Major cryptocurrencies suffered big losses on Monday. As I write this, bitcoin is down 14 percent over the last 24 hours, while ether is down 16 percent. Other major cryptocurrencies–including solana, dogecoin, and litecoin–are also down by double digits, according to CoinMarketCap.
The cryptocurrency crash is part of a broader market sell-off. The S&P 500 stock market index fell almost 4 percent on Monday amid fears of faster interest rate hikes from the Federal Reserve. All assets are under pressure due to high interest rates, including stocks and cryptos.
Another big factor that may have spooked cryptocurrency traders was the Monday announcement by crypto lender Celsius that it was suspending withdrawals. According to the company, this was due to “extreme market conditions”. “
Celsius is effectively an unregulated cryptocurrency bank. Celsius allows customers to deposit cryptocurrency and borrow dollars against it. Customers can also earn interest on cryptocurrency deposits, with the company’s website advertising interest rates as high as 18 percent for some cryptocurrencies. This is a lot more than what Americans can get from traditional banks. Celsius claims it has 1.7 millions customers.
A January Bloomberg article reported that Celsius had inspired loyalty from some of the platform’s users:
In testimonials posted last year on Twitter as part of a contest in which customers shared their ‘Celsius Story,’ many said they had entrusted Celsius with their life savings. One customer claimed that he used his home equity to cash in his retirement and save for his children’s education to pay the money into the company accounts. One said he was able to quit his job and move closer to his child because he had the money.
In a January Bloomberg article, Celsius CEO Alex Mashinsky “told Bloomberg Businessweek that Celsius is able to pay such high yields because it passes along most of its earnings to its users. He claimed that it is the traditional financial system which is ripping off people by taking their deposits and using them to make money. Then, it claims it can only pay small interest rates. “
“Somebody is lying,” Mashinsky said. “Either the bank lies or Celsius lies,” Mashinsky said. “
While Celsius offers higher interest rates than a traditional bank, Celsius deposits are not protected by the Federal Deposit Insurance Corporation, which provides a financial backstop for deposits in conventional banks. Some customers may not receive their entire money back if Celsius gets into financial trouble.
In a blog post last week, Celsius swatted away rumors that it was having financial difficulties.
“At this already challenging time, it’s unfortunate that vocal actors are spreading misinformation and confusion,” the company wrote. They have falsely claimed that Celsius suffered significant losses due to this collapse, and tried to link Celsius to it. “
That was a reference to last month’s news that terra, an “algorithmic stablecoin,” had proven not to be so stable in practice. Terra was to have a value of $1. The related cryptocurrency luna would supposedly act as a buffer. The whole house fell apart last month due to a wider cryptocurrency sell-off.
Celsius has grown rapidly over the last year, attracting increased regulatory scrutiny. Last September, regulators in several states opened investigations into the company’s business practices, arguing that the company’s lending products may constitute unregulated securities.
Celsius hasn’t provided details on the “extreme market conditions” that led the company to suspend withdrawals. Celsius claims that it is working hard to resume withdrawals but users have every reason to be concerned about its financial health.
Across the cryptocurrency sector, companies are tightening their belts with expectations that recent price declines might last for a while.
On Friday, the cryptocurrency exchange and wallet company Crypto.com announced it was laying off 260 employees, about 5 percent of its workforce. A week earlier, the Gemini cryptocurrency exchange, which the Winkelvoss brothers founded, announced it was cutting its workforce by 10 percent. The brothers blamed “turbulent market conditions” for the reductions. “
One of the biggest cryptocurrency companies, Coinbase, recently announced that it was freezing all new hiring. This included withdrawing offers that were already accepted by job candidates. Coinbase’s stock price has fallen more than 80 percent since its peak last November.
The steady drumbeat of bad news has led to discussion about the start of another “crypto winter.” At least three of these times have been experienced by the cryptocurrency community. During this time of retrenchment, it’s common for a significant number of cryptocurrency-related projects and companies to fail.
Each previous crypto winter has been followed by a thaw and then a new boom. Most recently, bitcoin fell to around $3,200 in late 2018 before soaring above $60,000 in 2021. The cryptocurrency boosters believe that the past will repeat itself with today’s low bitcoin prices leading to new records in a few years.
But there’s no guarantee that will happen. There is no guarantee that the crypto sector will reach saturation. After that, cryptocurrency prices may begin to behave like traditional assets, rising during booms and plummeting during downturns, but not necessarily providing outstanding returns for those who keep them long-term.
Tim Lee was on staff at Ars from 2017 to 2021. In 2021, he launched Full Stack Economics, an independent email newsletter about the economy, technology, and public policy. You can subscribe to his newsletter here.