Bitcoin dropped to $18,248 and Ether dropped to $944 mid-afternoon Saturday as selling in the cryptocurrency market accelerates. The world’s two most popular cryptocurrencies are down over 35% in the past week as they both break symbolic price barriers.
The carnage in the cryptocurrency market has in part to do with pressure from macroeconomic forces, including spiraling inflation and a succession of Fed rate hikes. We have also seen these blue chip cryptos track lower stocks. It doesn’t help that cryptocurrency companies are laying off massive amounts of employees, and some of the most popular names in the industry are facing solvency meltdowns.
Here’s how we got here.
Celsius CEO Alex Mashinsky.
Piaras O Midheach Sportsfile for Web Summit | Getty Images
The week began with cryptocurrency prices plummeting and bitcoin dropping as much as 17% at one point in the day. It looked like crypto winter was here.
In the chaos, Celsius, a major cryptocurrency staking and lending company, shocked the market when it announced that all withdrawals, exchanges and transfers between accounts had been paused due to “extreme market conditions”. In a memo addressed to the Celsius Community, the platform also said the move was designed to “stabilize liquidity and operations”.
Celsius effectively locked up its $12 billion in crypto assets under management, raising concerns about the platform’s solvency. The news spread across the cryptocurrency industry, reminiscent of what happened in May when a failed dollar-pegged stablecoin project lost $60 billion in value and dragged the cryptocurrency industry with it.
Celsius was known for offering users up to 18.63% yield on their deposits. It’s like a product a bank would offer, except without any of the regulatory safeguards.
Those crazy high yields were what ended up being scrutinized.
“This risk certainly looks like it’s just the beginning,” said John Todaro, vice president of cryptographic assets and blockchain research at Needham.
“What I would say is on the decentralized side – a lot of these DeFi protocols, a lot of these positions are over-secured, so you shouldn’t see the underfunding situation that can happen with centralized borrowers and lenders, you can still see a lot of liquidations with that collateral. being sold on DeFi protocols,” Todaro continued.
People watch as the logo of Coinbase Global Inc, the largest US cryptocurrency exchange, is displayed on the Nasdaq MarketSite jumbotron in Times Square in New York, US, April 14, 2021.
Shannon Stapleton | Reuters
Cryptocurrency markets appeared to stabilize on Tuesday, with bitcoin hovering around $22,000 and ether around $1,100.
Investors were weighing the fallout from Celsius, and in the meantime, another cryptocurrency company has joined a growing list of companies cutting employees to try to boost profits.
Coinbase announced that it was laying off nearly a fifth of its workforce due to cryptocurrency volatility. The company had already cut spending and even rescinded job offers in hopes of stabilizing its business.
“We had the recent inflation report that came out and I think it surprised a lot of people,” explained President and COO Emilie Choi.
“We’ve already heard Jamie Dimon and others talk about an upcoming economic hurricane, and so given what’s been going on in the economy, it seems like the most prudent thing to do right now,” Choi continued.
Crypto companies in general are looking for ways to cut costs as investors exit riskier assets, reducing trading volumes.
Crypto.com recently announced a staff reduction of 260 peopleas did Gemini, which said it would lay off 10% of its workforce — a first for the US-based cryptocurrency exchange and custodian.
Michael Saylor, president and CEO of MicroStrategy, first got into bitcoin in 2020, when he decided to start adding the cryptocurrency to MicroStrategy’s balance sheet as part of an unorthodox treasury management strategy.
Eva Marie Uzcategui | Bloomberg | Getty Images
MicroStrategy CEO Michael Saylor appeared on CNBC Wednesday morning to discuss concerns surrounding his company, which has placed a $4 billion bet on bitcoin. Saylor said the company is also the first and only exchange-traded bitcoin fund in the US, so investing in MicroStrategy is the closest you’ll get to a spot bitcoin ETF.
MicroStrategy used the company’s debt to buy bitcoin, and in March, Saylor decided to take another step towards normalizing bitcoin-backed finance when he borrowed $205 million using his bitcoin as collateral – to then buy more cryptocurrencies.
“We have $5 billion in collateral. We’ve borrowed $200 million. So I’m not telling people to take a highly leveraged loan. What I’m doing, I think, is doing my best to lead the way and normalize the bitcoin-backed funding,” said Saylor, who added that publicly traded cryptocurrency miner Marathon Digital also signed a credit line with Silvergate Bank.
As bitcoin prices plummeted this week, investors feared the company would be asked to offer more collateral for its loan, but Saylor said the fears were overblown.
“Margin calling is a lot of ado about nothing,” Saylor told CNBC earlier this week. “It made me famous on Twitter, so I appreciate that… We feel we have a strong balance sheet, we’re comfortable, and the margin lending is well managed.”
Then, on Wednesday afternoon, the Federal Reserve raised interest rates by three-quarters of a percentage point in its most aggressive hike since 1994. The Fed said the move was in an effort to contain sky-high inflation.
Cryptocurrency prices initially surged on the news as investors hoped we could avoid a recession, but this recovery was short-lived.
Bitcoin and other cryptocurrencies are in freefall.
Dan Kitwood | Getty Images
We went back to red on Thursday. Bitcoin has dropped to around $20,000, to prices it hasn’t seen since late 2020.
The losses were closely linked to a selloff on Wall Street, in which the Dow dropped 700 points to its lowest level in more than a year.
It seems investors can’t shake recession fears, and some say it could take some time for cryptocurrencies to recover from selling riskier assets.
“I think we’re in a long downturn here,” Jill Gunter, co-founder and chief strategy officer at Espresso Systems, told CNBC’s Squawk on the Street.
“I think we went down the elevator and I think we as an industry are going to have to go up the stairs back and come out building a real utility,” she said.
Gunter said that, in many ways, what we’re seeing is a “healthy swoon.”
“Nobody wants, as a builder, as a long-term investor… to be in a market where it’s being driven only by short-term price action, by speculation, like, let’s be honest, the cryptocurrency market has largely been in the last few years. two years,” Gunter continued.
friday to saturday
Bitcoin and other cryptocurrencies dropped sharply as investors dumped risky assets. A cryptocurrency lending company called Celsius is pausing withdrawals for its customers, sparking fears of contagion in the wider market.
Nurfoto | Nurfoto | Getty Images
The carnage in the cryptocurrency markets shows no signs of slowing down as bitcoin and ether continue their sell-off at a rapid pace Saturday afternoon.
This comes as cryptocurrency hedge funds and companies face growing questions about insolvency.
“We had financial instability because of this opaque leverage, you just couldn’t tell where all these risks were piling up,” said Paxos CEO and co-founder Charles Cascarilla. told CNBC.
“In a way, this is just an old story. You’re borrowing short and long. And I think it’s really unfortunate that people have lost money, and I think, in a way, it’s going to shrink the space, because you’re going to lose some early adopters or some of people who have just entered space,” Cascarilla continued.
But Cascarilla also says investors are still looking for quality cryptocurrency investments.
“The fundamental technology here and the adoption curve that we see, the institutions that are coming, how can you make your financial system operate at the speed of the internet, these are things that need to happen,” he said.