Digital tokens are in free fall as fears of climbing inflation, aggressive interest rate rises and liquidity issues at a key player in the crypto space have plagued crypto markets.
The sell-off in cryptocurrencies deepened even further on Wednesday, with bitcoin sinking very close to the key level of $20,000.
Bitcoin plunged as much as 10% to an intraday low of $20,166, according to Coinbase data. It was last trading at $21,544.37, down about 2.6%, around 4:24 p.m. ET. The world’s largest digital currency has plunged nearly 70% since the peak of the crypto craze in November 2021.
$20,000, according to Charlie Morris, head of digital asset management business ByteTree, is near to the high point of bitcoin’s previous significant bull run in 2017, and so “may prove to be a support level.”
“Bitcoin has generated no money since the 2017 high of $20k,” he told CNBC, “but that hides the outsized gains over all earlier time frames.”
Fears of rising inflation, aggressive interest rate hikes, and liquidity concerns at a prominent player in the crypto world have caused digital currencies to plummet.
As expected, the Federal Reserve boosted interest rates by 75 basis points. Chairman Jerome Powell also hinted that if inflation remained high, another 0.75 percentage point boost could be implemented next month.
Mostafa Al-Mashita, executive vice president of SDM, a Canadian crypto firm, said crypto has been affected by the broader “risk-off atmosphere” that is hitting markets.
“What we are experiencing is the impact of a worsening macroeconomic trend in which inflation is rising because of supply-chain issues,” he said.
Earlier this week, crypto lending firm Celsius began blocking users from accessing their funds, stoking speculation that the company may soon become insolvent.
Investors worry a possible liquidation of Celsius may lead to even more pain for crypto, potentially knocking down other major players.
“If Celsius collapses, a liquid cascade could occur where whales who have leveraged bets on Bitcoin and Ethereum become liquidated,” said Marcus Sotiriou, analyst at U.K. based digital asset broker GlobalBlock.
Celsius holds a lot of assets in the decentralized finance space, including staked ether, a token offered by crypto start-up Lido Finance that is meant to be worth the same as ether, the second-biggest cryptocurrency.
Staked ether is essentially an IOU that investors buy to earn rewards on their ether holdings. The original ether is kept locked in the crypto equivalent of a vault, and can’t be accessed until the Ethereum blockchain successfully passes a long-awaited upgrade.
Celsius “may be forced to sell their holdings to satisfy redemptions since the underlying ETH is locked up with no withdrawal date in sight,” Marc-Thomas Arjoon, research associate at CoinShares, said in a note published Monday.
The crypto market was already on shaky ground after the $60 billion collapse of two popular tokens last month. Now, key players in the space are bracing for a long-term bear market known as “crypto winter.”
Numerous companies have cut back on costs dramatically, with Coinbase on Tuesday announcing it would lay off around 1,100 people.
There’s now also speculation that Three Arrows Capital, a crypto hedge fund, is on the brink of collapse. Zu Shu, the firm’s co-founder, said it was “in the process of communicating with relevant parties and fully committed to working this out.”