Crypto

After a Crazy Week in Crypto, Investors Are Wondering What’s Next

Crypto was all the rage in 2021. This week, it crashed.

The nosedive began on Sunday night. One of the largest crypto lending platforms, Celsius Network LLC, unexpectedly told customers that it was pausing all withdrawals, trades, and transfers between accounts due to extreme market conditions.

Celsius customers panicked and people with money on other crypto platforms began to wonder if they would be next.

Anxiety spread rapidly. Bitcoin and ether prices fell around 15% on Monday and continued to fall throughout the week, piling on the decline that has affected them throughout the year. Digital currencies are down 54% and 70%, respectively, so far this year, according to data from CoinDesk.

“Market sentiment is very, very depressed here.”


— Frank Downing, ARK Investment Management

On Tuesday, Coinbase Global Inc.,

the largest crypto exchange in the US, said it would cut its workforce by about 18%. In a letter, Chief Executive Brian Armstrong said the company had grown too fast and a potential recession “could lead to another crypto winter.”

Two other prominent crypto firms, Crypto.com and BlockFi, also announced layoffs.

“It sucks right now,” said Jeff Dorman, chief investment officer at Arca, a digital asset investment firm. “Companies are laying people off, activity is down, crypto is back to being the laughing stock of Wall Street.”

The crazy week in crypto is unfolding alongside a broader market tumult. The Federal Reserve is trying to rein in decades-high inflation, announcing this week its biggest interest-rate hike since 1994. While the question of whether the United States will slip into recession is far from settled, many investors worry that higher interest rates will tip you toward one. Those concerns have pushed stocks lower throughout the year, with the S&P 500 entering a bear market this week.

BlockFi earlier this year paid $100 million to settle an SEC investigation into its crypto lending business.


Photo:

Gabby Jones/Bloomberg News

In crypto, the industry is considering both the dramatic change in macroeconomic conditions and the decline in investor interest. Higher rates make speculative investments like cryptocurrencies less attractive as investors may find other options to make a profit. Celsius’s troubles could also accelerate a regulatory crackdown on crypto lenders, which could continue to push crypto prices lower.

On Wednesday afternoon, Celsius CEO Alex Mashinsky said the company is “working nonstop” to address the issue, but offered no clues as to when the recalls would resume.

Crypto lenders like Celsius accept customer deposits in cryptocurrencies and lend them to other users, such as market makers and exchanges, for a return. Celsius also put client funds into high-risk decentralized finance projects for a return. DeFi, as it is known, is a kind of parallel financial system for cryptocurrencies with its own version of banks and loans.

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Individual investors were attracted to Celsius because the company paid clients annual percentage yields of up to 18.6% on cryptocurrency deposits, far more than they could get from a regular bank account. But what many are now realizing is that while crypto firms like Celsius resemble banks in some ways, they lack the legal protections built into the traditional financial system.

In April, Celsius stopped offering interest-bearing accounts to “non-accredited” investors, or those who don’t meet a certain wealth threshold, after coming under pressure from regulators.

In February, Celsius competitor BlockFi paid $100 million to settle claims that its product violated investor protection laws, the highest fine ever awarded by a cryptocurrency company, officials with the Commission said. Bolsa y Valores at that time. The company neither admitted nor denied any wrongdoing.

On Thursday, the Texas State Securities Board said it has opened an investigation into Celsius for its decision to freeze customer accounts. The board is working in conjunction with New Jersey, Kentucky, Alabama and Washington.

“The regulators were already looking at the space; They will probably move even faster now,” said Frank Downing, an analyst at ARK Investment Management.

“Market sentiment is very, very depressed here,” Downing added. “Given the macro context here, we don’t rule out a further leg down.”

Mr. Dorman, Arca’s chief investment officer, said his company maintains a higher cash balance, but isn’t afraid to put money to work for good opportunities.

“As long-term investors, we’re looking at things that, in the next 12 to 36 months, we think will trade significantly higher than where they trade today,” he said.

write to Vicky Ge Huang at vicky.huang@wsj.com

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