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Crypto Market Crashes Over 70%, What Is Celsius

 

What has happened?

  • The carnage in the crypto market has gathered pace with no near-term respite in sight.
  • Considering the latest slide, investors have lost over $2 trillion (about Rs 15.65 lakh crore) over eight months.

  • If we compare the notional value lost, only eight countries have a GDP more than what the crypto market eroded in less than three quarters.
  • Countries like Canada and Italy have a GDP of little more than $2 trillion, whereas Brazil’s GDP stood at $1.83 trillion.
  • The total market capitalization (m-cap) of the digital market is marginally above the $1 trillion mark, which was more than $3 trillion at its peak in November 2021.

Reasons for the crash

  • The crypto market has been under pressure from the Federal Reserve, hiking the interest rates to combat inflation over the past few months.
  • Bitcoin, Ethereum, and most cryptocurrencies suffered losses over the weekend after a broad sell-off following the data showing US inflation hitting a 40-year high.
  • Investors are continuing to stay away from riskier assets, which is reflecting in the stock markets as well.
  • Experts say that the crypto price plunge indicate a falling risk appetite of investors.
  • They are clearly wary of risky assets.
  • With all its uncertainties and volatilities, crypto is considered as one of the most volatile instruments for investment purpose. 

Immediate cause

  • The immediate trigger for the crypto crash appears to be a massive sell-off by investors amid heightened inflation fears and pausing of withdrawal by crypto lending service Celsius.
  • Major U.S. cryptocurrency lending company Celsius Network froze withdrawals and transfers on Monday, citing “extreme” market conditions.

What is crypto lending?

  • Crypto lending is essentially banking – for the crypto world.
  • Just as customers at traditional banks earn interest on their savings in dollars or pounds, crypto users that deposit their bitcoin or ether at crypto lenders also earn money, usually in cryptocurrency.
  • While savings at traditional banks offer paltry returns due to historically low interest rates, crypto lenders offer much higher returns – at the very top end as much as 20%, though rates depend on the tokens being deposited.
  • Crypto lenders make money by lending – also for a fee, typically between 5%-10% – digital tokens to investors or crypto companies, who might use the tokens for speculation, hedging or as working capital.
  • The lenders profit from the spread between the interest they pay on deposits and that charged on loans.

Boom in Crypto leding

  • Crypto lending has boomed over the past two years, along as decentralised finance, or “DeFi,” platforms.
  • DeFi and crypto lending both tout a vision of financial services where lenders and borrowers bypass the traditional financial firms that act as gatekeepers for loans or other products.
  • The sites say they are easier to access than banks, too, with prospective clients facing less paperwork when lending or borrowing crypto.
  • The total value of crypto at DeFi sites soared to a record $110 billion in November, up fivefold from a year earlier and reflecting record highs for bitcoin, according to industry site DeFi Pulse.

The issue

  • Unlike traditional regulated banks, crypto lenders aren’t overseen by financial regulators – so there are few rules on the capital they must hold, or transparency over their reserves.
  • That means that customers who hold their crypto at the platforms could lose access to their funds – as happened with Celsius on Monday.
  • Crypto lenders also face other risks, from volatility in crypto markets than can hit the value of savings to tech failures and hacks.

What Celsius said?

  • It, however, added that customers will continue to accrue rewards during the pause.
  • Celsius has not yet provided a timeline for resuming withdrawals.
  • Earlier, Celsius had told non accredited investors that could no longer transfer funds.

conclusion

  • Experts say, the volatility in the market would continue which would have a significant impact on the valuation of other coins including Ripple, Cardano, Tether, Solana, among others.
  • The recovery will not be anything soon based on the current market sentiments and statistics.
  • “This could be a start to another crypto winter which could last for another 2 years,” he adds.
  • On the other hand, some experts are suggesting investors to buy the dips to average out their cost and make gains in the longer term.

Q) What is the main economic problem faced by the society?

  1. Unemployment
  2. Inequality
  3. Poverty
  4. Scarcity

 

 

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