The cryptocurrency market is experiencing turbulent times. The rise in interest rates caused by inflation, the fear that a recession is brewing in the US, together with the fall of some of the large platforms or cryptoactive funds have paid for the falls. Bitcoin was trading at $67,734 on Nov. 9, 2021. Eight months later, it is trading at about $20,000, the lowest level since December 2020, according to data from Bloomberg. Assumes a 70% drop. And it leaves the market divided between the stupefaction of some and the warnings (“I already said so”) of others.
The fall does not only affect bitcoin. Ether costs around 1,000 dollars, when in November it was trading above 4,600 dollars, a 75% drop.
The risk of recession in the world’s largest economy is the main reason for the weakness of crypto assets. With a recovery still weak, the US Federal Reserve has decided to fight rampant inflation with aggressive increases in interest rates (from 0.75 points a week ago and new rises are expected at the July meeting). Cryptocurrencies have been moving in the same direction as the Stock Market for months: investors’ appetite for risky assets decreases and the search for safety penalizes stocks and cryptos, compared to increases in bonds.
The venture capital fund Three Arrows Capital (3AC) has joined the list of negative news in the cryptocurrency market, surfacing multimillion-dollar losses. The collapse of prices in cryptocurrencies that are very often used as collateral for loans or as a counterpart in token issuances has caused stoppages in redemptions and in firms such as BlockFi, Celsius or Terra/Luna. “Macroeconomic conditions need to improve and the Fed’s strategy of aggressive rate hikes needs to be stopped before the cryptocurrency market bottoms out,” analyst firm Glassnode told Bloomberg.
Analysts also add to the underlying causes technical reasons that can magnify the declines: the risk is that bitcoin stabilizes below $20,000 and that implies an avalanche of closing positions by investors who bet on the rises. “In general terms, the critical support levels in bitcoin and ethereum are of concern, since investor sentiment does not support a strong rebound from these levels,” they indicate from XTB. It is what experts have called “crypto winter”: there is still a lot of pessimism and until an improvement in sentiment emerges, the cascade of falls can continue.
It’s not all bad news in a still developing market. “Blockchain technology, and cryptocurrencies in particular, is the new technological revolution and it is here to stay,” they say from Activotrade. “However, the solvency problems of several cryptocurrency hedge funds and lenders have damaged investor confidence and fueled the flight of crypto assets.”
The return obtained in cryptocurrencies since before the Covid pandemic is still very positive. Bitcoin has appreciated 127% since March 2020 and ethereum more than 500%.
- Celsius. The difficulties that some crypto-asset firms are going through have taken a toll on investor sentiment. A few days ago Celsius asked users for more time to stabilize liquidity and operations, paralyzing their clients’ cash withdrawals. Celsius has been wildly popular since its launch four years ago and has grown to have more than $10 billion in assets under management, according to Activotrade.
- Blockfi. Another case is that of BlockFi, which also proposes the suspension of fund withdrawals. The cryptocurrency lending platform announced on Tuesday that it has received a $250 million support facility from crypto asset firm FTX to help bolster its balance sheet.
- 3AC. Following several days of rumours, cryptocurrency hedge fund Three Arrows Capital (3AC) confirmed that it has suffered heavy losses on long leveraged positions. As of April, Three Arrows Capital had more than $3 billion in assets under management. The founders are studying different options to save the company.
- Risks. These latest examples “highlight the leverage that some companies assume to generate profitability, and that is when the risks come, as in previous crises, due to leverage,” they say from Activotrade.
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