Celsius Liquidity Crisis Fuels Crypto Market Contagion Fears

Cryptocurrencies have crashed in 2022.

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A liquidity crisis at cryptocurrency lending firm Celsius has investors worried about broader contagion that could topple other major players in the market.

Celsius recently moved to pause all account withdrawals, raising fears that it may be on the brink of bankruptcy. The company lends client funds similar to a bank, but without the stringent insurance requirements imposed on traditional lenders.

Bitcoin sank below $21,000 on Tuesday, extending sharp declines from the previous day and sinking deeper into 18-month lows. The total value of all digital tokens combined also fell below $1 trillion for the first time since early 2021, according to data from CoinMarketCap.

Crypto investors fear that the possible collapse of Celsius could cause even more pain in a market that was already on shaky ground after the demise of $60 billion stablecoin company Terra. Celsius was an investor in Terra, but says he had “minimal” exposure to the project.

Celsius did not respond to multiple requests for comment from CNBC.

“In the medium term, everyone is setting themselves up for more downside,” said Mikkel Morch, CEO of cryptocurrency hedge fund ARK36.

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“Bear markets have a way of exposing previously hidden weaknesses and over-leveraged projects, so we may see events like the Terra ecosystem reversal last month.”

Monsur Hussain, senior director of financial institutions at Fitch Ratings, said that the liquidation of Celsius assets would “further shake the valuation of crypto assets, leading to a broader round of contagion within the crypto sphere.”

Celsius has a large presence in the so-called decentralized finance space, which aims to recreate traditional financial products like loans without the involvement of middlemen like banks.

Celsius owns numerous popular assets in the DeFi world, including staking ether, a version of the ether cryptocurrency that promises users rewards for their deposits.

“If you go into full sell-off mode, you’re going to have to close these positions,” said Omid Malekan, an adjunct professor at Columbia Business School.

USDD, a supposed stablecoin that should always be worth $1, fell as low as 97 cents on Monday, echoing the troubles of Terra’s UST stablecoin last month. Justin Sun, the coin’s creator, accused unnamed investors of “shorting” the token and pledged $2 billion in funding to prop up its dollar peg.

Elsewhere, rival crypto lenders Nexo and BlockFi sought to downplay concerns about the health of their operations after Celsius announced its decision to halt withdrawals.

Nexo said it had a “strong liquidity and capital position” and had even offered to acquire part of Celsius’s loan portfolio, a proposal it says the company “rejected.” Meanwhile, BlockFi said that all of its services “continue to operate as normal” and that it has “zero exposure” to staked ether.

That’s not to say, however, that it hasn’t been hit by the recession: This month, BlockFi laid off around 20% of its workforce in response to a “dramatic change in macroeconomic conditions.”

Celsius’s liquidity crisis has raised concerns about possible spillover effects on other financial markets.

CDPQ, the manager of Canada’s second largest pension fund, co-led an equity investment in Celsius earlier this year. In a statement Monday, the company said it is “closely monitoring the situation.”

Many analysts agree that the fallout from the Celsius debacle is likely to be limited to cryptocurrencies. “The greatest risk of contagion is within the crypto markets themselves,” Malekan said.

Fitch’s Hussain said the selloff in cryptocurrency prices reflected a “shrinking of the entire cryptocurrency market,” adding that “contagion with the broader centralized financial system will be limited.”

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