Crypto Contagion Fears Spread After Celsius Network Freezes Withdrawals

In the latest indicator of the financial market crisis affecting the cryptosphere, Bitcoin plunged as much as 14% on Monday when major U.S. cryptocurrency lending business Celsius Network suspended withdrawals and transfers, citing "extreme" market circumstances.

The action by Celsius caused a sell-off in cryptocurrencies, with their value falling below $1 trillion for the first time since January 2021 on Monday, raising concerns that the sell-off may spread to other assets or firms.

"In crypto, almost anything can be systemic... since the whole industry is over-levered," said Cory Klippsten, CEO of Swan Bitcoin, a bitcoin savings platform. "It's all a jigsaw puzzle."

Celsius CEO Alex Mashinsky and the company as a whole did not reply to calls for comment from Reuters.

Celsius, situated in New Jersey, has roughly $11.8 billion in assets and provides consumers who deposit cryptocurrencies with its platform interest-bearing products. It then earns money by lending out cryptocurrency.

Following Celsius's news, bitcoin fell to an 18-month low of $22,725, before marginally recovering to roughly $23,265. The second-largest token, ether, fell as much as 18 percent to $1,176, its lowest level since January 2021.

Companies with a cryptocurrency exposure have previously cautioned that falling token values might have unintended consequences, such as triggering margin calls.

"It's still an uneasy situation, and there's some danger of contagion surrounding crypto in general," Joseph Edwards, head of financial strategy at fund management company Solrise Finance, said.

In recent weeks, crypto markets have plummeted as increasing interest rates and inflation led investors to flee riskier assets across financial markets.

Investors increased their bets on Federal Reserve rate rises after U.S. inflation data on Friday showed the highest price increase since 1981, pushing markets to prolong their sell-off on Monday.

That was most likely the primary cause of the crypto market's decline. Infrastructure Capital Management's chief investment officer, Jay Hatfield, said in a letter on Monday.

"A lot of bubbles have resulted from the Fed's overexpansion of its balance sheet," he added, citing tech stocks and crypto tokens as examples.

The collapse of the terraUSD and luna tokens in May, followed by Tether, the world's biggest stablecoin, momentarily losing its 1:1 peg with the dollar, has spooked cryptocurrency investors.

While Tether has invested in Celsius, its loan activity with the crypto platform has "always been overcollateralized" and has no influence on Tether's reserves, according to a blog post https://tether.to/en/celsius-feels-impact-of-market-volatility-tether-reserves-hold-strong published on Monday. At the time of writing, the token was trading at $1.

BlockFi, another crypto lending company, said on Monday that it was cutting its workforce by around 20% owing to a "dramatic change in macroeconomic circumstances." According to BlockFi, it is not exposed to Celsius.

Bitcoin, which soared in 2020 and 2021, has lost over half of its value this year. This year, Ethereum has lost almost 67 percent of its value.

Customers who move their crypto to Celsius's platform may receive an annual return of up to 18.6 percent, according to the company's website. Customers are encouraged to "Earn high. Borrow low," according to the website.

On Sunday evening, the business claimed it has halted withdrawals and transfers between accounts "to stabilize liquidity and operations while we take efforts to maintain and safeguard assets" in a blog post https://blockfi.com/a-message-from-our-founders.

The business said, "We are taking this move now to put Celsius in a stronger position to honor its withdrawal commitments over time."

According to CoinGecko statistics, the value of Celsius's token has dropped by 97 percent in the past year, from $7 to about 20 cents.

'GREY AREA' is a term used to describe an area that is grey in color.

Crypto lending has exploded in popularity, with a slew of new organizations launching operations in the previous year.

Regulators are concerned about investor protections and systemic risks from unregulated lending products as a result of this.

According to Matthew Nyman of CMS law firm, Celsius and other businesses who provide comparable services exist in a regulatory "grey area."

Last year, Celsius raised $750 million from investors including Caisse de Dépôt et Placement du Québec, Canada's second-largest pension fund. Celsius was valued at $3.25 billion at the time.

Celsius had $11.8 billion in assets as of May 17, down more than half from October, and had processed $8.2 billion in loans, according to its website.

In October of last year, Mashinsky, the CEO, was cited as stating that Celsius had more than $25 billion in assets.

On Monday, rival crypto lender Nexo said that it had made an offer to purchase Celsius' outstanding assets.

"On Sunday morning, we contacted Celsius to inquire about purchasing its collateralized loan portfolio. "So far, Celsius has opted not to participate," said Antoni Trenchev, co-founder of Nexo.