First Mover Asia: Celsius Risks Triggered Crypto Crash, Says Huobi Group CFO; Bitcoin Wobbles but Doesn’t Break Post-Rate Hike

Good morning. Here’s what’s happening:

Prices: Bitcoin fell as the U.S. Federal Reserve Chair Jerome Powell announced the highest interest rate hike since 1994. Bitcoin later recovered.

Insights: Huobi Group’s chief financial officer attributed the recent crypto crash to lending platform Celsius’ announcement that it would pause withdrawals.

Technician’s take: In place of Technician’s Take, First Mover Asia is republishing a report on the current crypto winter by CoinDesk columnist David Z. Morris.

Catch the latest episodes of CoinDesk TV for insightful interviews with crypto industry leaders and analysis. And sign up for First Mover, our daily newsletter putting the latest moves in crypto markets in context.

Bitcoin (BTC): $22,710 +3.6%

Ether (ETH): $1,246 +4%

Bitcoin Wobbles but Regains Its Balance

The Fed decreed interest rates will rise again.

Bitcoin cowered at first, then shrugged and climbed.

The largest cryptocurrency by market capitalization recently moved past $22,700, a 3.6% jump from where it stood 24 hours earlier. Upon hearing the widely expected news Wednesday morning that the U.S. central bank would hike rates by the highest increment in more than a quarter-century – three-quarters of a percentage point – bitcoin fell toward $20,000. The price recovered shortly after Federal Reserve Chair Jerome Powell made his announcement.

Ether, the second-largest crypto by market cap, also dropped first before rising about 4% from Tuesday to cross $1,200. Other major altcoins were in the green with SOL up 20% at one point, and UNI and DOT each rising over 15%. The increases recovered some of the massive amounts of ground that major cryptos lost over the past six days following first a surprising poor Consumer Price Index showing untamed inflation and then crypto lending platform Celsius’ decision to halt withdrawals.

The fear, uncertainty, and doubt (FUD as it’s known in the industry) has taken hold over crypto markets, moving from one party (and what it signifies within the ecosystem) to the next,” Elementus CEO Max Galka wrote to CoinDesk. “Today it is Celsius, tomorrow it will likely be another entity. When this cycle starts, exotic assets like cryptocurrencies are the first to be sold among institutional investors, and we will all know where the road ends.”

Crypto prices dovetailed with stocks’ gains on Wednesday with the tech heavy Nasdaq rising 2.5% to reverse some of its steep losses from earlier in the week. The S&P 500, which hit bear market territory on Tuesday, meaning that it fell at least 20% from its previous high, gained 1.4% to break a five-day losing streak as investors reacted positively to the Fed’s strong inflationary medicine and indications that it would continue its monetary hawkishness. Gold, a traditional safe haven that had dropped in previous days, increased 1.2%.

Powell said that last week’s inflation surprise warranted “strong action at this meeting” rather than waiting another six weeks for the next gathering. “We decided we needed to go ahead, and so we did,” Powell said. “We came to the view that we’d like to do a little more front-end loading on that.”

He noted that “either a 50-basis-point or a 75-basis-point increase seems most likely at our next meeting.”

Inflation played prominently on the minds of European financial leaders as well earlier Wednesday as the European Central Bank called an unscheduled meeting to consider wider market issues, including rising borrowing costs among indebted countries on the continent.

Meanwhile, the crypto industry continued to reckon with fallout from Celsius and the collapse last month of the terraUSD stablecoin (UST) and LUNA token that supported it. Bitcoin was trading near $40,000 prior to UST losing its dollar peg in early May, and the dual debacles have undermined crypto investor confidence. Elementus’ Galka noted similarities in the current environment to the 2008 financial crisis when equity markets plummeted.

“The current market conditions surrounding Terra and Celsius, and what both parties represent purely as psychological catalysts, do appear to have the makings of another 2008 crash,” Galka wrote. “There are important differentiators for sure: Terra USD was a flawed protocol vulnerable to attack, while the houses sold in 2008 dropped in fundamental value. In both cases, however, widespread fear was the primary motivator, introduced by the possibility of risk becoming a reality.”

S&P 500: 3,789 +1.4%

DJIA: 30,668 +1%

Nasdaq: 11,099 +2.5%

Gold: $1,834 +1.2%

Celsius Triggered the Latest Crypto Crash

Bitcoin extended its losing streak to a record nine days and neared the $20,000 level after Asian markets closed. The largest cryptocurrency by market capitalization is down 30% decline over the past week.

Risk-averse traders continue to shy away from bitcoin amid macroeconomic concerns such as rising inflation and contagion risks from within the crypto market.

Some, like Lily Zhang, the chief financial officer of Huobi Group, attributed bitcoin’s fall this week to troubles at prominent crypto lender Celsius, plus weak global markets. Huobi is one of the most popular exchanges in the Asian market and trades billions of dollars daily.

“We believe that the immediate trigger for the crypto crash appears to be a massive sell-off by investors amid the pausing of withdrawal services by crypto lending firm Celsius,” Zhang told CoinDesk in an email, adding the development came as crypto traders were just recovering from the implosion of Terra last month.

Celsius offered its users yields of up to 17% on deposits – an attractive amount for users looking to enter the crypto market and earn on idle capital. The firm used several strategies to garner returns, such as investing in liquidity pools on decentralized finance (DeFi) platforms.

Such strategies worked … until they didn’t. Poor market dynamics caused prices of staked ether (stETH), a popular ether derivative product used by the likes of Celsius, to stray away from prices of spot ether (ETH) and sent investing strategies akilter.

The contagion risk affected many prominent crypto players, with Celsius pausing all user withdrawals this week and notable crypto fund Three Arrows Capital seeing at least $400 million in losses due to liquidations.

Contagion risks on top of macroeconomic concerns could have led to outflows. As per a note this week from crypto firm CoinShares, investors have withdrawn over $102 million from cryptocurrencies last week amid expectations of a tightening of monetary policy by the U.S. Federal Reserve.

Meanwhile, Huobi’s Zhang says the market could see further declines as more liquidations occur and players are forced to sell.

“In the short term, the market will remain in a precarious position, and we should prepare for more liquidations which will increase the downward trend we are already seeing on stETH,” Zhang said.

Zhang, however, added that prices could see a recovery after short-term volatility subsides: “On an optimistic note, as the selling pressure on stETH continues to increase, more demand will seep into the second-hand markets and create cheaper stETH prices that may be attractive to new investors, which will in-turn increase demand and drive prices back up to normal.”

Sentiment among other crypto traders remains mixed. BitMEX founder Arthur Hayes fears the market has not yet hit rock bottom, and we could see a massive sell-off in cryptocurrencies if bitcoin falls below $20,000. Elsewhere, Galaxy Digital head Mike Novogratz said in a tweet that bitcoin is close to the “bottom” and will hold above $20,000.

As for the Celsius troubles, some say users are better off custodying their own assets than depending on a third party. One executive who has witnessed several crypto winters, said that markets can decline quickly and scarily, but they’re not indefinite.

“Self-custody is what crypto was built for, and what we are seeing right now is not unusual,” explained Brian Norton, chief operating officer of MyEtherWallet, in an email to CoinDesk. “These sorts of occurrences illustrate the need and benefits of self-custody, and provide time and opportunity for people to learn how it is done.

“I think every time you see this, it just reinforces the point that if you are relying exclusively on centralized platforms, even when the yields are great, you’re still giving up a good deal of control over your digital assets,” Norton added.

Crypto Winter Is Here. The Weak Will Die, and the Strong Will Eat Their Bones

Let visions of Consensus carry you through the bear market.

It has been a week of whiplash for us here at CoinDesk. On the one hand, we just scored an immense triumph as an organization with Consensus 2022, which wrapped up on Sunday. The conference was a sprawling, frenetic four days that proved how intense and broad the interest in crypto is. It also, if I can pat my fellow CoinDeskers on the back, proved once and for all that we are the media organization at the center of it all.

This article is excerpted from The Node, CoinDesk’s daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.

On the other hand, of course, in the mere two days since Consensus ended, we’ve seen an incredible rout in crypto markets, with bitcoin (BTC) and ether (ETH) both dropping roughly 20% in two days.

There are now signs of a liquidity crunch, and maybe even insolvency, at the centralized lending platform Celsius Network ­– arguably the “other shoe” dropping after the LUNA/UST unwind. Trouble at Celsius, in turn, seems to have traders worried about stETH, an important bond-like token related to the Ethereum Merge. There are similar, seeming liquidity issues at Three Arrows Capital and, to top it all off, crypto exchange Coinbase just laid off 1,100 people.

There is so much to say about this moment, and we here at CoinDesk will be saying all of it in the coming weeks and months as we help you navigate the crypto crisis. But before the dominos started toppling at scale, I was planning for this column to be about the amazingness of Consensus. And I still think that’s important, because the vision and passion that was on display at Consensus in Austin, Texas, last weekend is exactly how we find our way out of this mess.

A big tent

Above all, Consensus was a big tent. Huge, in fact, literally and figuratively. We drew 17,000 attendees to the conference itself, and another 3,000 attended satellite events. It was the South by Southwest of crypto, complete with concerts from Disclosure and Big Boi. And it will be next year, in Austin, too.

More to the point, though, the breadth of programming and perspectives was mind-boggling. For instance, I was on my way to moderate a panel and had a few moments to spare, and so I stuck my head in a random auditorium – and there was Facebook whistleblower Frances Haugen, who has little crypto involvement aside from a shared concern about data harvesting.

I got to see sci-fi author Neal Stephenson and technologist Jaron Lanier in conversation with CoinDesk contributor Leah Callon-Butler. I myself got to interview one of the Baylor University bitcoin researchers, and also had a delightfully unhinged conversation with Chris Gabriel, aka MemeAnalysis, about memetics, Freud, black magic and the CIA.

See also: Ex-CIA Director Says Criminals Will Move Away From Bitcoin

Crypto, it seems clear, is becoming a Schelling point for various stripes of dissatisfaction with the status quo. A Schelling point is, very loosely, a symbol, site, technology or other focal point that draws people together to collaborate without explicit communication or coordination. Crypto has seized society’s imagination and become a site for transformative change – even if we’re not clear where it’s headed.

Crashdown?

And here we get to the market crash. I feel immense empathy for those who are losing their jobs right now and for those who will in the coming days and weeks. I’ve been there – I lost my job as a result of the 2018 crypto crash.

But there are also immense positives to a crypto downturn. The products failing – particularly luna and Celsius – were substantially illusory all along, driven by inflated, unsustainable returns. It’s now becoming clear that the “profits” depositors in these systems received were essentially a game of musical chairs using venture capital money.

Coinbase, meanwhile, has admitted that it made a major strategic mistake by hiring too fast despite, as I pointed out when it went public in 2021, the brutally cyclical nature of the exchange business. And Three Arrows, a highly influential venture firm, appears to have been heavily invested in some of the most speculative and risky projects on the market.

I know it’s a terrible cliché, but it’s nonetheless true: All of that is, in fact, the good news.

Back at it

While we’ll certainly see more unwinds, withdrawal freezes and mysterious silences over the next few weeks or even months, the market crash will be hardest on companies and investors who have made poor decisions. As crypto expanded and hype built over the past two years, fundamentally worthless projects proliferated, minting their own ephemeral tokens and convincing uninformed retail traders and high-profile veteran hedge fund managers alike that they had value.

This sort of garbage has crept into crypto during every expansion cycle. The current downturn is the holy cleansing flame that will eliminate it, in the same way that an old-growth forest needs a good fire every once in a while to renew itself. Getting rid of fake trash built on hype and a cult of personality means that, while there may be less money sloshing around for the next year or so, a much higher proportion of that will go to credible projects.

Capital is available

Those who are looking to build something based on a solid idea will thrive in this environment – especially because, unlike in 2018, it seems likely there will still be substantial venture capital available. As an example, consider that OpenSea, which generated $20 billion in NFT sales in 2021, was founded in 2017, with a lot of building through 2018 and 2019. That was not just during a fallow period for crypto, it was before most people had heard the term non-fungible token.

See also: 6 Reasons for Optimism This Crypto Winter | Opinion

There will be other OpenSeas, other Ethereum Name Services (ENS), other genuinely useful and profitable services or technologies developed during the coming bear market (OK, I’m ready to call it a crypto winter now). The best way to survive, or thrive, will be to do that building and position yourself to reap the benefits during the next big surge.

And remember that these downturns are always shorter than they seem. Personally, after losing my crypto job in 2018 it was less than two years before I was back in the industry – and having even more fun than before.

Bank of England interest rate decision

9 a.m. HKT/SGT(1 a.m. UTC): Melbourne Institute’s Australia consumer inflation expectations (June)

9 a.m. HKT/SGT(1 a.m. UTC): China house price index (May)

In case you missed it, here is the most recent episode of “First Mover/” on CoinDesk TV:

Fed Decision Day: Bitcoin Drops Toward $20K, Former CFTC Chair on Crypto Lending Crisis, DeFi Regulation

Former Commodity Futures Trading Commission Chairman Timothy Massad joined “First Mover” to discuss the crypto lending crisis and outlook for decentralized finance regulation. Bitcoin dropped near $20,000 level amid contagion risks in the crypto market. Doug Schwenk of Digital Asset Research provided his markets analysis. Plus, three-time Grammy-nominated, multi-platinum recording artist and entrepreneur French Montana shared his “French Family NFT” that unlocks NFT music rights to his upcoming new album.

Fed Announces Biggest Interest Rate Hike in 28 Years; Bitcoin Gains: “The labor market is extremely tight, and inflation is much too high,” said Chair Jerome Powell.

Celsius Troubles, UST Collapse May Help Crypto Long Term, FSInsight Says: The firm sees good buying opportunity now for bitcoin.

Three Arrows Faces Possible Insolvency After Unforeseen Liquidations: Report: The investment firm has been one of the most vocal crypto market participants in the past few years.

Tether Sees New Wave of Redemptions as Fear of Market Contagion Spreads: Investors pulled out some $1.6 billion this week from USDT, the largest stablecoin by market capitalization, amid growing nervousness as cryptocurrency prices keep sliding.

A Manhattan Landlord Listed His Office Building in ETH as an NFT. Then Its Price Dropped $12M: The owner, Chris Okada, says the building will be relisted in the coming days to adjust for ether’s 40% price drop.

The Meme Economy: Those who grasp the memetic nature of not only crypto, but all value, can gain immense power from understanding natural flows of meaning. This piece is a preview of a talk to be given on the Big Ideas stage at Consensus 2022.

Today’s crypto explainer: 15 Ways to Stay Sane While Trading Crypto

Other voices: Inside a Corporate Culture War Stoked by a Crypto C.E.O. (The New York Times)

“We’re not trying to induce a recession now. Let’s be clear about that.” (Fed Chairman Jerome Powell) … “Nexo’s business model is designed with sustainability in mind, so we continue to grow even, and especially, now. We are not spoiled by VCs, Hollywood actors & sports teams – we did it organically on our own.” (Nexo/Twitter) … “@CelsiusNetwork team is working non-stop. We’re focused on your concerns and thankful to have heard from so many. To see you come together is a clear sign our community is the strongest in the world. This is a difficult moment; your patience and support mean the world to us.” (Crypto lending platform Celsius/Twitter) … “Two of the largest names in the play-to-earn scholarship space have decided to part ways after seven months. Members of Merit Circle voted to terminate their relationship with Yield Guild Games (YGG), buying out the guild’s 175,000 USDC ($175,000) investment in the play-to-earn gaming decentralized autonomous organization (DAO) for 1.75 million USDC.” (Gaming DAO Merit Circle, YGG ‘Terminate Relationship’/CoinDesk) … “Uhh… a massive DAO just voted to “refund” one of their investors who was owed a 30x return ($5M+)This is an insane story that impacts all builders in web3 and as a founder I need to speak out Merit Circle DAO vs YGG 🧵” (101.XYZ CEO Tim Connors/Twitter)