Bitcoin tumbles amid crypto contagion fears after Celsius Network freezes withdrawals

The Celsius move triggered a slide across cryptocurrencies, with their value dropping below US$1 trillion, on June 13, 2022. PHOTO: REUTERS

SINGAPORE (BLOOMBERG, REUTERS) - Bitcoin extended declines on Tuesday (June 14) as investor sentiment took another leg down over fears that bigger Federal Reserve interest rate hikes loom to quell inflation.

Also triggering worries was the move by major US cryptocurrency-lending company Celsius Network on Monday to freeze withdrawals and transfers, citing "extreme" market conditions, another sign of the financial market downturn hitting the cryptosphere.

The Celsius move triggered a slide across cryptocurrencies, with their value dropping below US$1 trillion (S$1.39 trillion) on Monday for the first time since January 2021, sparking worries the rout might spill over to other assets or hit other companies.

"Almost anything can be systemic in crypto... because the whole space is over-levered," said Mr Cory Klippsten, chief executive of Swan Bitcoin, a Bitcoin savings platform. "It is all a house of cards."

Celsius CEO Alex Mashinsky and Celsius did not respond to Reuters' requests for comment.

New Jersey-based Celsius, which has around US$11.8 billion in assets, offers interest-bearing products to customers who deposit cryptocurrencies with its platform. It then lends out cryptocurrencies to earn a return.

Bitcoin, the world's largest digital token, shed as much as 10.3 per cent to reach US$20,824, the lowest level since December 2020. It fell as much as 15 per cent on Monday after the Celsius announcement.

A range of other tokens from Ether to Avalanche were also nursing losses.

"Sentiment for cryptos is terrible as the global crypto market cap has fallen below US$1 trillion dollars," said Mr Edward Moya, senior market analyst for the Americas at Oanda. He added that a Bitcoin drop below the US$20,000 level could lead to "even uglier" price action.

Cryptocurrencies have become emblematic of a flight from speculative investments as monetary policy is tightened around the world to fight price pressures, draining liquidity from global markets.

Crypto lender Celsius freezing withdrawals on Monday exacerbated worries about the stress in the digital-asset sector, which was already on tenterhooks after the collapse of the Terra/Luna ecosystem.

Traders are also monitoring MicroStrategy, whose big bet on Bitcoin is backfiring. Among the issues weighing on the company is the threat that an even deeper drop in the token's price will require it to post additional collateral for loans.

Companies exposed to cryptocurrencies have previously warned that declines in token prices could have ripple effects, including by triggering margin calls.

Markets extended a sell-off on Monday after United States inflation data last Friday that showed the largest price increase since 1981, prompting investors to raise their bets on Fed rate hikes.

That was likely the key driver of the crypto market nosedive, Mr Jay Hatfield, chief investment officer at Infrastructure Capital Management, wrote in a note on Monday.

"The Fed's overexpansion of its balance sheet led to a number of bubbles, including tech stocks (and) crypto tokens," he said.

Cryptocurrency investors have also been rattled by the collapse of the TerraUSD and Luna tokens in May, which was shortly followed by Tether, the world's largest stablecoin, briefly breaking its one-to-one peg with the US dollar.

In a blog post on Monday, Tether said that while it has invested in Celsius, its lending activity with the crypto platform has "always been overcollateralised" and has no impact on Tether's reserves. The token was last trading flat at US$1.

Also on Monday, BlockFi, another crypto-lending platform, said it was reducing its headcount by about 20 per cent due to a "dramatic shift in macroeconomic conditions". BlockFi said that it has no exposure to Celsius.

Bitcoin, which surged in 2020 and 2021, is down more than 50 per cent so far this year. Ethereum is down over 67 per cent in 2022.

Crypto lending

Celsius says on its website that customers who transfer their crypto to its platform can earn an annual return of up to 18.6 per cent. In a blog post on Sunday evening, the company said it had frozen withdrawals, as well as transfers between accounts, "to stabilise liquidity and operations while we take steps to preserve and protect assets".

"We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations," the company said.

Celsius' token has fallen about 97 per cent in the last 12 months, from US$7 to around 20 US cents, based on CoinGecko data.

'Grey area'

Crypto-lending products have surged in popularity and many companies have launched offerings within the last year.

This has sparked concerns among regulators who are worried about investor protection and systemic risks from unregulated lending products.

Celsius and crypto firms that offer similar services operate in a regulatory "grey area", said Mr Matthew Nyman at CMS law firm.

Celsius raised US$750 million in funding last year from investors, including Canada's second-largest pension fund Caisse de Depot et Placement du Quebec. Celsius was valued at the time at US$3.25 billion.

As at May 17, Celsius had US$11.8 billion in assets, its website said, down by more than half from October, and had processed a total of US$8.2 billion worth of loans.

Mr Mashinsky, the CEO, was quoted in October last year saying that Celsius had more than US$25 billion in assets.

Rival crypto lender Nexo said on Monday it had offered to buy Celsius' outstanding assets.

"We reached out to Celsius on Sunday morning to discuss the acquisition of its collateralised loan portfolio. So far, Celsius has chosen not to engage," said Nexo co-founder Antoni Trenchev.

Celsius did not respond to a request for comment on Nexo's offer.

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