The past few months have not been very positive for cryptocurrencies, especially from the price standpoint. Ever since Bitcoin reached its ATH in November in 2021, its price has mostly been falling down.
However, the current few days have really pushed it to the levels where many believe Bitcoin will never get again. After Bitcoin fell below 40,000 dollars, many thought that the lowest possible price for BTC to reach was between 30,000 – 33,000 dollars. Yet, the price is now approaching 20,000 dollars and the break of the previous-cycle ATH (19,800 USD) is very likely. This has never happened in the history of Bitcoin, so what are the main reasons for this?
1. Luna, Celsius and Three Arrow Capital (3AC)
One of the main reasons why the current market is not in the best shape is the blow up of several significant projects. Terra with its Luna stablecoin was one of them. Yet, this has happened about a month ago, so this would not justify the current price drawdown.
And while the collapse of Luna was without any doubt a problematic event, it brought a cascade of other events, which are currently occurring and have the potential to put more selling pressure on the biggest cryptocurrencies in the market. Currently, the crypto industry is much more worried about Celsius and Three Arrow Capital than Luna. And here is the reason why:
The Celsius liquidity crisis
Celsius was rather heavily involved with Luna, being one of the 7 whale wallets that contributed to the UST depeg. Moreover, Celsius was counting on an asset called Lido Stake ETH (stETH), which solved for the liquidity problem of Ethereum Beacon Chain. However, while in the bull market the peg of stETH to ETH worked, in the bear market the ratio began to slide. This has put yet more pressure on the liquidity of Celsius as the users of this platform have had a difficult time withdrawing their assets.
And this was the last problematic piece. Once the prices of the cryptocurrencies dropped and the users began withdrawing their assets, Celsius started to face a liquidity crisis that could only spiral more downwards, essentially leading to the shutting down of the withdrawals. And while this might give them time to slowly sell some of their illiquid assets (if they indeed have them), it means that Celsius has definitely completely lost its credibility, just like Luna a month ago.
Three Arrows Capital with margin call?
Sadly for the crypto markets, this is not the only insolvency problem that it is currently facing. The most recent one involves Three Arrows Capital, commonly known as 3AC. 3AC is one of the largest Crypto-focused Venture Capital firms in the world started in 2012. 3AC has invested in numerous projects, starting from Bitcoin and Ethereum to projects such as Aave, Solana, Orca or even Terra.
The problems with Terra lost 3AC a lot of money. They have invested approximately 560 million dollars in Luna, which are now worth around 670 dollars. Some even suggest that due to this loss, 3AC moved some of its capital to more levered positions than before, to earn lost money back. However, this is never a good idea, since it puts more pressure on risk management, money management and liquidity as such.
The problems with liquidity are just like with Celsius, connected not only through the stETH, but also through margin calls, which many believe the 3AC is about to get soon. And if they have problems with liquidity and margin calls, they would be pushed to sell some of their assets to cover for the losses or “top up” their positions. This means that many of the tokens that the 3AC has invested in can be for sale, putting more selling pressure on some of the assets such as Near, Polkadot, Kusama, Avalanche or even Ethereum and Bitcoin.
Unfortunately, 3AC is not very transparent with what it is doing. Their wallets are not really known by the public. In the past, Zhu Su, the founder of 3AC has on many occasions made contradictory claims which only confused the followers of this VC, yet again, questioning the credibility of the whole project.
Others to follow?
While the case of Luna and its pathetic try with Luna 2.0 has already ended and is hopefully fully buried in the cryptocurrency history, Celsius and 3AC are still trying to stand strong. This might be, however, more difficult with time, as the pressure on these companies increases by worsening market conditions and lost support of the community.
Some experts from the industry even point out that Celsius and 3AC are not the last ones to lose ground. Nexo, BlockFi or even Coinbase are being highlighted as the next potential threats for the cryptocurrencies. This is mostly due to their lending and borrowing nature which is in many cases pushed to the edge with excessive leverage, something that in the bear market shows. Thus, mainly Bitcoiners are warning against the custodians such as Celsius, 3AC, Nexo or BlockFi and repeating the common saying:
“Not your keys, not your coins.”
2. Inflation and interest rates hike putting pressure on the markets
With inflation at a 40-year high, the central banks all around the world are facing tough decisions. As was recorded only a few days ago, the inflation in the United States is over 8.6%, inflation in many European countries over 12% or even 15% and countries such as Turkey are facing inflation over 73%. Thus, these banks are facing a dilemma not seen in decades. They need to fight increasing inflation without letting the panic spread around the markets.
And with the current measures such as interest rate hikes or quantitative tightening, the central banks have to tread very carefully in this uncharted territory. Some of them have even used monetary policies in such measures that were not seen in decades. For instance, the Federal Reserve has increased the interest rates first in March by 50 bps and now in June by 75 bps. Interest rate of this size was last seen in 1991. It is likely that the same steps will even follow in July, where the Fed is expected to increase interest rates yet again and it might be yet again by 75bps.
Thus, unless the inflation does not start slowing down, the central bankers will be in a trickier and stickier position. The interest rate hikes cannot continue forever. With each new interest rate hike, the power of monetary policies of the Federal Reserve or other central banks are slowly diminishing. This only increases the pressure on the markets, which can be seen through not only crypto markets, but also stock markets and possibly soon a real estate market.
The S&P500 for instance is seeing one of the worst years in its history. It has already shrunk by more than 22% since the beginning of the year, with no signs of slowing down. If interest rate hikes continue, there is only a small chance for the stock market to push up. And with the correlation that Bitcoin has with it, if the S&P500 decreases, in most cases so does Bitcoin, crypto fans might not be very pleased with the next few weeks or months.
Additionally, the downtrend seems to be only worsening in the past few days not only for crypto, but especially for S&P500. Over the last two weeks, S&P500 has lost almost 13%, which has happened previously in March 2020, August 2011 and March 2009. All of these dates are connected to very extreme and chaotic times in the markets that happened at some of the most disturbing times in history.
3. Pessimistic sentiment – Fear and Greed with near-record numbers
These, in combination with a pessimistic outlook that is not only spreading around the cryptocurrency world, but in the financial markets as such, can hardly be seen as positive signs for a bottom or reversal. Additionally, with the macroeconomic conditions, never-ending pandemic lockdowns and geopolitical conflicts spreading all around the world, the markets are far from a good shape, which is another reason that is fuelling the current meltdown in the crypto industry.
Thus, it is a no surprise that with conditions such as these, the newest and most risky assets will suffer the most. On the contrary, it was only a matter of time until Bitcoin and other cryptocurrencies bleed more significantly, which is exactly what is currently happening.
And while this might have been expected, not many actually believed that Bitcoin and altcoins such as Ethereum, Cardano or Solana will go to such low prices. The current negative situation can be portrayed not only through the prices, but also the overall sentiment in the market. And while this can be seen through several metrics, the best one might be the Bitcoin Fear and Greed Index.
The Fear and Greed Index displays the current atmosphere in the markets, and the current values make for grim reading. The Fear and Greed Index is flashing numbers that have only been seen in the most severe and extreme bear markets in the history of cryptocurrencies. In fact, only on August 22nd 2019 was the value of Fear and Greed lower and the value at that time was 5. Solely this portrays in how much trouble the cryptocurrencies currently are.
Conclusion
The current red numbers in the cryptocurrency space are a result of extreme pressures. These are coming both from within the crypto industry through problems of Celsius and 3AC, as well as, from the outside by worsening macroeconomic conditions seen through inflation and unprecedented rate hikes of most central banks around the world.
Yet, this does not mean that the future of cryptocurrencies is in danger. On the contrary, the crypto market just needs to shake out the excessive leverage and weak hands and it will undoubtedly rise to become stronger than ever in the coming months and years.
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