The worst US inflation in four decades is triggering another crypto crash, slashing the sector’s market capitalisation to below $1 trillion for the first time since January 2021.
More than $2 trillion in value has been erased since November 10, when Trading View figures show total market value stood at over $3 trillion. Bitcoin steadied Tuesday after a giddying plunges of as much as 17% Monday and is down 25.6% over the past five days. It stood at $22,362.8 at 6.45am GMT.
The latest rout follows hard on the heels of the spectacular collapse of stablecoin TerraUSD in May – a token that was supposed to be safe as it was supported by another token pegged to the US dollar.
“Some say winter is coming,” says Mike Boroughs, managing partner of wealth management firm Fortis Capital Management. “But I say winter is here, and it’s about to get colder.”
Boroughs predicts continued weakness as a variety of forces converge to drive further selling that will see more investors exit the market just as new buyers become more risk-averse.
Even worse, there could be a downward spiral of forced sales as lenders call in loans secured with crypto assets that fall below the value of the loan, further hitting values.
“Many of these lenders have taken crypto as collateral for loans, that’s why you could see some contagion,” says Boroughs. “Suddenly, the collateral is worth less, so they call in the loan. In some cases, when the value of the crypto collateral falls below the value of the loan, the lender may just sell the crypto, which could create a cascading effect of falling values and more forced sales.”
Already, one of the world’s largest crypto lenders had to suspend withdrawals, citing “extreme market conditions.” Celsius Network said on Monday it would suspend operations as it halted client withdrawals.
Celsius borrowed crypto assets and lent or staked them elsewhere, gaining yield on the spread between the two.
“Our ultimate objective is stabilising liquidity and restoring withdrawals,” Celsius said in a statement on Medium. “We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations.”
Celsius Helped Spark the Crypto Crash
The move to stop withdrawals contributed to a crypto rout, so while depositors wait for Celsius to “restore withdrawals” they are seeing the value of their deposits shrink: Bitcoin fell about 11% to $23,576 on Monday alone. Ether, the second largest cryptocurrency, plunged more than 8% to $1,311, its lowest level in 15 months.
Celsius Network raised some $750 million in funding in late 2021 and became a major player in crypto lending, operating in more than 100 countries. Celsius offered interest rates on crypto deposits that ranged from 3% to as high as 9%. US dollar money market accounts, by contrast, offer an average of 0.9%.
Celsius used the deposits to lend to other clients or to stake in other crypto currencies to earn staking rewards.
(Some crypto currencies, such as Bitcoin, are created when users solve complex math problems to settle trades, called “proof of work”; others are created through staking, in which every stakeholder in the network verifies ownership to facilitate trades, called “proof of stake.” With a proof of stake token, simply owning it earns rewards in the form of more crypto.)
In this case, the falling value of one crypto led to downward pressure on the others – and that dynamic could get worse in coming weeks, potentially turning into a self-reinforcing downward spiral.