Crypto crisis deepens and spreads

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by Glenn Dyer

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The crypto world continues to be rattled by the spillover of those big falls of Friday, the weekend and Monday, with the decision by Celsius Network to suspend withdrawals of any type still rattling confidence and activity.

Celsius’s problems saw increased speculation about the fate of similar businesses and tokens with several situations emerging during Tuesday.

Analysts and media commentators said the collapse in the crypto space would be on the agenda for the two-day Fed meeting that started Tuesday but would not affect the central bank’s decision, now increasingly tipped to be a rise of 0.75% instead of the previous forecast for a rise of half a per cent.

Commentators generally saw little spillover into the wider financial markets, except in isolated areas of individual investors or small companies with little systemic risk.

But regulators are getting involved in the crypto mess with Fox News reporting that the Securities and Exchange Commission had written to at least one leading crypto lender with a series of questions about its business.

The report said the inquiry is not a reaction to the current problems but was sent after May’s problems and collapse of Terra’s UST stablecoin and the associated LUNA token.

Fox News said the SEC was asking about the kinds of protections the lender has in place against insider trading. The inquiry is meant to cover additional exchanges as well, according to the Fox report

While the price of bitcoin again dropped – to less than $US21,000 in Asian trading Tuesday, it rose back to around $US21,400 just before 8am Sydney time on Wednesday, according to Coindesk. That’s down close to 7% for the day.

The value of the entire crypto business fell further under the $US1 trillion level.

Coinbase, the cryptocurrency exchange, revealed it will cut 18% of full-time jobs, according to an email sent to employees on Tuesday morning.

Seeing the company had around 5,000 full timers, the cut equates to more than 1,100 people.

CEO Brian Armstrong blamed the need for the cuts on several factors – a possible recession; the need to manage Coinbase’s burn rate and increase efficiency (ie, more cost cuts are needed). He also said the company grew “too quickly” during a bull market.

Unlike Monday’s 11% slide, shares in Coinbase ended down less than 1% on Tuesday.

That announcement followed one from crypto lender BlockFi, which said it will be cutting around 20% of its 850 staff as the company because of the dramatic downturn in digital currencies and worries about a weaker economy.

CEO Zac Prince revealed the cuts in a tweet Monday, saying that BlockFi has been impacted by the “dramatic shift in macroeconomic conditions,” which have had a “negative impact” on growth.

Meanwhile CDPQ, the manager of Canada’s second-biggest pension fund, which co-led an equity investment in Celsius late last year said in a statement that it is “closely monitoring the situation.”

It also told the Financial Times that Celsius had endured a “strong volume of withdrawals” from customers in recent weeks.

Many analysts though said any spillover effects from the Celsius problem would likely to be limited to the crypto sector.

Monsur Hussain, senior director of financial institutions at Fitch Ratings, said a liquidation of Celsius’ assets would “further rock the valuation of cryptoassets, leading to a wider round of contagion within the crypto sphere.”

Celsius has a large presence in the so-called decentralized finance space, which aims to recreate traditional financial products like loans without the involvement of intermediaries like banks.

Fitch’s Hussain said the falls in crypto prices reflected a “shrinking of the entire crypto market,” and agreed that “contagion with the broader centralised financial system will be limited.”

Crypto investors fear the possible collapse of Celsius may lead to even more pain for a market that was already on shaky ground after the demise of $US60 billion stablecoin venture Terra in May. Celsius was an investor in Terra, but claimed it had “minimal” exposure to the project.

Some media reports said Celsius was more involved in Terra than it has admitted.

The Financial Times reported on Tuesday:

“In May, Celsius pulled $500mn from the Terra ecosystem shortly before it collapsed, contributing to the rush to the exits that pulled down the terra stablecoin and its linked luna token. The company had a tougher time last year when it lost 900 bitcoin it had deposited with a crypto venture called the Badger DAO that was then hacked. Celsius was also the holder of large amounts of stETH issued by another company, Stakehound, which became practically worthless when Stakehound lost the keys to the underlying ether.”

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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