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Major cryptocurrencies suffered big losses on Monday. As of this writing, Bitcoin is down 14 percent over the past 24 hours, while Ether is down 16 percent. Other major cryptocurrencies — including Solana, Dogecoin, and Litecoin — are also down by double digits, according to CoinMarketCap.
The cryptocurrency crash is part of a broader market sell-off. The S&P 500 stock market index fell nearly 4 percent Monday on fears of faster rate hikes from the Federal Reserve. High interest rates are putting downward pressure on all assets, including stocks and cryptocurrencies.
Another big factor that may have spooked cryptocurrency traders was crypto lender Celsius’ Monday announcement that it was suspending payouts. The company said this was the result of “extreme market conditions”.
Celsius is effectively an unregulated cryptocurrency bank. Clients can deposit cryptocurrencies with Celsius and then borrow dollars against those holdings. Customers can also earn interest on cryptocurrency deposits, with the company’s website touting interest rates of up to 18 percent for some cryptocurrencies. That number is far more than Americans can earn from traditional banks. Celsius says it has 1.7 million customers.
A January Bloomberg article reported that Celsius had won the loyalty of some users of the platform:
In testimonials posted to Twitter last year as part of a contest in which customers shared their “Celsius story,” many said they trusted Celsius with their savings. One said he took up home ownership and used his work pension and savings to fund 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 earnings on to its users to use to make money, and then to claim that it can only pay tiny interest rates.”
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“Someone is lying,” Mashinsky said. “Either the bank lies or Celsius lies.”
While Celsius offers higher interest rates than a traditional bank, Celsius deposits are not protected by the Federal Deposit Insurance Corporation, which provides financial protection for deposits with traditional banks. This means that if Celsius runs into financial difficulties, some customers may not get all of their money back.
In a blog post last week, Celsius brushed aside rumors of financial troubles.
“At this already challenging time, it is unfortunate that voice actors are spreading misinformation and confusion,” the company wrote. “For example, they have tried unsuccessfully to link Celsius to the collapse of Luna and falsely claim that Celsius suffered significant casualties as a result.”
That was a reference to last month’s news that Terra, an “algorithmic stablecoin,” hadn’t proven to be that stable in practice. Terra’s value was supposed to be pegged to $1, with its associated cryptocurrency Luna reportedly providing a backing to that peg. But the whole house of cards collapsed last month amid a broader cryptocurrency selloff.
Celsius has grown rapidly over the past year, prompting increased regulatory scrutiny. Last September, regulators in several states launched investigations into the company’s business practices, arguing that the company’s lending products may constitute unregulated securities.
Celsius didn’t provide any details on the “extreme market conditions” that caused the company to suspend payouts. Celsius claims it is working diligently to resume payouts, but users have good reason to worry about the company’s financial health.
Across the cryptocurrency sector, companies are tightening their belts with the expectation that recent price declines could continue for a while.
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On Friday, cryptocurrency exchange and wallet company Crypto.com announced It laid off 260 employees, about 5 percent of its workforce. A week earlier, cryptocurrency exchange Gemini, founded by the Winkelvoss brothers, announced it would cut its workforce by 10 percent. The brothers blamed the cuts on “turbulent market conditions that are likely to persist for some time.”
One of the largest cryptocurrency companies, Coinbase, recently announced that it is freezing all new hires. This included withdrawing some offers that job applicants had already accepted. Coinbase’s share price has fallen more than 80 percent since its peak last November.
The steady drumbeat of bad news has prompted discussions about the start of another “crypto winter.” The cryptocurrency world has seen at least three of these periods. In this era of cutback, it is common for a significant number of cryptocurrency-related projects and businesses to fail.
Each previous crypto winter was followed by a thaw and then a new boom. Most recently, Bitcoin fell to around $3,200 in late 2018 before surging to over $60,000 in 2021. Cryptocurrency boosters are hoping history will repeat itself as today’s low bitcoin price will lead to new price records a few years from now.
But there is no guarantee that will happen. Eventually, the crypto sector will reach a saturation point, after which cryptocurrency prices may behave more like other traditional assets – rising during booms and falling during downturns, but not necessarily delivering stellar returns for those who hold them over the long term.
Tim Lee was an Ars associate from 2017 to 2021. In 2021 he launched Full Stack Economics, an independent email newsletter about business, technology and public policy. You can subscribe to his newsletter here.