On Monday morning, the cryptocurrency industry was on edge as investors concerned that contagion from difficulties at large crypto firms might cause a massive shakeout if not addressed.
Bitcoin, which has lost 57% this year and 37% this month, dipped below $20,000 for the first time since December 2020 over the weekend. The level has symbolic value because it corresponds to the peak of the 2017 cycle.
The price drop comes as a result of problems at multiple large industry players, and future drops might have a cascading impact as other crypto investors are forced to sell their holdings to pay margin calls and cover losses.
Three Arrows Capital, a crypto hedge fund, is considering its alternatives, including asset sales and a bailout by another firm, according to its founders in a Wall Street Journal piece published Friday, the same day Asia-focused crypto lender Babel Finance announced it would cease withdrawals.
Many of the industry’s current issues may be linked back to the catastrophic collapse of so-called stablecoin TerraUSD in May, as announced by US-based lender Celsius Network earlier this month.
On Monday, bitcoin was trading on either side of $20,000, while ether, the second-largest cryptocurrency, was trading at $1,075, having fallen below its own symbolic barrier of $1,000 over the weekend.
“If the market goes higher, everyone breathes a sigh of relief, things will get refinanced, people will raise equity, and all of the risks will dissipate. But if we move much lower from here, I think it could be a total shitstorm,” said Adam Farthing, chief risk office for Japan at crypto liquidity provider B2C2.
“There is a lot of credit being withdrawn from the system and if lenders have to absorb losses from Celsius and Three Arrows, they will reduce the size of their future loan books which means that the entire amount of credit available in the crypto ecosystem is much reduced.
“It feels very like 2008 to me in terms of how there could be a domino effect of bankruptcies and liquidations,” Farthing said.
To be fair, the crypto advances have coincided with a stock market fall, with U.S. stocks suffering their largest weekly percentage decline in two years on fears of increasing interest rates and a higher probability of a recession.
The price of bitcoin has tended to swing in a similar way to other risk assets like tech stocks.
Investors sought the relative safety of bitcoin and stablecoins, whose values are tethered to established assets, most often the US dollar. Smaller cryptocurrencies have been hammered even harder than major tokens.
