NW Week

Thursday, February 22, 2024

How the cryptocurrency market crashed

How the crypto market crashed

Key takeaways:

  • On Sunday, the Celsius Network, a cryptocurrency lending, and trading platform announced that all withdrawals and transfers would be suspended.
  • In May, the value of TerraUSD, a popular stablecoin, dropped from around $1 to less than ten cents. As of June 18, that cryptocurrency is worth less than a dime.
  • While crypto exchange platforms may offer services similar to banks, Clements points out that they have far fewer safeguards.

The cryptocurrency market has had yet another dismal week.

Celsius Network, a crypto lending and trading platform stated on Sunday that all withdrawals and transfers would be halted. Another crypto trading site, Coinbase, laid off 18% of its staff on Tuesday, predicting an extended “crypto winter.” And, for the first time since 2020, the price of Bitcoin plummeted below US$20,000 on Saturday.

Last month, the US Federal Reserve announced its intention to raise interest rates to combat inflation, prompting investors to liquidate riskier assets such as crypto holdings. However, it isn’t the only reason to blame for the crypto market’s recent decline.

Many crypto-trading sites offered decentralized financial products, often known as DeFi. DeFi, like a bank, allows customers to borrow, trade, and earn interest on their cryptocurrency holdings.

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“The DeFi ecosystem aims to establish a financial system that works in tandem with the traditional financial system. It’s essentially an attempt to use open source worldwide decentralized blockchains to imitate traditional financial system activities, “In a video interview with CTVNews.ca on Saturday, Ryan Clements, an associate professor of Calgary’s Faculty of Law, said.

However, algorithmic stablecoins, which seem to be cryptocurrencies that attempt to fix their importance at a consistent rate via computer calculations that control their supply, provide investors with a purportedly stable option to volatile cryptocurrencies like Bitcoin and are frequently used in the DeFi ecosystem.

However, the value of TerraUSD, a popular stablecoin, fell from approximately $1 to less than ten cents in May. That cryptocurrency is currently worth less than a penny as of June 18.

How the crypto market crashed
How the crypto market crashed. Image from Mint

“That failed catastrophically, and it had a cascade effect on the greater crypto market, accelerating the selling pressure,” Clements explained.

Some crypto exchanges, like Celsius, used a fractional reserve mechanism similar to a bank, lending out crypto assets it received as deposits. Withdrawals and transfers were blocked as selling pressure increased.

“As a crypto bank, there was a run on Celsius, and Celsius had to halt all withdrawals because it couldn’t meet depositor expectations,” Clements added.

While crypto exchange platforms may provide services similar to those provided by banks, Clements points out that significantly fewer safeguards are in place. Unlike bank deposits, which the Canadian Deposit Insurance Corporation covers, crypto deposits are not. If your crypto platform goes down, you could lose all of your money.

Quadriga, a crypto exchange situated in British Columbia, shut down in 2019. At least $169 million was lost by its clients.

Source: CTV News

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