Massacre in the cryptocurrency market puts $20,000 in sight for Bitcoin

The cryptocurrency market remains in the deepest red on Tuesday after a black weekly start for digital assets, which has seen Bitcoin overshoot its yearly lows and fall to price levels not reached since late 2020. The plunge in the last seven days for the quintessential digital currency is 25% - up 13% in 24 hours - and the total cryptocurrency market capitalization has fallen below $1 trillion for the first time since January 2021.

Selling continues in Bitcoin as it loses $22,000 momentarily, while chaos reigns in the 'altcoins'. Ethereum is down 32% in the last seven days and remains around $1,180, as Dogecoin or Avalanche show similar losses during the last week and, in general, the main crypto currencies by market capitalization give up 20% on average in the last seven days.

The reasons for these extreme market conditions are due to the fact that the cryptocurrency trading and lending platform Celsius Network decided to suspend all withdrawals, exchanges and transfers between accounts as a consequence of the "extreme conditions" in the market. Binance also announced that it was temporarily suspending Bitcoin withdrawals.

"The worst may be yet to come," commented Craig Erlam, an analyst at Oanda. "Market conditions were already far from optimal - severe risk aversion and expectations of higher interest rates - but add in a major cryptocurrency lender freezing withdrawals and it's really the perfect storm." "Confidence in the cryptocurrency market already took a hit this year with the Terra debacle, and this is another big blow. Suddenly, $20,000 looks extremely vulnerable for the digital currency," he warned.

From a technical analysis point of view, "it almost certainly looks like we could end up seeing an extension of the declines to the $19,980 level," stated César Nuez, analyst at Bolsamanía. "This gives it a 20% downside margin from current prices. The first resistance level is at $32,430. We will not appreciate a technical improvement as long as it keeps trading below this price level."

THE CELSIUS CASE... AND INFLATION

How did all this happen, Marcus Sotiriou, analyst at GlobalBlock, questioned. "Many think it is mainly due to fear surrounding the risk of insolvency of one of the largest lending platforms Celsius, after it has been widely speculated that they have been irresponsible with client funds," he commented. The platform announced on Monday that they "paused all withdrawals, redemptions and transfers between accounts." Their operations will continue and they will continue to inform the community. Celsius has taken this action to stabilize liquidity and to preserve and protect assets." The fear in the market is that other platforms will adopt this practice, as Binance did.

They were heavily exposed to UST (Terra dollar) with about $500 million of customer funds, and also lost about $50 million, when the DeFi Badger DAO protocol exploded. At the time, Celsius declined to comment on the percentage of customer funds held in the DeFi protocols. "The biggest problem Celsius currently has appears to be its $1.5 billion position in stETH - 1 stETH is a claim to 1 ETH locked on the Beacon blockchain. At the moment, stETH is trading at a discount of more than 5% to ETH, raising fears that if customers try to redeem their positions, Celsius will run out of liquid funds to pay them back," the analyst explained. "They are taking massive loans against their illiquid positions to pay their clients' redemptions, but they could run out of funds in 5 weeks," he added.

Despite the fear, uncertainty and doubt caused by the Celsius debacle, the sell-off began early in the weekend on Friday after U.S. inflation data was released. CPI came in at 8.6% year-over-year in May, up 0.3% from April, showing that inflation is rising rather than slowing. "I think this is the biggest contributor to the drop we have seen, as it results in a more aggressive US Federal Reserve - they are now forced to remove more liquidity from the market in order to reduce inflation. When liquidity is removed, risk assets are hit the hardest, which includes cryptocurrencies," commented Sotiriou.

"It is important to remember that this period of persistent inflation should pass, and the cryptocurrency industry will become more efficient, as insecure and incompetent companies are gradually weeded out," the expert concluded.