Bitcoin lost over 30% in the past week. Here is what happened.
Bitcoin dropped to $18,248, and Ether lost value to drop toward $944 as of mid-afternoon on June 18. The sell-off in the crypto market keeps accelerating and no end is seen in sight. The world’s two biggest and most popular cryptos are down by over 35% in the past week, as both coins breached their symbolic price barriers.
Carnage in the cryptocurrency market is partially to do with pressure from various macroeconomic forces, including the spiraling inflation and a succession of Fed rate hikes. We have already seen the blue-chip cryptos track equities lower. It does not help that crypto companies are laying off many employees, and some of the most popular names in the space are seen to be facing insolvency meltdowns.
Here is how we got there.
The week started with cryptocurrency prices plunging violently, and bitcoin dropping as much as 17% at one point in the day. It appeared like the crypto winter was already here.
Amidst all these chaos, Celsius, a huge crypto staking and lending company, shocked the entire market when it confirmed that all withdrawals, swaps, and transfers between accounts on the platform have paused as a result of ‘extreme market conditions.’ In a memo addressed to the Celsius Community, this platform also stated the move was designed to “stabilize liquidity and operations.”
Celsius effectively locked up its entire $12 billion in crypto assets under management (AUM), raising fears about the platform’s solvency. That news rippled across the Crypto space, reminding some of what happened in May, when a failed US dollar-pegged stablecoin project lost around $60 billion in value and it dragged the entire crypto sector down with it.
Celsius was famous for offering users an incredible yield of up to 18.63% on their deposits. It is like a product a bank would offer, except with none of the regulatory safeguards.
The crazy high yields were what eventually came under scrutiny. John Todaro, Needham’s vice president of crypto assets and blockchain research, stated:
“This risk certainly seems like it’s just the beginning. What I would say is on the decentralized side — a lot of these DeFi protocols, a lot of those positions are over collateralized, so you shouldn’t quite see the underfunding situation that could happen with centralized borrowers and lenders. But that being said, you could still see a lot of liquidations with that collateral being sold off on DeFi protocols.”
The crypto markets seemed to stabilize on Tuesday, with bitcoin hovering at about $22,000 and ether at about $1,100. Investors were assessing the fallout of Celsius, and in the meantime, another crypto company joined a growing list of firms cutting staff aiming to shore up some of their profits.
Coinbase announced that it was laying off almost 20% of its workforce due to crypto volatility. The firm had previously cut spending and also withdrew job offers in the hopes of stabilizing its business. President and Chief Operating Officer Emilie Choi commented:
“We had the recent inflation report that came out that I think surprised many folks. We’ve had Jamie Dimon and others talk about an upcoming economic hurricane and so given what’s happening in the economy, it feels like the most prudent thing to do right now.”
Crypto firms across the board are now seeking different ways of cutting costs, as investors rotate out of the riskiest assets, pulling down significant trading volumes. Crypto.com recently confirmed a staff reduction of 260 people, as did Gemini, which mentioned that it would lay off up to 10% of its workforce – a first for the United States-based crypto exchange and custodian.
MicroStrategy CEO Michael Saylor went to CNBC on June 15 morning to discuss worries around his company, which has now made a $4 billion bet on bitcoin. Saylor first got into bitcoin in 2021, when he decided to begin adding the crypto to MicroStrategy’s balance sheet as part of an unorthodox treasury management method.
Saylor said that the firm doubles as the first and only bitcoin spot exchange-traded fund (ETF) in the United States, thus investing in MicroStrategy is the closest you will get to a bitcoin spot ETF.
MicroStrategy has utilized the company debt to buy bitcoin, and in March, Saylor decided to take another bold step toward normalizing bitcoin-backed finance when he borrowed around $205 million using his BTC as collateral — to then acquire more of the crypto. Saylor said:
“We have $5 billion in collateral. We borrowed $200 million. So I’m not telling people to go out and take a highly leveraged loan. What I am doing, I think, is doing my best to lead the way and to normalize the bitcoin-backed financing industry.”
He added that publicly traded crypto miner Marathon Digital also took out a considerable credit line with Silvergate Bank. As the prices of Bitcoin tanked this week, investors worried the firm would be requested to put up more collateral for its loan, but Saylor said the fears were quite overblown.
Saylor told CNBC earlier this week:
“The margin call is much ado about nothing. It’s just made me Twitter famous, so I appreciate that…We feel like we have a fortress balance sheet, we’re comfortable, and the margin loan is well managed.”
Then on June 15 afternoon, the Federal Reserve raised its benchmark interest rates three-quarters of a percentage point in its most aggressive hike in the past 28 years. The Fed said this move was made to curb sky-high inflation.
The crypto initially rallied on that news as investors were hopeful that we could avoid a recession. But, the rally was short-lived.
Bitcoin and other crypto went on a free fall. We got back deep in the red on Thursday as the flagship crypto plunged to about $20,000, sinking to levels it had never been to since the end of 2021.
These losses were closely tied to a sell-off on Wall Street, in which the Dow lost 700 points to reach its lowest level in over a year. It seems the investors cannot shake the fears of recession, and some even believe it could take time for cryptos to recover from the sell-off in most of the riskier assets.
Jill Gunter, Espresso Systems co-founder & chief strategy officer, told CNBC’s Squawk on the Street:
“I think that we’re in a long drawdown period here. I think that we’ve taken the elevator down, and I think that we, as an industry, are going to have to take the stairs back up and climb out by building real utility.”
Gunter insisted that, in many ways, what we are now seeing is a “healthy washout.” She continued:
“One doesn’t want to, as a builder, as an investor for the long-term… be in a market where it’s being driven by just short-term price action, by speculation, as, let’s be honest, the crypto market has been largely over the last couple of years.”
June 17 Into June 18
Bitcoin and other cryptos plunged steeply as investors continued to dump the risky assets. Carnage in the crypto markets shows no signs of slowing down, as bitcoin and ether continue their sell-off at a rapid clip on Saturday afternoon during the American hours. This came as crypto hedge funds and businesses faced growing worries about insolvency. Paxos CEO & Co-Founder Charles Cascarilla told CNBC:
“We had financial instability because of this opaque leverage, you just couldn’t tell where all these risks were building up. In some ways, this is just an age old story. You’re borrowing short and lending long.
And I think it’s really unfortunate that people lost money, and I think it will, in some ways, set back the space, because you will lose some early adopters or some of the people who just came in new to the space.”
However, Cascarilla also stated that investors are still seeking quality crypto investments. He stated:
“The fundamental technology here and the adoption curve that we see, the institutions that are coming in, how you can get your financial system to operate at the speed of the internet, those are things that need to happen.”
At the time of publication, Bitcoin is threatening to drop below $17,500 with $14,000 now beckoning on the horizon. Ether is hovering around $920 and investors are not ruling out a drop toward $850. The world’s two most popular cryptos are down over 35% in the past week, after breaching their symbolic barriers.
How low will the crypto market sink before the bulls try to re-enter the market?