The Crypto Crash
On Monday the 13th of June, the cryptocurrency market experienced a ground-breaking selloff. This came after Celsius, a major crypto lending platform that essentially functions like a bank, announced that it would momentarily stop withdrawals. Then, for the first time in over a year, crypto’s overall market cap plummeted below $1 trillion.
How did this impact the crypto community?
A rep for Celsius explained that because of ‘extreme market conditions,’ they would need to take time to ‘stabilise liquidity and operations’ so that they could fulfil all future withdrawal obligations. They also mentioned that their almost 2 million users would still be able to accumulate rewards.
Following this downturn, Binance—the largest crypto exchange in the world—decided to pause Bitcoin withdrawals because of a backlog issue. They said that this would not impact other cryptocurrencies—only Bitcoin. Consequently, Bitcoin dropped nearly 14% to a low of around $20,300 for the first time since the end of 2020. This catalysed a drop in the world’s second-largest token, Ether, which ultimately led to more cryptocurrencies losing their value.
The challenging environment also caused BlockFi to let go of 20% of the company’s employees. BlockFi is a well-known crypto firm backed by German-American billionaire Peter Thiel.
Market heads into bear territory
Experts in the field are warning that the selloff will continue, which will in turn put more selling pressure on stocks. Some argue that crypto has no real-world utility and this implosion was inevitable. Therefore, it would be near impossible to predict if or when it will bottom out. As fears of a recession loom, these experts say this is a sign that the markets are experiencing a risk-averse sentiment amongst investors who are now flocking to safer options. This means that the stock market may suffer the repercussions of the crypto world.
Crypto investors will have even more reason to be fearful if the price of Bitcoin falls below $20,000.
As investors continued to sell their riskier assets on Monday, the S&P 500 fell into bear market territory. Bear markets, though relatively rare, are when stocks drop a minimum of 20% from their recent peak. They signal that investors hold a pessimistic outlook on the economy. The last bear market was in 2020 when the coronavirus was first spreading. The recovery then was speedy. Before that, the last major bear market was from 2007 to 2008 when the housing market collapsed.
A number of firms on Wall Street predicted that the central bank would raise interest rates by 0.75%. Their predictions were correct. The 0.75% increase was announced Wednesday. This will have a subsequent effect on the markets at large.
What are the implications of such a fallout?
While it seems that the news from Celsius did drive the mass selloff, the crypto market’s downward turn was anticipated, as it began over the weekend. It has been evident for some time that external economic factors were influencing the crypto market. Investors have recently been intimidated by high inflation and interest rate hikes. Last week, the US Labor Department released a report which showed that annual inflation increased to 8.6% in May. This is the biggest 12-month increase in prices the country has seen in over 4 decades. Crypto investors were thus left with a feeling of unease.
Now, questions are circulating within the industry about how reliable crypto platforms like Celsius are. They promise high (and often unrealistic) yields to their customers, but after so many high-profile crypto collapses, it is apparent that investors cannot rely on the crypto market to stabilise. This recent crypto crash came days after Alex Mashinsky, Celsius CEO, accused those who have criticised his company of spreading what is known in the crypto world as “FUD”, meaning fear, uncertainty, and doubt.
Celsius is just one of the many exchanges that have raised millions in funding, as well as borrowed large sums of money from other companies.
To protect your assets, it is important to seek professional advice during periods of uncertainty like what the world is facing today with inflation and the cost-of-living crisis. Contact us today to schedule a free consultation with a Wealth Manager.