Crypto panic as digital assets follow share prices in a downward spiral

The cryptocurrency market could do with some respite but its convention-breaking nature means there is no hiatus. Trading in digital assets such as bitcoin and ethereum runs 24/7, unlike their conventional peers in equities on the New York and London stock exchanges, which at least get the weekend off.

So one torrid week tends to run into another for this most cutting-edge of markets. Bitcoin – the cryptocurrency cornerstone – fell below the key level of $20,000 on Saturday morning, meaning it has dropped 34% in the past seven days, according to CoinGecko, which showed that ethereum, the other pillar of the market, had fallen 40% to $994 in the same period. There are fears bitcoin’s fall will trigger more sell-offs, leading to another tumultuous seven days for digital assets.

The entire crypto market fell below $1 trillion last week, a precipitous decline from its peak of $3tn in November last year. A number of factors drove the declines – a mix of crypto-specific events and wider macroeconomic issues – and some of them will continue to hang over the market this week as well.

On Monday the cryptocurrency lending platform Celsius Network halted withdrawals because of “extreme market conditions”, prompting a sell-off. Celsius, a bank-like business that offers customers high interest rates on their cryptocurrency deposits, has yet to lift restrictions on withdrawals or announce a resolution of its problems.

Three Arrows Capital, a cryptocurrency hedge fund that makes highly leveraged bets on crypto assets, is also thrashing out its future after being hit hard by the digital assets sell-off. Amid rumours of insolvency, last Wednesday, Zhu Su, the Dubai-based investor behind Three Arrows, tweeted that “we are in the process of communicating with relevant parties and fully committed to working this out”.

Kyle Davies, Three Arrows’ co-founder, provided some more clarity to the Wall Street Journal on Friday, saying that the firm was exploring options including asset sales and a rescue by another firm. “We have always been believers in crypto and we still are,” Davies said.

But for others there is less belief that problems will go away in the short term. Faith in cryptocurrencies was undermined last month by the collapse of terra, a so-called stablecoin, whose value was supposed to be pegged to the dollar.

“I’d say that the dust has not settled yet,” says Teunis Brosens, head economist for digital finance at Dutch bank ING. “Investors may continue to act on their doubts and test the stability of various stablecoins, platforms and crypto companies. We might see more casualties in the form of liquidity in certain coins drying up, stablecoins losing their peg, and funds having to halt redemptions.”

Brosens adds that some of the issues affecting the equity and bond markets have had an impact on bitcoin. The cryptocurrency was seen as a hedge, or protection, against inflation. That has not been the case recently as rising inflation has prompted central banks to raise interest rates, a combination that always hits risky assets.

“Bitcoin is in fact today not seen as an inflation-proof store of value,” Brosens says. “Instead, bitcoin and crypto as a whole have so far this year behaved very much like traditional risky assets, retreating as inflation and rate-hike fears increase.”

Some market watchers believe crypto will not decouple from the wider markets entirely. “What we have tended to see with crypto, and particularly bitcoin, is that it moves with the stock market,” says Kim Grauer at Chainalysis, a blockchain research firm. “There are periods that we have seen in the past few weeks where inflation figures hit, the Fed increases rates, the market tanks and bitcoin follows. But it really quickly bounces back and recorrelates with the stock market.”