Digital Coin Downcast: Vicious Cycle?

The cryptocurrency markets have been a downtrend in recent weeks as investors sold off riskier assets in financial markets in response to high-interest rates and inflation. On Monday (6/13), digital coins fell even further, leaving a market cap of US$1 trillion down from its peak of US$3 trillion in November 2021. Bitcoin, the most valued cryptocurrency, dropped 15% to an 18-month low, trading below US$21,000. Meanwhile, Ethereum, the second-biggest cryptocurrency, plunged 17% dropping below US$1,200. Investors were still startled by the collapse of the Luna token and UST stablecoin back in May, which sent shockwaves throughout the cryptocurrency market, leaving investors with extreme fear. Investors quickly pulled out their holdings in other stablecoins such as USDT, fearing another crash. In the last two days, US$1.6 billion was redeemed off of USDT as investors flee the market and up to US$10 billion in the previous few weeks. In other news, competing crypto lenders Nexo and BlockFi attempted to play down worries about the sustainability of their businesses following Celsius's move to suspend withdrawals. Nexo claimed to have a strong liquidity and equity position and even offered to buy portions of Celsius' loan portfolio, which they rejected. Meanwhile, BlockFi stated that most of its services continue to work correctly and have zero correspondence to the fall of staked ether (stETH), an Ethereum pegged token. The company was unfortunately affected by the downturn; BlockFi cut off approximately 20% of its workers earlier this month in reaction to the dramatic shift in macroeconomic conditions.

As a response to the downturn of the market, Celsius, one of the most popular cryptocurrency lending platforms that had promised an 18.63% yield for investors, has frozen all the transactions and withdrawals on Monday (6/13), mainly caused by what now appears to be a cash-flow insolvency situation within the company due to extreme market conditions. Furthermore, a legal attorney was recruited into the company to consider the restructuring alternatives and solutions to the surging financial problems. The Celsius’ cel token has declined to about US$0.5 from its all-time high of over US$7 in the previous year. Moreover, the token has dropped more than 50% in the past week. On the other hand, the world’s largest crypto exchange, Binance, had temporarily halted all Bitcoin withdrawals for about 3 hours and reported that it was due to some technical issues that have allegedly caused a backlog on the Bitcoin network, though not much believed this. Despite being unrelated, the timing of the incident has raised concerns within the Bitcoin community that Binance might be suffering from a liquidity issue similar to Celsius, which further exacerbated the panic in the crypto market. Consequently, investors will continue to sell riskier investments, such as cryptocurrencies and growth stocks, whereas the Fed struggles to control the greatest inflation in decades. Bloomberg reported that most crypto investors are relative newcomers, making them the biggest and toughest group in Monday’s brutal bout of selling. Retail investors are now being crushed after riding the crypto hype train over the past year.

The stock and cryptocurrency markets are still experiencing setbacks due to potential macroeconomics hurdles, interest rate hikes, and prolonged inflation. According to the US Bureau of Labor and Statistics, inflation is currently at 8.6%, the highest value over the past four decades. Thus, more interest rate rises would be required to maintain inflation under control. Many experts think any fallout from the Celsius fiasco will most likely be restricted to the cryptocurrency industry. Omid Malekan, an adjunct professor at Columbia Business School, stated that the greatest danger of contagion is inside crypto markets and will not affect the more extensive centralized financial system. However, Bitcoin’s downturn is believed to be a purchasing opportunity before the cryptocurrency becomes more viable. According to the 4th Annual Global Crypto Hedge Fund Report 2022 by PWC, 42% of hedge funds still predict that Bitcoin will reach US$100 thousand, while the other 35% estimate between US$50 and US$75 thousand by the end of 2022. According to Forbes, it is hard to foresee what will happen next in the cryptocurrency market since it will mainly be influenced by spreading possible platform crashes, inflation rates, Fed tightening, and other variables. The cryptocurrency market continues to be turbulent and unpredictable. Henceforward, with the lack of restrictions, investors should perceive this as a great opportunity to participate at their own risk.

Sources:

BBC News

Business Insider

CNBC

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