Cryptocurrency Collapse Indicates Deeper Financial Crisis

The past week has been described as the moment when the financial world changed – business channel CNBC described it as a “new reality” – as it became clear that global central banks intended to raise interest rates no matter what.

An advertisement for the Bitcoin cryptocurrency is displayed on a street in Hong Kong, Thursday, February 17, 2022 [AP Photo/Kin Cheung] [AP Photo/Kin Cheung]

The most important step was the decision by the US Federal Reserve to raise its key interest rate by 0.75 percentage point, the largest increase since 1994, and this is just the beginning.

The Bank of England raised its rate for the fifth time and forecast inflation in the UK would rise to 11 percent. Smaller central banks, such as the Reserve Bank of Australia, have indicated further interest rate hikes.

One of the most important decisions was that of the Swiss National Bank, which raised its key rate by 0.5 percentage point. Previously, she had been one of the strongest advocates of keeping interest rates at historically low levels.

The official reason for the rate hikes is the need to fight inflation, but central banks are well aware that their actions will not mitigate the price hikes. Their joint action has a different purpose. With inflation reaching its highest level in four decades, it is seeking to suppress wage demands from the working class around the world by provoking a recession, if necessary.

Rate hikes caused stock markets around the world to fall sharply, led by Wall Street. The S&P 500 stock index is down about 22 percent from its previous peak, and the Dow Jones’ decline is approaching 20 percent. The tech-savvy, interest-rate-sensitive NASDAQ index fell more than 30 percent, and some major stocks fell more than 50 percent from their highs.

One of the indications of growing instability is the precipitous decline in cryptocurrencies and traders’ decisions to suspend trading due to turbulent market conditions.

Cryptocurrency lender Celsius Network, which sent shockwaves through the crypto market by suspending withdrawals last week, said it would “take time” to normalize its operations. In a blog post on Tuesday, he said he would continue to work “with regulators and officials regarding this hiatus and our company’s determination to find a solution.” But he did not give details.

The chaos started last month when the so-called stablecoin TerraUSD, which was used to facilitate cryptocurrency transactions by providing a link to the US dollar, failed to maintain parity with the dollar.

The stop in pullbacks extended beyond Celsius. On Friday, Hong Kong-based cryptocurrency lender Babel Finance said it was suspending withdrawals due to “unusual liquidity pressures” and Singapore-based crypto hedge fund Three Arrows was unable to make margin calls from lenders.

On Tuesday, Hong Kong-based cryptocurrency exchange Hoo shut down transactions that threatened to drain its money. He said he was trying to reconfigure his assets in an “orderly and reasonable” way in the medium and long term.

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