Cryptocurrency plunges as crypto ‘bank’ Celsius suspends withdrawals

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Major cryptocurrencies suffered big losses on Monday. As I write this, bitcoin is down 14% in the last 24 hours, while ether is down 16%. Other major cryptocurrencies including solana, dogecoin and litecoin are also down double digits, according to CoinMarketCap.

The cryptocurrency crash is part of a broader sell-off in the market. The S&P 500 stock index fell nearly 4% on Monday amid fears of a faster rate hike from the Federal Reserve. High interest rates put downward pressure on all assets, including stocks and cryptocurrencies.

Another major factor that may have spooked cryptocurrency traders was crypto lender Celsius’ announcement on Monday that it was suspending withdrawals. The company said this was the result of “extreme market conditions”.

Celsius is actually an unregulated cryptocurrency bank. Customers can deposit cryptocurrency with Celsius and then borrow dollars against those holdings. Customers can also earn interest on cryptocurrency deposits, with the company’s website advertising interest rates of up to 18% for certain cryptocurrencies. This figure is far greater than what Americans can earn from conventional banks. Celsius says it has 1.7 million customers.

A Bloomberg article from January reported that Celsius had inspired the loyalty of some users of the platform:

In testimonials posted last year on Twitter as part of a contest in which customers shared their “Celsius story”, many said they had entrusted Celsius with their savings. One said he took the equity out of his home and cashed in his work pension and savings for his children’s education to put the money in the company’s accounts. Another said it allowed him to quit his job to be closer to his child.

In a January Bloomberg article, Celsius CEO Alex Mashinsky “told Bloomberg Businessweek that Celsius is able to pay such high returns because it passes most of its revenue on to its users. He said that it’s the traditional financial system that rips people off by taking their deposits, using them to make money, and then pretending it can only pay minimal interest rates.”

“Someone is lying,” Mashinsky said. “Either the bank is lying or Celsius is lying.”

While Celsius offers higher interest rates than a traditional bank, Celsius deposits are not protected by the Federal Deposit Insurance Corporation, which provides financial support for deposits at conventional banks. This means that if Celsius were to run into financial difficulties, some customers might not get all of their money back.

In a blog post last week, Celsius brushed off rumors that he was struggling financially.

“At this already difficult time, it is unfortunate that voice actors are spreading misinformation and confusion,” the company wrote. “They tried unsuccessfully, for example, to link Celsius to the Luna collapse and falsely claim that Celsius suffered significant losses as a result.”

This was a reference to news from last month that terra, an “algorithmic stablecoin”, turned out not to be so stable in practice. Terra’s value was supposed to be pegged to $1, with the associated cryptocurrency luna supposed to provide a safety net for that peg. But the whole house of cards came crashing down last month amid a broader cryptocurrency selloff.

Celsius has grown rapidly over the past year, attracting increased regulatory scrutiny. Last September, regulators in several states opened investigations into the company’s business practices, arguing that the company’s loan products may constitute unregulated securities.

Celsius did not provide details of the “extreme market conditions” that led the company to suspend withdrawals. Celsius says it is working diligently to resume withdrawals, but users have good reason to be concerned about the company’s financial health.

In the cryptocurrency industry, companies are tightening their belts expecting recent price declines to last for some time.

On Friday, cryptocurrency exchange and wallet company announcement it was laying off 260 employees, or about 5% of its workforce. A week earlier, cryptocurrency exchange Gemini, founded by the Winkelvoss brothers, announced that it was cutting its workforce by 10%. The brothers blamed the cuts on “turbulent market conditions likely to persist for some time”.

One of the biggest cryptocurrency companies, Coinbase, recently announced that it is freezing all new hiring. This included withdrawing some offers that candidates had already accepted. Coinbase’s stock price has fallen more than 80% since its peak last November.

The steady drumbeat of bad news has led to talk of the start of another “crypto winter”. The cryptocurrency world has seen at least three such periods. During this downturn, it is common for a significant number of cryptocurrency-related projects and businesses to fail.

Every previous crypto winter has been followed by a thaw and then a new boom. More recently, bitcoin fell to around $3,200 in late 2018 before surging above $60,000 in 2021. Cryptocurrency boosters are hoping history will repeat itself, with bitcoin’s current low price leading to new price records in a few years.

But there is no guarantee that this will happen. At some point, the crypto sector will reach a saturation point, after which cryptocurrency prices may begin to behave more like other conventional assets – rising during booms and falling during downturns, but not delivering. not necessarily exceptional returns for those who hold them for the long term.

Tim Lee was on staff at Ars from 2017 to 2021. In 2021, he launched Full Stack Economics, an independent e-newsletter on economics, technology and public policy. You can subscribe to his newsletter here.