How a Lending Platform Caused the Crypto Market Cap to Sink Below $1 Trillion

Staked Ethereum and overall economic inflation have contributed to this crash, but lending platform Celsius Network is being seen as the main culprit.

(Photo: IANS)

Monday, 13 June, saw a massive fall in cryptocurrency prices as investors began selling off their assets en masse.

The prices of dominant cryptocurrencies like Bitcoin and Ethereum fell by over 70 percent from their peak values. The total crypto market valuation dropped below $1 trillion, a massive drop from its peak valuation of over $3 trillion.

Staked Ethereum and overall economic inflation have contributed to this crash, but lending platform Celsius Network is being seen as the main culprit.

What's Celsius Network, what did it do?

Celsius Network is a decentralised finance platform that offers services for cryptocurrencies similar to what banks offer for traditional finance. It offers high rates of interest on crypto deposits and loans out the deposits to other customers to meet these obligations.

On the morning of 13 June, Celsius made an announcement on their blog that they would be freezing withdrawals as well as other transactions like swapping and transfers between accounts.

Shortly after, crypto investors, who were already anxious about inflation, began liquidating their crypto assets. Celsius’ announcement seems to have been a highly negative indicator for the stability of the crypto market as a whole.

This sudden bearish sentiment in the crypto market comes in the wake of rising economic tensions, particularly in the US. Inflation in the American economy is the highest it has been since 1981, with food and fuel prices being at an all-time high.

Furthermore, the US Federal Reserve increased interest rates in order to combat the rising inflation. Investors are now much wearier of risky investments and seem to be staying away from volatile assets like cryptocurrencies.

These factors have led to a steady decline in cryptocurrency prices over the last six months. The sudden mass sell-off that followed Celsius’ announcement is not surprising when viewed in this context.

Why did Celsius freeze withdrawals?

Celsius Network had been facing issues for a while now. So far, they have seen a major decline in the total amount of digital assets locked into their protocol. This figure has declined from $24 billion to $12 billion in 2022.

Their main issue, however, was being unable to meet the customer withdrawal demand, which was increasing due to the economic uncertainty. Celsius had lent too much and didn't have enough crypto to pay back its depositors.

In their statement, Celsius wrote that they had taken the decision to freeze withdrawals due to “extreme market conditions” and that their ultimate objective is “stabilizing liquidity and restoring withdrawals, swap, and transfers between accounts as quickly as possible.”

There have also been allegations of mismanagement of assets by the company. This is largely due to their activities involving Staked Ethereum. Put simply, Staked Ethereum is a protocol by which Ethereum can be staked to the Ethereum 2.0 beacon chain, to be redeemed later down the line when it merges with the main Ethereum blockchain.

Celsius had been staking large amounts of their Ethereum deposits in this way in order to accrue interest. As a result, only 27 percent of the company’s Ethereum is liquid.

De-pegging the Staked Ethereum in order to liquidate the assets led to massive financial losses for Celsius since Staked Ethereum is valued at a slightly lower amount than Ethereum. This further worsened Celsius’ insolvency, leading them to take the drastic measure that resulted in the market crash.

In the 24 hours since Celsius’ announcement, Bitcoin has declined in value by almost 14 percent; even dropping below $22,000 at its lowest. Ethereum declined by almost 17 percent, hitting $1091 at its lowest.

Celsius’ own native token CEL saw a drop of 70 percent within a single hour. Though most coins have begun correcting themselves after the drastic drop, the bearish market trend is expected to continue.

(With inputs from agencies)