By Marcus Sotiriou, analyst at the UK-based digital asset broker Global block
The total crypto market capitalization fell below $1 trillion for the first time since January 2021. After starting the weekend at $1.16 trillion, the value of all cryptocurrencies reached a low of $940 billion this morning as Bitcoin fell below $24,000.
How did all this happen?
Many believe this is mainly due to fear surrounding the risk of insolvency at one of Celsius’s biggest lending platforms, after it was widely speculated they had been irresponsible with client funds.
They were heavily exposed to UST with around $500 million in client funds, and also lost around $50 million, when the DeFi Badger DAO protocol was mined. Back then Celsius declined to comment on the percentage of client funds held in DeFi protocols. The biggest problem Celsius currently has seems to be its $1.5 billion position in stETH – 1 stETH is a claim on 1 ETH locked on the Beacon Chain. Currently, stETH is trading at a discount of over 5% to ETH, raising concerns that if clients try to buy back positions, Celsius will run out of cash to repay them. They borrow heavily against their illiquid positions to pay for client redemptions, but they could run out of funds within 5 weeks.
Celsius announced this morning that it has “suspended all withdrawals, exchanges and transfers between accounts. His operations will continue and he will continue to update the community. Celsius has taken this action to stabilize liquidity and to preserve and protect assets.
Despite the fear, uncertainty and doubt that the Celsius debacle has caused, selling began on Friday at the start of the weekend after the release of US inflation data. The CPI would have been 8.6% year-on-year in May, an increase of 0.3% from April, showing that inflation is rising rather than slowing. I think that contributes more to the decline we’ve seen because it translates to a more hawkish Federal Reserve – they’re now being forced to pull more cash out of the market in order to bring inflation down. When liquidity is removed, risky assets are hit the hardest, including crypto.
It is important to remember that this period of persistent inflation should pass and the crypto industry will become more efficient as insecure and incompetent businesses are phased out.