The cryptocurrency sector is going through a deep crisis, but not everything is black

Nothing goes right in the crypto ecosystem. Prices plummet and the bad news piles up. Cryptocurrencies are highly correlated to the stock markets and are viewed as risky assets by institutional investors and fund managers in the same way as technology stocks. They are now subject to the same fears as traditional stock markets, related to inflation, the tightening of monetary policy by central banks and the risk of recession in several countries, most notably the United States.

Risk aversion therefore forces many investors to withdraw their money from cryptocurrencies. And prices plummet. Bitcoin fell below $21,000 on Monday and has lost up to 70% since its all-time high in early November. The drop is even more pronounced for ether (-77%), the second largest cryptocurrency in terms of capitalization, which fell below $1,100. Industry-wide capitalization rose from $3,000 billion in capitalization in November to nearly $940 billion on Monday night.

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Panic among recent investors

“There were $4.7 billion in bitcoin sales at a loss on Monday, which is unprecedented in one day,” said Laurent Pignot, financial analyst at Zonebourse. “It’s symptomatic of investor panic,” he said. But at the same time, “the major wallets have grown by more than 10,000 bitcoins,” Laurent Pignot points to figures from Glassnode, a crypto data provider.

“The panic is greater among investors who have invested recently and less among those who have more experience,” concludes the analyst. More experienced investors continue to buy because they believe the price of bitcoin will rise in the long run.

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Withdrawals blocked on Celsius

However, the bad news for the sector does not stop with falling prices. Or rather, this dive reveals deeper flaws within the crypto ecosystem. Platforms have suspended the ability to withdraw funds, such as banks fearing a stampede at savers’ counters to recover their funds.

Celsius Network, which specializes in cryptocurrency lending, has therefore paused “all withdrawals, derivatives and transfers between accounts” on its platform “due to extreme market conditions,” the company said in a statement. The platform, which claims 1.7 million customers and $11.8 billion under management, explains that it took this move to “put itself in a better position to meet its withdrawal obligations over the long term.” Investors don’t know when they will see their money back, or if they will actually get it back.

Warning about stablecoins

The platform could face a liquidity crisis due to its exposure to the stablecoin terra, which faltered in May, sparking a wave of panic in the crypto market. “We don’t know the investment strategy of players like Celsius”,

explains Stanislas Barthelemi, consultant at Blockchain Partner, a consultancy affiliated with KPMG. This type of platform often shows an attractive interest to investors, sometimes well above 10%, in exchange for lending their cryptocurrencies. “They are starting to be regulated, but still not very transparent,” the expert recalls.

Since yesterday, another “algorithmic” type of stablecoin, the USDD, which works very much on terra, has been in trouble. It struggles to maintain parity with the dollar when it is supposed to be worth 1 dollar permanently. The Tron DAO team behind this stablecoin injected the equivalent of $700 million into cryptocurrencies in an effort to return to parity with the dollar. So far without success: it was only worth $0.98 on Tuesday at 7:30 PM. Fortunately, USDD is not an industry heavyweight like terra, the fourth stablecoin before its collapse.

Binance is struggling too

In another sign of serious market disruption, Binance, the world’s largest cryptocurrency exchange, announced a complete suspension of bitcoin withdrawals on Monday. Scheduled for about 30 minutes, this suspension ended up lasting several hours on the market with over 90 million users.

A somewhat reassuring event for the market. “There have been occasions in the past for platforms to suspend their exchanges, especially during the fall of the crypto market in 2018,” says Laurent Pignot, nevertheless. “Binance received too many transactions to process at once and was unable to manage it,” explains Stanislas Barthelemi. According to him, the problem stems from “poor risk management by certain actors”.

But it is not the intrinsic workings of the bitcoin cryptocurrency, nor of the blockchain, that are being questioned.

Recruitment and dismissal freeze

Several companies in the sector have been hit hard by the fall in prices. There are many announcements of staff freezing and even layoffs. Brian Armstrong, the boss of Coinbase, one of the industry’s largest platforms listed on the Nasdaq, unveiled an 18% reduction plan on Tuesday, which should lead to the shedding of 1,100 jobs. “We grew too fast,” he explains, as Coinbase ramped up development and hiring in 2021 when prices rose.

This plan joins a long list. The Geminin platform, founded by the Winklevoss brothers, had already announced the layoff of 10% of its employees in early June, citing a “cryptographic winter”. For its part, the Crypto.com platform has made the decision to say goodbye to 260 employees, or about 5% of its workforce. Finally, BlockFi, which specializes like Celsius in the lending and lending of cryptocurrencies, announced the layoff of 20% of its staff on Monday. Going against the grain, Binance nevertheless continues to hire staff and is still looking for 2,000 job openings.

The current purge may be a blessing in disguise. “It’s a way to clean up the market to get back on its feet,” said Stanislas Barthelemi. “The current period will reveal the players who are really solid and resilient,” said Laurent Pignot. According to him, most of the price drop is over, even though bitcoin may “still fall below $20,000”. Others are much more pessimistic. Interviewed in the 21 Million newsletter, Christopher Dembik, director of macroeconomic research at Saxo Bank, foresees a rapid decline in the cryptocurrency, potentially as high as $10,000.

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