Cryptocurrency plunge worries Wall Street

At the beginning of 2022, the combined assets of the cryptocurrency industry were estimated at $3 trillion. Now, the prices of bitcoins and other cryptocurrencies are in the process of accelerated decline after the Federal Reserve (Fed) signaled an interest rate hike to try to end inflation.

On Monday (20), bitcoin traded at $20,097, about 70% below its peak in November last year ($69,000).

What happens to cryptocurrencies is an extreme version of what we see in stock markets: investors sell risky assets when they see the growing threat of a recession.

For experts, this shows growing concern on Wall Street about the fundamental underpinnings of the decentralized finance industry, which seems fragile at the moment.

Dubbed the “crypto winter”, this is not the first period of recession in the history of bitcoin or cryptocurrencies, but it is the most worrying in the view of the financial market.

Cryptocurrency Terra, known for its stability, collapsed in a matter of days in May, taking $40 billion in investor fortune. The Celsius Network company, responsible for operating a bank for cryptocurrency holders, froze the accounts of 1.7 million customers in the last week, taking deposits and making investments with those amounts – once valued at approximately $10 billion. Unlike real banks, there is no federal insurance protecting these consumers’ deposits.

The founder of Singapore-based Three Arrows Capital then commented on rumors of its impending collapse with a mysterious tweet: “We are in the process of communicating with the relevant parties and are fully committed to resolving this situation.”

Last week, the CEO and co-founder of Coinbase, one of the largest cryptocurrency exchanges, announced that the company would lay off around 18% of its employees and said that a wider recession could make the industry’s woes even worse.

“A recession could lead to another crypto ‘winter’ and could last for a long time,” said CEO Brian Armstrong.

This is not the first “crypto winter”. In 2018, bitcoin dropped from $20,000 to less than $4,000. But analysts say this time it looks different.

Hilary Allen, an American University law professor who has done research on cryptocurrencies, said she is not worried about the latest industry turmoil rippling through the wider economy. However, among investors, problems may be brewing under the surface.

“There are hedge funds that have bank loans that have placed bets on cryptocurrencies, for example,” she said. And whenever investors borrow money to increase the size of their bets – something known in the financial world as “leverage” – the concern is that losses can accumulate quickly.

“People are trying to do analytics, but there’s a lack of transparency and it’s hard to understand how much leverage there is in the system,” said Stefan Coolican, a former investment banker and now a member of the advisory board at Ether Capital.

For these and other reasons, there has been an effort in Washington to more closely regulate the cryptocurrency industry, an effort that is gaining traction.

“We believe that the recent turmoil only underscores the urgent need for regulatory frameworks that mitigate the risks that digital assets pose,” the Treasury Department said in a statement.