The past month has seen a major plunge in cryptocurrency prices, as recessionary fears loom and major firms experience operational problems and insolvencies.
The Analyst: Marcus Sotiriou, the analyst at the UK-based digital asset broker GlobalBlock, analyzed the severe sell-off experienced in the cryptocurrency market recently.
The Thesis: Sotiriou highlights three primary reasons for the recent crash experienced in the cryptocurrency market.
1. Insolvency of crypto hedge funds such as 3 AC (Three Arrows Capital): One of the largest cryptocurrency lenders and borrowers, 3AC, has faced major illiquidity and insolvency following the recent market crash. With hundreds of thousands of Ethereum (CRYPTO: ETH) tokens under management, the company's insolvency obstructs the withdrawal of funds for investors globally.
3AC's bankruptcy would implicate major losses incurred by investors. Illiquidity results in a drastic difference between the funds received at the liquidation of collateral and the funds they are owed. As lenders would have to protect their investments, they would have to withdraw their funds leading to the cryptocurrency assets being deleveraged. This has created an acute FUD for investors across the cryptocurrency sector.
2. Systemic issues in the infrastructure of companies, such as Celsius: One of the biggest crypto lenders, Celsius faces risks of insolvency. The firm also halted withdrawals in order to “stabilize liquidity.” The company has firmly tried to prevent this liquidity crisis, as it has heavily added to its three biggest positions that face liquidation. For example, the company reduced a liquidation price of $22,500 to $14,000 on its position, involving Maker wBTC Vault.
There is also fear looming around Staked Ether or Lido Staked ETH (CRYPTO: stETH) on the platform. Despite collateralizing positions, the uncertainty surrounding the Staked Ether keeps investors globally in a fearful state.
3. Unwind of liquidity in global markets due to rate hikes and QT: As the U.S. government has overextended money supply via quantitive easing (QE) over the past few years, there has been hyper-inflation across the U.S. economy.
Consequently, the Federal Reserve has undertaken quantitive tightening (QT) by hiking interest rates. On June 15, the Federal Reserve announced that it would be hiking interest rates by 0.75%. Therefore, there is a significant capital flow-out of risk-on assets, such as cryptocurrency. Thus, recessionary fears looming in the global economy have drastically plunged cryptocurrency markets.
BTC Price Action: Bitcoin (CRYPTO: BTC) has fallen from the all-time high of $68,990 to $20,849.63 at publication Friday morning. Furthermore, the market cap of the crypto sector has fallen to below $900 billion, around one-third of its all-time high.
