Crypto was all the rage in 2021. This week, it came crashing down.
The tailspin started late Sunday. One of the largest crypto lending platforms, Celsius Network LLC, unexpectedly told customers that it was pausing all withdrawals, swaps and transfers between accounts due to extreme market conditions.
Celsius customers panicked, and people with money in other crypto platforms started to wonder if they would be next.
The anxiety spread quickly. Prices for bitcoin and ether tumbled about 15% on Monday and continued to fall throughout the week, piling onto the decline that has plagued them all year. The digital currencies are down 54% and 70%, respectively, year to date, according to CoinDesk data.
“‘The market sentiment is very, very depressed here.’”
On Tuesday, Coinbase Global Inc., the largest crypto exchange in the U.S., said it would cut its workforce by about 18%. In a letter, Chief Executive Brian Armstrong said that the company had grown too quickly and that a potential recession “could lead to another crypto winter.”
Two other prominent crypto companies, Crypto.com and BlockFi, also announced layoffs.
“It sucks right now,” said Jeff Dorman, chief investment officer at Arca, a digital-asset investment firm. “Companies are laying people off, activity is down, crypto is back to being the laughingstock of Wall Street.”
The crazy week in crypto is playing out alongside broader market tumult. The Federal Reserve is trying to tame decades-high inflation, and this week it announced its biggest interest-rate increase since 1994. While the question of whether the U.S. will enter a recession is far from settled, many investors are worried that higher interest rates will tip it into one. Those concerns have pushed stocks lower throughout the year, and the S&P 500 entered a bear market this week.
In crypto, the industry is reckoning with both the dramatic shift in macroeconomic conditions and waning investor interest. Higher rates make speculative investments like crypto less attractive, since investors can find other options for earning returns. Celsius’s problems could also accelerate a regulatory crackdown on crypto lenders, which could continue to push crypto prices lower.
On Wednesday afternoon, Celsius CEO Alex Mashinsky said the company is “working nonstop” to address the issue but offered no clues about when withdrawals would resume.
Crypto lenders like Celsius accept customer deposits of cryptocurrencies and lend them out to other users like market makers and exchanges to earn a return. Celsius also put customer funds into high-risk decentralized-finance projects to earn a return. DeFi, as it is known, is a sort of parallel financial system for crypto with its own version of banks and lending.
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Individual investors were drawn to Celsius because the company paid customers annual percentage yields of up to 18.6% on cryptocurrency deposits—far more than they could get from a regular bank account. But what many are only now realizing is that while crypto companies such as Celsius look like banks in some ways, they lack the legal protections built into the traditional financial system.
In April, Celsius stopped offering interest-bearing accounts to “nonaccredited” investors, or those who don’t meet a certain wealth threshold, after being pressed by regulators.
In February, Celsius competitor BlockFi paid $100 million to settle claims that its product violated investor-protection laws, the highest fine ever agreed to by a cryptocurrency company, Securities and Exchange Commission officials said at the time. The company neither admitted nor denied wrongdoing.
On Thursday, the Texas State Securities Board said it has opened an investigation into Celsius over its decision to freeze customer accounts. The board is working in conjunction with New Jersey, Kentucky, Alabama and Washington.
“Regulators were already looking at the space—they will probably move even more quickly now,” said Frank Downing, an analyst at ARK Investment Management.
“The market sentiment is very, very depressed here,” Mr. Downing added. “Given the macro context here, we are not ruling out a further leg down.”
On Friday, Babel Finance, a Hong Kong-based crypto lending and trading firm, said it is suspending redemptions and withdrawals from all products, citing “unusual liquidity pressures.”
“We are in close communication with all related parties and will share updates in a timely manner. Babel Finance has no exposure to Celsius,” a company spokesperson said.
Also Friday, cryptocurrency hedge fund Three Arrows Capital said it has hired legal and financial advisers to explore options including asset sales and a rescue by another firm. The hedge fund has suffered heavy losses from the crypto selloff.
Mr. Dorman, the chief investment officer at Arca, said his firm is maintaining a higher cash balance but isn’t afraid to put money to work for good opportunities.
“As long-term investors, we are looking for things that, in the next 12 to 36 months, we believe will be trading significantly higher than where they are trading today,” he said.
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