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After a crazy week in crypto, investors wonder what’s next


Cryptocurrency has been all the rage in 2021. This week, it crashed.

The event begins late on Sunday. One of the largest crypto lending platforms, Celsius Network LLC, unexpectedly told a customer that suspend all withdrawals, swaps and transfers between accounts due to extreme market conditions.

Celsius customers panicked and those with funds in other crypto platforms began to wonder if they were next.

Anxiety spreads quickly. Bitcoin and ether prices fell about 15% on Monday and continued to decline throughout the week, piling on the drop that has plagued them all year. According to CoinDesk data, digital currencies are down 54% and 70% year-on-year, respectively.

WSJ’s Dion Rabouin explains why Wall Street is betting big on crypto right now and what that means for the new asset class and its future. Photo compilation: Elizabeth Smelov

‘Market sentiment is very, very depressed here.’


– Frank Downing, Investment Manager ARK

On Tuesday,

Coinbase Global Inc.,

The largest cryptocurrency exchange in the US, said it will cut about 18% of the workforce. In a letter, CEO Brian Armstrong said that the company has grown too quickly and that a potential recession “could lead to another crypto winter.”

Two other well-known crypto companies, Crypto.com and BlockFi, have also announced layoffs.

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

The crazy week in crypto is coming along with the broader market turmoil. The Federal Reserve is trying to rein in decades-high inflation, and this week it announced Biggest interest rate hike since 1994. While the question of whether the US will enter a recession remains unresolved, many investors fear that higher interest rates will crash. Those concerns pushed stocks lower throughout the year, and the S&P 500 entered the bear market this week.

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


Image:

Gabby Jones / Bloomberg News

In crypto, the industry is taking into account both the dramatic change in macroeconomic conditions and waning investor interest. Higher rates make speculative investments such as cryptocurrencies less attractive, as investors can find other options for profit. Celsius issues could also hasten a regulatory crackdown on crypto-lending institutions, which could further push crypto prices lower.

On Wednesday afternoon, Celsius CEO Alex Mashinsky said the company was “working nonstop” to resolve the issue but gave no clue as to when withdrawals would resume.

Cryptocurrency lenders like Celsius accept customer deposits in cryptocurrencies and lend to other users like market makers and exchanges for profit. Celsius also puts client funds into high-risk decentralized financial projects for profit. DeFi, as it is known, is a kind of parallel financial system for cryptocurrencies with its own version of banking and lending.

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Individual investors are attracted to degrees Celsius because the company has paid customers a percentage annualized return of up to 18.6% on crypto deposits — more than they could get from a single Regular bank account. But which many people only realize now is that while crypto companies like Celsius look like banks in some ways, they lack the legal protections built into the traditional financial system.

In April, Celsius stopped offering interest-paying accounts to “non-accredited” investors or those who did not meet a certain asset threshold, after being pressed by regulators.

In February, C-degree competitor BlockFi paid $100 million to settle claims Securities and Exchange Commission officials said their product violated investor protection laws, the highest fine ever agreed by a crypto company at the time. The company neither admits nor denies wrongdoing.

On Thursday, the Texas State Securities Commission said it had opened an investigation into Celsius over its decision to freeze customer accounts. The board is partnering with New Jersey, Kentucky, Alabama and Washington.

“Regulators are already looking at the space – they are likely to move even faster now,” said Frank Downing, an analyst at ARK. Investment Management.

Mr Downing added: “The market sentiment here is very, very depressed. “Given the macro backdrop here, we don’t rule out a further downgrade.”

Mr. Dorman, chief investment officer at Arca, said his company is maintaining a higher cash balance but isn’t afraid to pool money to look for good opportunities.

“As long-term investors, we are looking for things that over the next 12 to 36 months, we believe will trade significantly higher than they are trading now.” he said.

Write letter for Vicky Ge Huang at [email protected]

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