, people will raise equity, and all of the risk will dissipate. But if we move much lower from here, I think it could be a total shitstorm,” said Adam Farthing, chief risk office for Japan at crypto liquidity provider B2C2.
“There is a lot of credit being withdrawn from the system and if lenders have to absorb losses from Celsius and Three Arrows, they will reduce the size of their future loan books, which means that the entire amount of credit available in the crypto ecosystem is much reduced.
“It feels very like 2008 to me in terms of how there could be a domino effect of bankruptcies and liquidations,” Farthing said.
To be sure, the developments in crypto have coincided with an equities slide, as US stocks suffered their biggest weekly percentage decline in two years on fears of rising interest rates and the growing likelihood of recession.
Smaller Cryptocurrencies Mauled
The bitcoin price has tended to move in a roughly similar manner to other risk assets such as tech stocks.
Smaller cryptocurrencies have been even harder hit than major tokens as investors sought the comparative safety of bitcoin and stablecoins whose values are pegged to those of traditional assets, most commonly the US dollar.
The overall crypto market capitalisation is roughly $870 billion, according to price site Coinmarketcap, down from a peak of $2.9 trillion in November 2021.
However, even stablecoins’ market capitalisations have dropped in recent months, suggesting investors are pulling money from the sector as a whole.
Tether, the world’s largest stablecoin has seen its market cap fall to around $68 billion on Monday, from over $83, billion in early May.
- Reuters with additional editing by Sean O’Meara