The crypto currency industry was on the edge on Monday morning as investors feared a backlash from problems at major crypto players which could release a major change in the market if not confined.
Bitcoin which plunged at 57 percent so far this year and 37 percent in June, fell below USD20000 over the weekend for the first time since December 2020 adding to series of sustained losses over the years. The level is of representational significance, as it was roughly the level of the 2017 cycle.
The massive crypto meltdown is part of a larger market downturn brought on by elevated inflation, rising interest rates, war in Ukraine, Covid lockdowns and supply chain chaos which has caused several major industry players to sell their major holdings to meet their margin calls and cover losses.
Cryptocurrency-focused hedge fund Three Arrows Capital Ltd. is exploring options including asset sales and a rescue by another firm, the firms’ founder Mr. Davies said on Friday. The firm has hired legal and financial advisers to help work out a solution for its investors and lenders, after suffering heavy losses from a broad market selloff in digital assets. Babel Finance, another Crypto lending platform said that it would suspend withdrawals citing liquidity pressures.
Another US based Crypto lending platform, Celsius paused withdrawals earlier this month over what it labeled as extreme market conditions. The Crypto market has seen major fluctuations, and some institutions in the industry have experienced unexpected risk events.
Crypto market fears compound
On Monday, Bitcoin was trading either side at USD20,000, while Ether was at USD 1075, having tumbled below its symbolic level of USD1000 over the weekend.
Adam Farthing, the chief risk officer for Japan at Crypto liquidity provider B2C2 said that if the market went higher, everyone would breathe a sigh of relief, people will raise equity, things will get refinanced, and all of the risk will dissipate. If the market were to move lower than this level, it would create chaos.
There is a lot of credit being withdrawn from the system, if lenders have to absorb losses from Celsius and Three Arrows, they will reduce the size of their future loan books which means that the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.
Farthing stated that the situation was reminiscent of 2008 in terms of how there could be a domino effect of liquidations and insolvencies.
The developments in crypto have coincided with an equities slide, as U.S. stocks suffered their biggest decline in weekly percentage in two years on fears of rising interest rates and the growing likelihood of recession.
The bitcoin price has a tendency to move in a roughly similar manner to other risk assets such as tech stocks.
Smaller cryptocurrencies have been hit even harder than the other major tokens as investors sought the comparative safety of bitcoin and stable coins whose values are pegged to those of traditional assets, most commonly the U.S. dollar.
According to a price site firm, the overall crypto market capitalisation is roughly USD870 billion, from a peak of USD2.9 trillion in November 2021.
However, in recent months even stablecoins market capitalisations have dropped, suggesting investors are pulling money from the sector as a whole.
On Monday, Tether, the world’s largest stablecoin has seen its market cap fall to around USD68 billion, from over USD83 billion in early May.