Crypto industry on edge as bitcoin hovers over key $ 20,000 level after dropping to $ 17,500

The cryptocurrency industry was on edge on Monday as bitcoin struggled to stay above its key $ 20,000 resistance level, with investors fearing problems at major crypto players could spark further market shakeout.

Bitcoin, the world’s most popular cryptocurrency, dropped Saturday to a low not seen in a year and a half – $ 17,592.78 – falling below the important $ 20,000 marker for the first time since December 2020.

The drastic drop, spurred by high inflation and upcoming rate hikes from the Fed, saw other smaller tokens that usually move in tandem with the coin, such as Ethereum, fall to similar lows – spurring experts to warn of an impending crisis.

Ethereum, the No.2 cryptocurrency, was trading at $ 1,129, after having dipped well below its own symbolic level of $ 1,000 over the weekend, to $ 879.80.

The numbers represent a strong fall from grace for the coins from late last year, when they reached record highs – with Bitcoin hitting $ 69,000 and Ethereum surpassing $ 4,900.

The coins have since seen their value fall drastically, as experts warn of an impending ‘domino effect of bankruptcies and liquidations’ as the industry enters a bear market.

Bitcoin, the world's most popular cryptocurrency, dropped Saturday to a low not seen in a year and a half - $ 17,592.78 - falling below the important $ 20,000 resistance marker for the first time since 2020. Experts say the decrease could have dire implications for crypto enthusiasts

Bitcoin, the world’s most popular cryptocurrency, dropped Saturday to a low not seen in a year and a half – $ 17,592.78 – falling below the important $ 20,000 resistance marker for the first time since 2020. Experts say the decrease could have dire implications for crypto enthusiasts

WHAT IS BITCOIN AND HOW DOES IT WORK?

What are Bitcoins?

Bitcoin is a cryptocurrency – an online type of money which is created using computer code.

It was invented in 2009 by someone calling themselves Satoshi Nakamoto – a mysterious computer coder who has never been found or identified themselves.

Bitcoins are created without using middlemen – which means no banks take a fee when they are exchanged.

They are stored in what are called virtual wallets known as blockchains which keep track of your money.

One of the selling points is that it can be used to buy things anonymously.

However, this has left the currency open to criticism and calls for tighter regulation as terrorists and criminals have used to it traffic drugs and guns.

How are they created?

Bitcoins are created through a process known as ‘mining’ which involves computers solving difficult maths problems with a 64-digit solution.

Every time a new maths problem is solved a fresh Bitcoin is produced.

Some people create powerful computers for the sole purpose of creating Bitcoins, which can require a huge amount of energy to run.

But the number which can be produced are limited – meaning the currency should maintain a certain level of value.

Why are they popular?

Some people value Bitcoin because it is a form of currency which cuts out banking middlemen and the Government – a form of peer to peer currency exchange.

And all transactions are recorded publicly so it is very hard to counterfeit.

Its value surged in 2017 – beating the ‘tulip mania’ of the 17th Century and the dot com boom of the early 2000s to be the biggest bubble in history.

But the bubble appeared to have burst, and questions arose over what market there is for the long-term.

In 2021, the coins’ value surged to record highs – highs that have since dissipated amid the sphere’s latest meltdown.

‘We’ve probably seen the worst of things in terms of any singular entity suffering, but most in the industry are braced for more to come,’ Joseph Edwards, head of financial strategy at fund management firm Solrise Finance, said of the looming crisis .

The coins ‘spectacular crash spurred crypto lenders such as Celsius, Binance, Three Arrows and Babel Finance to suspend withdrawals, after the drop spurred a sell off that likely left the firms see much of their evaluations – comprised of others’ money – evaporate.

Adam Farthing, chief risk office for Japan at crypto liquidity provider B2C2, says the situation has him concerned that apart from a bear market, the mass withdrawals could spell doom for the industry as a whole, as firms try to deal with the losses.

‘There is a lot of credit being withdrawn from the system and if lenders have to absorb losses from Celsius and Three Arrows, they will reduce the size of their future loan books which means that the entire amount of credit available in the crypto ecosystem is much reduced, ‘said

Farthing further warned: ‘It feels very like 2008 to me, in terms of how there could be a domino effect of bankruptcies and liquidations.’

US based lender Celsius Network announced it would suspend customer withdrawals earlier this month, after drops in May saw Bitcoin and Ethereum fall below previous resistance levels of $ 40,000 and $ 3,000, respectively.

A resistance level refers to price point where buyers are less inclined to buy coins – on their way down – or more inclined to sell them – on their way up – due to them reaching a marker where those who bought it at an earlier price feel pressured enough to sell.

The resistance markers met over the weekend were proceeded by sell offs seen during the week, causing Bitcoin to lose 20 percent of its value from last Monday, and more than half of its value from the beginning of the year.

Other currencies have had even more dramatic tumbles – with Ethereum down by more than 70 percent in the same period.

In a blog on Monday, Celsius said it would continue working with regulators and officials, but that it would pause its customer Q&A sessions.

A fall in stablecoins – a type of cryptocurrency designed to hold a steady value – further suggests people are pulling money from the sector at concerning speeds.

The coins are now nearing what market analysts commonly refer to as the ‘death cross,’ a bearish indicator which occurs when the 50-day moving average of a cryptocurrency dips below its 200-day moving average.

The fall follows problems at several major crypto firms, such as the collapse of stablecoin terraUSD, and of course the solvency issues seen at lenders such as Celsius.

The drastic drop, spurred by high inflation and upcoming rate hikes from the Fed, saw other smaller tokens that usually move in tandem with the coin, such as Ethereum, fall to similar lows - spurring experts to warn of an impending crisis

The drastic drop, spurred by high inflation and upcoming rate hikes from the Fed, saw other smaller tokens that usually move in tandem with the coin, such as Ethereum, fall to similar lows – spurring experts to warn of an impending crisis

Further declines, market players said, could have a knock-on effect as other crypto investors are forced to sell their holdings to meet margin calls – the minimum amount required for investors to incur profits – and cover losses.

One expert says the Federal Reserve is responsible for the downturn, after the agency announced it would be raising rates by 75 basis points this week, following a 25 basis point and a 50 basis point interest rate hike in March and May, respectively.

The hikes show the Fed is just now getting aggressive in tightening financial conditions amid record inflation seen the past year.

Bitcoin is a cryptocurrency - an online type of money which is created using computer code

Bitcoin is a cryptocurrency – an online type of money which is created using computer code

Ethereum, like Bitcoin, is a digital token used on a digital database called a blockchain.  It has gained prominence as a popular method to pay for NFTs (Non Fungible Tokens)

Ethereum, like Bitcoin, is a digital token used on a digital database called a blockchain. It has gained prominence as a popular method to pay for NFTs (Non Fungible Tokens)

Hedge fund strategist Peter Cecchini, of New York City based firm, Axonic Capital says the hikes, instead of quelling inflation, could likely increase the chances of a prolonged economic recession and a deep sell-off in the stock and crypto markets.

‘Stifling domestic demand with too-late rate hikes could now result in a prolonged recession, especially because policy works with a three-to-nine-month lag on the economy,’ Cecchini told Yahoo Finance over the weekend.

He added that the Fed’s taking so long to raise the rates could serve as a double-edged sword, since by lowering consumer demand for goods and services with higher interest, commodity prices that are driving inflation will likely rise.

That scenario could potentially lead to economic hardship for millions, as well as a drastic drop in the crypto sphere.

Crypto hedge fund Three Arrows Capital is exploring options including the sale of assets and a bailout by another firm, its founders told the Wall Street Journal in a story published Friday, the same day Asia-focused crypto lender Babel Finance said it would suspend withdrawals.

The head of one of the largest crypto exchanges, meanwhile, says the Federal Reserve is responsible for the recent downturn.

‘The core driver of this has been the Fed,’ said Sam Bankman-Fried, CEO of FTX Trading Limited, a popular platform used by investors to buy and sell cryptocurrency.

The Fed raising rates to quell inflation – which reached a rate of 8.6 percent last month – has led to a ‘recalibration’ of expectations of risk, Bankman-Fried told NPR.

The rise was the largest interest rate increase since 1994.

Bankman-Fried, who is worth a reported $ 21billion, said the national bank is ‘caught between a rock and a hard place’ with the aggressive hikes, due to the difficulty of the task in front of them.

The Fed's raising rates to quell inflation last week - which reached a rate of 8.6 percent in May - could have an unintended effect on the crypto market, economists have warned

The Fed’s raising rates to quell inflation last week – which reached a rate of 8.6 percent in May – could have an unintended effect on the crypto market, economists have warned

Bankman-Fried said a lot of his own outlook for his business is now dependent on decisions the Fed will make in the coming months, and whether the mass sell-offs seen in both the crypto sphere and world markets continue.

‘Literally, markets are scared,’ Bankman-Fried said. ‘People with money are scared.’

The fall in crypto markets has coincided with a slide for equities, as US stocks suffered their biggest weekly percentage decline in two years on fears of rising interest rates and the growing likelihood of recession.

Bitcoin’s moves have tended to follow a similar pattern to other risk assets such as tech stocks.

The overall crypto market capitalization is roughly $ 950 billion, according to price site Coinmarketcap, down from a peak of $ 2.9 trillion in November 2021.

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