Liquidity Crisis for Crypto Lenders Arises as BTC and ETH Reserves Fall
Despite gains in the last 24 hours, the slow crypto market price recovery has not been sufficient to offset recent losses from the crypto crash, which affected the largest market cap holders Bitcoin and Etherium.
Why is the Market so Volatile?
With Bitcoin reaching a 52-week low of about $23,000, a loss of 15.8 percent, a level not seen on the market since December 2020 as monetary policies tighten throughout the world owing to inflation, and Ethereum falling by 16.3 percent to $1,229 during the same period.
On June 10th, the Bureau of Labor Statistics issued its ‘consumer Price Index’ (CPI) report, which revealed yet another inflammation shock to the worldwide market, claiming that the US had reached an inflammation rate of 8.6 percent. This is the highest observed rate since 1981.
This caused numerous cryptocurrency holders, notably the Celsius network (CEL) and Binance, to cease transactions. Although Binance has resumed Bitcoin withdrawals, CEL, one of the largest decentralized financial platforms, has had a serious liquidity issue. As investors began to withdraw cash from Celsius, the developers put a halt to trading and withdrawals. In order to remedy the crisis, the Crypto lender also unstaked around $247 million in Bitcoins from Aave.
The Celsius team announced in a statement that they took the measure to place Celsius in a stronger position to meet its withdrawal commitments over time.
Celsius had a cult following in the crypto realm after advertising that users may receive a yearly percentage yield of close to 18 percent by investing their crypto assets on their platform.
In a mechanism similar to traditional bank lending, the firm accepts cryptocurrency deposits and lends them to other investors and financial organizations. Users profit from the revenue generated by crypto borrowers.
Until recently, Bitcoin was thought to be a store of wealth that was relatively resistant to swings in the value of risk assets. That is no longer true. Today, economic events that impact the value of risk assets, such as inflation, stock markets, and Fed monetary policy, influence Bitcoin and the larger crypto market.
Reasons for the Rising Inflation
One reason is that the Federal Reserve has increased interest rates twice this year and is set to do so again this week.
The Federal Reserve is confronting a record rise in inflation that exceeds anything experienced in the previous four decades. It is unknown how many rate rises left, but economists expect the central bank to continue hiking rates until the end of the year and until 2023. According to some forecasts, the federal funds rate might close the year at or over 3%.
When the Fed rises interest rates, it reduces demand for greater growth firms, such as technology stocks, as well as speculative risk assets, such as cryptocurrencies and Bitcoin.
It is difficult to predict how much desire in cryptocurrency will exist when all liquidity has dried up.
