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

Nothing is going right in the crypto ecosystem. Prices are plunging and bad news is piling up. Having become highly correlated to equity markets, cryptocurrencies are considered risky assets in the same way as technology stocks by institutional investors and fund managers. They are now subject to the same fears as traditional stock markets, linked to inflation, the tightening of monetary policy by central banks and the risk of recession in several countries, particularly the United States.

Risk aversion therefore pushes many investors to withdraw their money from cryptocurrencies. And prices are plunging. Bitcoin fell below $21,000 on Monday and has lost up to 70% since its all-time high in early November. The fall is even more marked for ether (-77%), the second cryptocurrency in terms of capitalization, which fell below 1,100 dollars. The capitalization of the entire sector rose from 3,000 billion dollars in capitalization in November to nearly 940 billion on Monday evening.

Panic among recent investors

“There were $4.7 billion in bitcoin sales at a loss on Monday, this is unprecedented in one day,” said Laurent Pignot, financial analyst at Zonebourse. “It’s symptomatic of a panic among investors,” he said. But at the same time, “the large wallets that hold more than 10,000 bitcoins have swelled”, points out Laurent Pignot, based on figures from Glassnode, a crypto data provider.

“Panic is more significant among investors who have invested recently and less among those who have a little more experience,” concludes the analyst. More seasoned investors continue to buy as they believe bitcoin’s price will go up in the long run.

Withdrawals blocked on Celsius

The bad news for the sector doesn’t end with falling prices, however. Or rather, this plunge reveals deeper flaws within the crypto ecosystem. Platforms have suspended the possibility of withdrawing money, like banks fearing a rush at the counters of savers to recover their money.

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

Alert on stablecoins

The platform could suffer a liquidity crunch due to its exposure to the stablecoin terra, which faltered in May, leading to 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 consulting firm attached to KPMG. This type of platform often displays attractive interest for investors, sometimes well above 10%, in exchange for the loan of their cryptocurrencies. “They are beginning to be regulated but still remain not very transparent,” recalls the expert.

Since yesterday, another “algorithmic” type stablecoin, the USDD, which works very similar to 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 in cryptocurrencies in an attempt to return to parity with the greenback. Without success for the moment: it was still worth only 0.98 dollars at 7:30 p.m. Tuesday. Fortunately, USDD is not an industry heavyweight like terra, the fourth stablecoin before its collapse.

Binance also struggling

In another sign of severe 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 finally lasted several hours on the marketplace with more than 90 million users.

A somewhat reassuring event for the market. “It has already happened in the past that platforms suspend their exchanges, especially during the fall of the crypto market in 2018”, nevertheless tempers Laurent Pignot. “Binance received too many transactions to process at once and was unable to manage”, explains Stanislas Barthelemi. According to him, the problem comes from “poor risk management by certain actors”.

But it is not the intrinsic functioning of the bitcoin cryptocurrency, nor of the blockchain, which are called into question.

Hiring and dismissal freeze

Several companies in the sector are strongly affected by the fall in prices. There are many announcements of hiring freezes and even layoffs. Brian Armstrong, the boss of Coinbase, one of the largest platforms in the sector listed on the Nasdaq, revealed on Tuesday a plan to reduce the workforce by 18%, which should lead to the elimination of 1,100 positions. “We grew too fast,” he explains, as Coinbase ramped up development and hiring in 2021, when prices soared.

This plan joins a long list. The Geminin platform, founded by the Winklevoss brothers, had already announced the dismissal of 10% of its employees in early June, evoking a “cryptographic winter”. The platform has for its part taken the decision to part with 260 employees, or around 5% of its workforce. BlockFi, finally, specialized like Celsius in the loans and borrowing of cryptocurrencies, announced the dismissal of 20% of its staff on Monday. Against the current, Binance nevertheless continues to hire and is still looking to fill 2,000 positions.

The current purge may be a blessing in disguise. “It’s a way to clean up the market to get back on a good footing,” judge Stanislas Barthelemi. “The current period will reveal the players who are really solid and resilient”, also believes Laurent Pignot. According to him, most of the decline in prices has passed, even if the bitcoin “can still fall below 20,000 dollars”. Others are much more pessimistic. Interviewed in the 21 Million newsletter, Christopher Dembik, director of macroeconomic research at Saxo Bank, foresees a rapid fall in the cryptocurrency, potentially down to $10,000.

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

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