On Monday morning, the cryptocurrency sector was on edge. Investors were concerned that contagion from difficulties at large crypto firms might cause a massive shakeout if not addressed.
Bitcoin has lost 57% this year and 37% this month; it dipped below $20,000 for the first time since December 2020 over the weekend. The level has symbolic value since it corresponds to the apex of the 2017 cycle. The price drop comes as a result of problems at multiple large industry participants; moreover, future drops might have a cascading impact as other crypto investors have to sell their holdings to pay margin calls and cover losses. Three Arrows Capital, a crypto hedge fund, is considering its alternatives, including asset sales and a rescue by another business, according to its founders in a Wall Street Journal piece published Friday, the same day Asia-focused crypto lender Babel Finance said it would cease withdrawals.
What Is the Leading Force Behind the Downtrend?
Many of the industry’s current issues may go back to the catastrophic collapse of the so-called stablecoin TerraUSD in May, as announced by US-based lender Celsius Network earlier this month. On Monday, bitcoin was trading on either side of $20,000; meanwhile, ether, the second-largest cryptocurrency, was trading at $1,075; it fell below its symbolic barrier of $1,000 over the weekend. Adam Farthing, chief risk officer at B2C2, a cryptocurrency liquidity provider in Japan explained that everyone breathes a sigh of relief if the market rises; goods will be refinanced, people will raise equity, and all risk will vanish. But if we go lower from here, I believe it’ll be an issue.
He believes that a lot of credit is being removed from the system; moreover, if lenders must absorb losses from Celsius and Three Arrows, they will shrink their future loan books, reducing the total amount of credit accessible in the crypto ecosystem.
The crypto advances have coincided with an equities downturn, with U.S. stocks suffering their largest weekly percentage fall in two years on worries of increasing interest rates and a looming recession. The price of bitcoin has tended to swing in a similar way to other risk assets like tech stocks.