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Black Monday in the crypto market

The week starts in the red for the main cryptocurrencies. Bitcoin price drops below $24,000, a level it hasn’t seen since December 2020.

A month after the crypto-crash, it starts again. At the time of writing, major cryptocurrencies are in the red, posting significant drops. This Monday around 3 p.m., the queen of cryptocurrencies, bitcoin, has fallen by more than 13% since this Sunday, trading at less than 24,000 dollars. This is the lowest level since December 2020. The asset has lost 65% of its value compared to its all-time high last November at $69,000.

In its fall, it dragged down the main cryptocurrencies, including ether, which plunged even more than bitcoin: the cryptocurrency fell by more than 17% over the past 24 hours, trading around 1,200 dollars.

A plummeting capitalization

The capitalization of all the cryptocurrencies in circulation is logically plummeting: 7 months ago, the market was still worth 3,000 billion dollars, whereas it now represents 968 million dollars. That is a return to the level of January 2021.

This Monday, the fall in the cryptocurrency market is even stronger than during the crypto crash of a month ago: bitcoin did not go below $26,000, while analysts feared that a fall below this level could cause bitcoin to plunge as low as $20,000.

Today, some analysts are already wondering how far the asset can go. Last month, the crypto crash had many consequences in terms of losses for individuals and investors, faced with the fall of cryptos, in particular with the collapse of the cryptocurrency luna and the stablecoin terra usd (UST).

Similarities are to be observed with the crypto-crash of a month ago, in particular on the stablecoin market. At this time, the Terra blockchain’s algorithmic stablecoin terra usd (UST) had crashed, losing its peg against the dollar and Tether’s USDT had also lost its peg against the dollar (at $0.97) as it is considered the most resilient stablecoin in the market.

This Monday, two new algorithmic stablecoins just lost their peg against the dollar: USDD and USDN. For its part, Tether’s USDT slipped as low as $0.997 in the early afternoon before rising again, after the American cryptocurrency lending and staking platform Celsius announced that its customers could no longer withdraw. nor transfer their funds to cryptos.

“Recent events that have affected the Celsius lending platform and its native token are the unfortunate result of volatility and extreme market conditions. Although Tether’s investment portfolio includes an investment in the company, representing a minimal portion of our own funds, there is no correlation between this investment and our own reserves or our stability,” Tether explained on his blog.

As a reminder, a stablecoin (or stable cryptocurrency) is a crypto-asset (or digital asset) that is pegged to a fiduciary currency such as the euro or the dollar. A stablecoin can also be backed by other assets (such as gold). This is called the underlying of the stablecoin.

When the price of the underlying goes up or down, the value of the stablecoin must align with it. The promise is to permanently maintain the parity, for example 1 UST = 1 dollar. This peg to a currency is also called a “peg”. When there is a gap between the value of the underlying and that of the stablecoin, it is called a “de-peg” or “loss of parity”.

Financial markets under pressure

For several months, the cryptocurrency market has been increasingly correlated with other financial markets, in particular with the Nasdaq, the American technology index. This Monday, in a gloomy economic context, the Nasdaq Composite is down 3.5% in pre-market electronic trading around 3 p.m. Paris time, which may in particular explain a fall in the cryptocurrency market. In general, the cryptocurrency market being smaller (1000 billion capitalization) than the Nasdaq (19.276 billion according to Factset), it is also subject to more volatility. A decline in the Nasdaq thus tends to result in an even sharper fall in the cryptocurrency market.

Tech stocks and cryptocurrencies are among the assets most sensitive to the monetary policies of central banks, and in particular the American central bank (the Fed). Overall, over the years 2020 and 2021, there was strong liquidity in the markets injected by central banks to support economies in the midst of a pandemic.

This caused the cryptocurrency and Nasdaq market to rise as well as other risky assets. But the year 2022 is different and the economic context has changed. In order to contain galloping inflation in the United States, the Fed raised its key rates and normalized its balance sheet. Faced with the tightening of monetary policy by the US central bank, investments in the riskiest assets are down. There is less money circulating in the financial markets, money is more expensive and this penalizes riskier assets like US tech stocks and cryptocurrencies.

In this context, the case of the Celsius company has undoubtedly accentuated the decline in cryptos. Bitcoin’s decline accelerated “after the Celsius platform suspended withdrawals,” UBS analyst Mark Haefele told AFP. Indeed, this Monday, Celsius, which has 1.7 million customers and claims around $12 billion in assets under management, announced that it no longer allows its customers to withdraw or transfer their funds in cryptocurrencies.

For several days, many analysts had warned of a liquidity risk for this platform, heavily exposed to the lido staked eth (stETH), a synthetic token created in 2020 by the decentralized platform Lido, which had lost its peg (or “peg “) with ether (i.e. 1 stETH = 1 ether) since the crypto-crash.

According to some analysts, the company was at risk of default if their users had to withdraw a lot of ether amid stress. The company reportedly recorded net withdrawals of just over $300 million in the last week of May, and $160 million last week.

Under Celsius’ Twitter post announcing the news, many Internet users testify to their panic at the impossibility of taking any action via this platform, which is reminiscent of the situation of the holders of the Luna cryptocurrency, a month ago, who had to do in the face of its collapse.

After Celsius, other companies potentially in turmoil?

Such a situation could have the effect of a contagion in decentralized finance. “stETH may not be ‘de-peg’, but the risk of contagion in decentralized finance (Defi) in a crypto bear market is high,” Brad Mills, an entrepreneur in the industry, warned last week. the crypto ecosystem, maximalist bitcoin.

The risk of contagion could also affect centralized platforms, such as the company Swissborg, considers the analyst Dirty Bubble Media. According to the data provided by the analyst, the company holds 79,597 ethers, of which 80% is stETH. Since the May 12 peg loss, if Swissborg closes its position, it could lose more than 2,500 ethers, or the equivalent of $4.5 million, the latter estimates.

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