After a Crazy Week in Crypto, Investors Are Wondering What’s Next

Crypto was all the rage in 2021. This week it crashed.

The fall began late Sunday. One of the biggest crypto lending platforms, Celsius Network LLC, has unexpectedly announced to its customers that it is suspending all withdrawals, exchanges and transfers between accounts due to extreme market conditions.

Celsius customers panicked, and people with money in other crypto platforms started wondering if they would be next.

Anxiety quickly spread. Bitcoin and ether prices fell around 15% on Monday and continued to decline throughout the week, building on the decline that has plagued them all year. Digital currencies are down 54% and 70%, respectively, since the start of the year, according to data from CoinDesk.

WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composition: Elizabeth Smelov

“The market sentiment is very, very depressed here.”


—Frank Downing, ARK Investment Management

Tuesday, Coinbase Global Inc.,

the largest crypto exchange in the United States, said it would reduce its workforce by around 18%. In a letter, chief executive Brian Armstrong said the company had grown too quickly and that a potential recession “could lead to another crypto winter.”

Two other top crypto companies, Crypto.com and BlockFi, also announced layoffs.

“It sucks right now,” said Jeff Dorman, chief investment officer at Arca, a digital asset investment firm. “Companies are laying off, business is down, crypto is once again the laughingstock of Wall Street.”

Crypto’s crazy week is unfolding alongside the broader market tumult. The Federal Reserve has been trying to rein in high inflation for decades and this week announced its largest interest rate hike since 1994. While the question of whether the United States will enter a recession is far from settled, many investors worry that higher interest rates will swing it into one. Those concerns have pushed stocks lower throughout the year, and the S&P 500 entered a bear market this week.

BlockFi earlier this year paid $100 million to settle an SEC investigation into its crypto lending business.


Photo:

Gabby Jones/Bloomberg News

In the realm of crypto, the industry is counting on both the drastic change in macroeconomic conditions and the decline in investor interest. Higher rates make speculative investments like crypto less appealing, as investors can find other options to earn returns. Celsius’s troubles could also accelerate a regulatory crackdown on crypto lenders, which could continue to drive crypto prices down.

On Wednesday afternoon, Celsius CEO Alex Mashinsky said the company was “working non-stop” to resolve the issue, but gave no indication of when withdrawals would resume.

Crypto lenders like Celsius accept cryptocurrency deposits from customers and lend them to other users like market makers and exchanges to earn a return. Celsius also invested client funds in high-risk decentralized finance projects to earn a return. DeFi, as it is called, is a kind of parallel financial system for crypto with its own version of banks and loans.

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Individual investors were drawn to Celsius because the company paid clients annual percentage returns of up to 18.6% on cryptocurrency deposits, far more than they could get from a bank account. ordinary. But what many are only now realizing is that while crypto companies such as Celsius are in some ways similar to banks, they lack the legal protections built into the traditional financial system.

In April, Celsius stopped offering interest-bearing accounts to “unaccredited” investors, or those who do not meet a certain wealth threshold, after being pressured by regulators.

In February, Celsius competitor BlockFi paid $100 million to settle allegations that its product violated investor protection laws, the highest fine ever accepted by a cryptocurrency firm, reported Securities and Exchange Commission officials said at the time. The company neither admitted nor denied wrongdoing.

On Thursday, the Texas State Securities Board said it had opened an investigation into Celsius over its decision to freeze client accounts. The council works in conjunction with New Jersey, Kentucky, Alabama and Washington.

“Regulators were already watching the space – they’re likely going to move even faster now,” said Frank Downing, analyst at ARK Investment Management.

“Market sentiment is very, very depressed here,” Downing added. “Given the macro context here, we’re not ruling out another leg down.”

On Friday, Babel Finance, a Hong Kong-based crypto lending and trading firm, said it was suspending redemptions and withdrawals of all products, citing “unusual liquidity pressures”.

“We are in close communication with all related parties and will share updates in a timely manner. Babel Finance has no exposure to Celsius,” a company spokesperson said.

Also on Friday, cryptocurrency hedge fund Three Arrows Capital said it had hired legal and financial advisers to explore options such as asset sales and a bailout by another company. The hedge fund suffered heavy losses from selling crypto.

Mr Dorman, chief investment officer at Arca, said his firm maintained a higher cash balance but was not afraid to put money to work for good opportunities.

“As long-term investors, we’re looking for things that over the next 12 to 36 months will trade significantly higher than they’re trading today,” he said.

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