What's causing the crypto bloodbath?

The cryptocurrency bloodbath has continued this week with Bitcoin at levels not seen since late 2020 while the value of the entire digital coin market has fallen below US$1 trillion (S$1.39 trillion) for the first time since January last year.

The rout comes after the crash of the Terra USD/Luna stablecoin project last month, which resulted in a significant loss in confidence in the crypto ecosystem.

Take Bitcoin. It was flying high at US$69,000 in November last year but now hovers just above US$20,000. On Monday alone, Bitcoin tumbled by around 17 per cent.

Here's why crypto prices are still falling:

This week's sell-off in crypto was triggered after Celsius Network, a major United States cryptocurrency lending company, froze withdrawals and transfers on Monday, citing "extreme" market conditions.

Celsius is one of the largest lenders of crypto, with around US$11.8 billion in assets, according to Bloomberg.

It offers users higher-than-average interest rates on their crypto deposits and then lends out the coins to earn a return. This has led to panic about the potential impact on the broader crypto market.

"If people won't be able to withdraw their cash when they want to, or when they need to, and especially when the market is falling sharply, it could trigger a bank run on cryptocurrency firms," Ms Ipek Ozkardeskaya, senior analyst at Swissquote Bank noted.

Additionally, crypto lenders are unregulated so there are few rules on the capital they must hold, or transparency over their reserves, which would have taken a hit from the recent volatility.

Volatility will likely come from the global economic situation.

Crypto prices have been volatile since the start of the year, pummelled by central banks raising interest rates to tackle soaring inflation. This has raised fears that the banks will need to act even more aggressively and drive investors away from risky assets like cryptos, wrote Mr Sipho Arntzen, an analyst from private bank Julius Baer.

All eyes will be on the US Federal Reserve's meeting this week, with the bank widely expected to announce further rate hikes at the gathering or in the months ahead.

The market is anticipating a 75-basis-point rise in one of the next three meetings this year, so any level above or below this could to lead to short-term spikes or slides in crypto prices.

No, but there will be more pain ahead. The financial health of Singapore-registered cryptocurrency hedge fund Three Arrows Capital has already come under scrutiny due to its exposure to a cryptocurrency called staked Ether (stETH).

Celsius is also exposed to stETH. According to Bloomberg, one Celsius wallet identified by blockchain analytics platform Nansen showed that it holds more than US$400 million in stETH.

The price of stETH has tumbled 35 per cent in the past seven days to US$1,137.38, while Ether has declined 34 per cent to US$1,193.98, according to CoinGecko.

Ms Ozkardeskaya noted that the industry may not be ready for further contagion.

But Mr Arntzen said that while crypto will take time to stabilise, "there remains long-term potential in the asset class due to the disruptive potential of the underlying blockchain technology".