Explained: Why is the crypto market collapsing?
Selling in the crypto market continued on Tuesday with Bitcoin and Ether falling to new 18-month lows. Bitcoin is the largest cryptocurrency in the world, while Ether is the number two token. But not just the top two, all major cryptocurrencies have been trading in the red lately, with the drop testing even long-term investors. What triggered this latest crash, and is there any respite in sight for investors?
What triggered the latest sale?
The fall began last week on Friday in sync with the sell-off in US stock markets triggered by a higher-than-expected rise in inflation and fears of more aggressive interest rate hikes by the US Federal Reserve. While crypto markets should ideally operate independently of traditional markets, they have also been susceptible in the past to movements in the traditional financial world.
Monday brought more bad news as leading cryptocurrency lending company Celsius Network froze withdrawals. In a blog post, New Jersey-based Celsius said it had frozen withdrawals and transfers between accounts “to stabilize liquidity and operations while we take steps to preserve and protect assets.” He blamed “extreme market conditions” for the move and said the move was intended to put “Celsius in a better position to meet, over time, its withdrawal obligations.” So far, he has given no timetable for the resumption of withdrawals.
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Earlier in May, the crypto market took a major hit after the staggering crash of the
TerraUST, an “algorithmic” stablecoin whose value is backed by a sister token known as Luna.
The dark red crash, which wiped out $40 billion in investor funds, rattled the system because stablecoins are not subject to wild fluctuations like other cryptocurrencies.
What is Celsius, why is its withdrawal ban important?
Celsius is a crypto lender, which basically means it is a bank in the crypto world.
Crypto lenders allow customers to deposit their coins with them for interest and then lend cryptocurrencies to earn a return.
With assets of approximately $11.8 billion, Celsius is a major player in the crypto lending market. Crypto savings parked with these lenders have been known to offer returns in the range of 17% to 20%.
These financial services are easier to access than traditional banks, but on the other hand have no regulatory oversight.
According to a Financial Times report, the value of assets parked with Celsius on May 17 was less than $12 billion compared to more than $24 billion in December 2021.
How serious is the crisis?
This is the second major crypto market crash in a month. Given the overall negative risk sentiment, a reversal of fortune seems unlikely anytime soon.
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In this latest accident, the The value of the crypto market has dropped below $1 trillion for the first time since January 2021.
After hitting an all-time high of $69,000 in November last year, Bitcoin has fallen almost 70%. It was trading in the $22,000 area on Tuesday. The number two token, Ether, is down 75% from its November high of $4,869.
The latest crash is likely to speed up the government surveillance process. In the United States, two senators on Tuesday proposed legislation to create a regulatory framework for the cryptocurrency industry, the Associated Press reported.