The market capitalization of Bitcoin and other cryptocurrencies slumped below US$1 trillion as fears of an interest-rate increase in the U.S. weighed on risk assets globally.
Bitcoin fell as much as 21.1% in Asian trade on Tuesday — at levels last seen in December 2020, according to CoinMarketCap data. The world’s largest cryptocurrency by market cap was down more than 66% from an all-time high of US$68,789.63 on Nov. 10, 2021.
Ethereum, the second-largest crypto by market cap, fell to a low of US$1,094.70, CoinMarketCap data showed. The global crypto market capitalization was at US$958.85 billion.
“Internationally, stock and crypto markets have become highly correlated,” said Rajagopal Menon, vice president at Zanmai Labs Pvt. Ltd. which operates WazirX.com, one of India’s largest cryptocurrency exchanges by volume. “The inflation rate globally has also been a major concern for investors.”
Market bets of the Federal Reserve adopting a more aggressive pace of tightening rose after 12-month U.S. inflation in May came in higher than expected, setting a fresh 40-year record. The central bank is due to make its next policy announcement on Wednesday with analysts expecting an increase of a 0.75 percentage point.
Risk assets such as stocks were affected as a result with the S&P 500 closing down 3.9% on Monday, its lowest level in about 18 months. Having lost more than 20% from its January 2022 all-time high, the U.S. stocks benchmark is now in so-called bear market territory, according to the most widely accepted definition of the term.
Yields on the benchmark 10-year U.S. government bonds hit their highest levels since 2011. Bond prices are inversely related to yields. This affects the prices of high-growth stocks and cryptocurrencies as investors need more returns over a risk-free rate of return offered by benchmark Treasuries.
“Interest rate hikes across major crypto nations are also a growing concern as they lessen liquidity,” Menon said. “Both [inflation and interest rate increases] have led to a massive selloff.”
“It is not the first time, nor will it be the last time of a global economic downturn that the crypto market has been hit terribly,” said Bit.com’s Toya Zhang. Following the hype accumulated through last year’s bull run, the crypto market “lacked an impetus for further growth after the DeFi, NFT and metaverse frenzy,” the chief marketing officer at the Seychelles-based cryptocurrency exchange said.
With over US$200 billion wiped out from the crypto market, “the crypto winter has come and it will last for a while,” Zhang told Forkast.
Ghost of Terra-LUNA’s past
Cryptocurrencies bore the brunt of the market slump as people sold off digital assets fearing a repeat of the Terra-LUNA debacle that wiped off billions of dollars in investor wealth.
Blockchain platform Tron Network tried to fend off short sellers by setting up a US$2 billion fund to support its algorithmic stablecoin USDD. Tron DAO Reserve, which manages USDD and guarantees its price stability, said on its verified Twitter handle that it received 700 million USDC (Circle’s stablecoin) to support the stablecoin, bringing the total defense fund to in excess of US$2.5 billion.
USDD uses an algorithmic mechanism to keep its dollar parity by burning its TRX cryptocurrency, a system similar to the Terra stablecoin that collapsed last month.
Tron’s native asset was reportedly being heavily shorted and founder Justin Sun sought to force short sellers to cover their positions by driving up TRX’s price.
“Funding rate of shorting TRX on Binance is negative 500% APR,” Sun tweeted. “[Tron DAO Reserve] will deploy 2 billion USD to fight them. I don’t think they can last for even 24 hours. [A] short squeeze is coming,” he added.
As prices across the broad crypto market fell, the total value locked (TVL) in decentralized finance (DeFi) fell to US$63.12 billion, sinking to levels last seen around April of 2021, according to DefiLlama data. The TVL of Tron DeFi dropped to US$4.53 billion, data showed.
Meanwhile, Celsius Network, a crypto staking and lending platform that claims to have 1.7 million users, froze withdrawals, swaps, and transfers on Monday citing “extreme market conditions.” This led its native token CEL to plunge more than 50% Monday evening time in Asia. It was last down by more than 96.1% from an all-time high of US$8.05 about a year ago, CoinMarketCap data showed.
The news that stETH might have de-anchored led to malicious short selling, ChainUp’s Jeff Mei told Forkast. He was referring to the Staked Ethereum (stETH) of Lido Finance, the largest Ether staking service. The Celsius Network had over US$1.5 billion in positions, with more than 400,000 stETH tokens worth more than US$500 million, the Singapore-based chief marketing officer of blockchain technology solutions provider said.
Celsius had the option of exchanging stETH for ETH on the Curve Protocol, Mei said. However, liquidity on the protocol is currently drying up, with only 155,000 ETH or 23% of the pool’s proportion, he said.
“If stETH continues to depeg or market conditions continue to deteriorate, Celsius may be liquidated on the Aave protocol, raising concerns about a possible liquidity cascade in the broader markets,” Mei told Forkast.
What lies ahead
Bitcoin’s price slump comes amid an increase in the difficulty of mining the cryptocurrency.
A reading of Bitcoin mining difficulty, or a measure of how hard a miner would have to work to verify transactions on a block in the blockchain, is now at 30.28 trillion at a block height of 739,872, according to BTC.com data. The difficulty level, which undergoes adjustments about every two weeks, reached a record high of 31.25 trillion on May 11.
A higher number means it is more difficult to produce the coin, threatening the viability of an effort to do so amid a steep drop in prices.
When BTC is at US$21,000 half of the miners are still profitable, ChainUp’s Mei said.
“The miners on the old machines temporarily quit when they reach the shutdown price, and the remaining miners can mine more coins due to the decrease in the difficulty of computing power,” Mei said. “Bear market hoarding is the consensus among miners so that mining remains profitable.”
Bitcoin acts as a hedge against inflation over the long term, as currency debasement isn’t currently possible in the cryptocurrency but can happen in fiat, AAX’s Ben Caselin said. “So that’s only a matter of time before that kind of enters the public mind,” the vice president of global marketing and communication at the crypto exchange said.
“I don’t think there’s so much to worry about in terms of Bitcoin,” said Caselin. “The rest of the market. Take your chances.”