With the market entering its deepest and darkest phase, Celsius, the giant US DeFi lending platform, has been fighting to keep its feet on the ground after announcing the pause of its withdrawals, swaps and transfers between accounts, locking all its customers out of their money.
Bitcoin and other cryptocurrencies took a beating on the news, for the world’s biggest digital asset decreased by 15%, reaching $20,150, almost near the peak of 2018. Ether also dropped 17%, reaching $1,030, while Celsius’ cel token plunged more than 38%.
In addition to that, cryptocurrencies have also been tangled up in a market panic over rising inflation and higher interest rates, which has dulled the appetite for higher-risk assets, making the situation even worse.
In actual fact, the Federal Reserve will most probably raise rates by three quarters of a point tonight, according to Fed funds futures listed on the CME. This marks a huge unexpected change in sentiment from Monday, when just 40% of investors believed the Fed would raise rates that high. A week ago, expectations for an increase were just 3%. Does this mean we’re headed towards a recession? Only time will tell.
Now, with $8 billion worth of cryptocurrencies tied up in Celsius accounts and loans, the platform remains a main threat to the space; if the latter starts liquidating assets, this will definitely cause a turmoil in the market. In fact, some have already speculated that the most recent declines have been happening because of the company selling.
Moreover, regulators will seize every opportunity they have to control the industry, and this would be the perfect excuse to go there, which leads us to the long- term risk: strict and prohibitive regulations.
However, this situation raises a question that is probably on the mind of every crypto enthusiast and investor: unlike traditional financial institutions, such as banks, blockchain technology allows one to be in full control of their assets. But isn’t this the case with Celsius, as investors have no longer access to theirs?
Blockchain transparency & control over assets
As mentioned above, the group, which offers users higher-than-average interest rates on their deposits, is essentially the crypto equivalent of a bank — but without the strict insurance requirements faced by traditional lenders. Nonetheless, since it functions under blockchain technology, depositors have significantly more control over their personal information and financial data than users of fiat currencies.
This shows that at the end of the day, even if one is fully invested in this technology and hands over their assets to an exchange, they will not be in control of anything they own, as Celsius’ decision to pause all transactions confirms that.
Future of the market & other projects
Celsius explains that its decision is intended to protect the community, and that the activity itself will serve the users, but there is nothing in this action that really serves them. It is just a signal to announce that the company is in a liquidity crisis and it cannot meet its obligations.
Nevertheless, this remains a great tragedy for the immense number of users who have put all their trust in this platform, as they have lost huge amounts of money that they might not even get back. But the Celsius situation is only a small part of the bigger picture; the company’s collapse took place not only because of its business model, but because it invested its assets in projects with a business model similar to its own. These projects operated on a mutual feed of risk aimed at creating artificial demand for their currencies, which made them look more successful than they really were. This is why, other projects are expected to collapse as well, which will cleanse the market in the long-run. But this steadiness will not be achieved without regulatory intervention and oversight of players managing billions of dollars in assets. Until then, cryptocurrencies will keep on suffering and more projects will eventually fall.
Likewise, it is not looking good for MicroStrategy, a huge investor in Bitcoin, which has borrowed $205 million from crypto bank Silvergate Capital Corp in March, with the three-year loan mostly secured against some 19,466 bitcoins.
The CEO of the technology company actually began purchasing Bitcoin in August 2020, bringing the company’s total to 129,218 Bitcoins over the following months.
Since MicroStrategy owns roughly 129,218 bitcoin, a drop in the value of Bitcoin is commonly connected to a drop in its share price.
The lower the price goes, the bigger risk it poses to the company, and if the value of Bitcoin keeps decreasing, MicroStrategy may have to offer up more of its Bitcoin stash to cover the loan with Silvergate Bank that has been used to buy more Bitcoin. In other words, if both companies, whether Celsius or MicroStrategy, officially reach liquidation state, it will create an intense selling pressure, leading to a bigger crash of the market.
However, the good news is that even if we reach that point, the company holds sufficient Bitcoin to secure the loan and still have some in store, giving investors a sense of relief..
Better yet, all it takes is a rise in Bitcoin price to clear this out, in hopes of readjusting the whole space and Celsius issue. Nonetheless, tonight’s decision of the Federal Reserve regarding the increase in interest rate will be the deal breaker, as it will affect the price of Bitcoin even more, making it a fight- fire- with- fire situation.