What You Need To Know About Celsius And Bitcoin

Crypto lending platform Celsius Network (CEL-USD) announced Monday that it will be temporarily halting all withdrawals, Swap, and transfers between accounts” until further notice. Paired with a hotter-than-expected inflation print released Friday which has escalated recession fears, Bitcoin (BTC-USD) fell through its $24,000 support Monday morning. Currently trading at under $23,500 (June 13th), Bitcoin’s value has dropped to its lowest since December 2020.

It has been a torturous year for crypto investors, though equity and credit investors have not fared much better. The Terra/Luna (LUNC-USD) collapse in early May had crypto investors out hundreds of billions of dollars overnight. And while crypto investors are still grappling with the aftermath of the stablecoin’s demise and mulling on how fleeting the asset class’ performance can be, a fresh 40-year record for price increases in May is now escalating fears of steeper rate hikes that could risk an economic recession.

The combination of brewing macroeconomic headwinds and confidence-destroying developments within the crypto realm underscores more headache in the near term for investors in the nascent asset class, as corroborated by the latest landslide in Bitcoin’s performance. Volatility will likely remain the near-term theme for crypto assets, especially the benchmark and largest cryptocurrency Bitcoin, as investors adjust to recurring turmoil that shows no immediate respite in sight.

Bitcoin in 2022

Similar to the turmoil that has swept across all traditional asset classes spanning equities to credits, Bitcoin and its crypto peers may be headed towards an extended period of similar fate in the months ahead. This is a stark contrast to Bitcoin’s performance in 2021 when it staged a momentum-fuelled climb towards its all-time high. Accommodative pandemic-era monetary policies and stimulus checks had fuelled cross-asset growth like never before, with Bitcoin being heralded as a gold-like safe-haven asset once upon a time as it defied market instability driven by COVID-induced economic uncertainties.

But now, barely halfway into the year, the world’s largest cryptocurrency has already lost half of its value, with its brief peak at $68,000+ from just seven months ago being more and more out of reach. Its declines have been largely in parallel to the faltering global macroeconomic outlook as inflation remains persistent while the Fed continues to play catch up.

Equity Correlation. Bitcoin’s correlation to the equity market has been approaching an all-time high in recent months. With a correlation coefficient of 1 implying “the assets are moving in lockstep”, the 90-day correlation coefficient between Bitcoin and the Nasdaq 100 index has been hovering around 0.70. The high correlation should not be surprising, given the cryptocurrency’s nature as one of the riskiest assets on the market with no tangible “long-term case“. Unlike equities and credits, which have their performance backed by fundamentals and the broader economy, cryptocurrencies like Bitcoin are primarily driven by sentiment and demand for now given it has no structural use case.

And the current macro backdrop has certainly not boded well for speculative assets like Bitcoin, as evidenced by its recent volatility. After weeks of staying range-bound at the $30,000-level, and “defying predictions of a potential further decline but also struggling to gain upward momentum”, the Bitcoin has succumbed to the former following the release of a hotter-than-expected May inflation print on Friday (June 10th). Market participants are bracing for more aggressive rate hikes at upcoming FOMC meetings as the Fed continues to prioritize keeping record-high inflation in check at all costs.

The odds of a 75-bps rate hike before September have surged to 50% based on how traders have been pricing interest rate swaps “tied to FOMC policy outcome dates” following the May inflation print – if materialized, it would mark the Fed’s first 75 bps rate hike since 1994. The combination of high inflation and aggressive rate hikes is fuelling investors’ angst of an incoming economic recession, which could eat into consumer spending and erode growth, creating a risk-off environment that is spoiling market appetite for Bitcoin.

Terra/Luna Collapse. The TerraUSD (UST-USD) stablecoin’s collapse in early May unleashed a bloodbath across crypto assets, destroying “over $200 billion of wealth from the market in just 24 hours”. Bitcoin dipped below $29,000 for the first time since December 2020, following the broad-based sell-off in crypto assets. It was a crypto calamity that had even spread to related equities like Coinbase (COIN), which dropped to its all-time low in the $40-range at the time before paring losses to trade range-bound in the $60-level in recent weeks.

Regulated by complex computer algorithms that few can grasp, stablecoins are meant to maintain a one-to-one peg to the dollar. It essentially mimics a currency similar to the dollar, which is subject to less value fluctuation than pure crypto assets like Bitcoin so it is easier to use in transactions. However, unlike the dollar, stablecoins are decentralized and free from intermediary interference. Instead of being backed or regulated by a bank or government, stablecoins rely on computer algorithms to automatically maintain its value by increasing or decreasing supply. In the case of the Terra/Luna collapse, the UST stablecoin fell off its peg, which accordingly eroded users’ confidence in the affiliate Luna token as well as the viability of other cryptocurrencies.

The Terra/Luna relationship was simple: every one unit of UST was redeemable for $1 worth of Luna. When UST’s peg to the dollar falls below 1, there is an “incentive to trade one UST for $1 worth of Luna”. Alternatively, when UST’s peg to the dollar is above 1, there is an incentive to sell $1 of Luna for 1 UST to lock-in an “instant profit”.

But as the UST’s peg to the dollar unravelled, the Luna’s value went with it. This was because user confidence was the primary driver of the Terra/Luna system’s success:

UST’s value depends on confidence among users in Luna’s value, and Luna’s value is ultimately based on confidence that UST will remain stable…If users lost confidence in the system, they could rush to sell or redeem their coins, and others might follow, fearing they wouldn’t get their $1 per token back if they waited too long. In theory, the network could always issue more Luna tokens to those who wanted out. But that was a risk, too. The more tokens issued, the further the price of Luna would drop, which in turn would mean the network would have to issue even more, exacerbating the decline. On Wall Street, that’s called a ‘death spiral'”.

Source: Bloomberg.

Even as the Luna Foundation Guard (“LFG”) – a reserve created to provide “just-in-case” backing for the UST – liquidated its $10 billion worth of Bitcoin for UST in an attempt to shore up the stablecoin’s peg to the dollar, it did little to salvage the system’s carnage, while bringing the value of the world’s largest cryptocurrency down with it at the same time.

The Terra/Luna collapse highlighted the vulnerability of decentralized finance (“DeFi”), the fragility of the underlying technology, and the volatility of crypto asset valuations. Paired with ongoing economic uncertainties, the situation created the perfect storm that took the value of Bitcoin further down a notch.

It’s “Winter” Degrees Celsius…

The combination of an “unfavourable macro and crypto environment” has created a vicious cycle of deterrence from Bitcoin this year. And the Celsius Network’s recent decision to halt withdrawals has only further compounded pains for Bitcoin investors, as it brings into question again the integrity of DeFi, as well as the “sustainability of high yields” offered by crypto platforms on deposits.

What is the Celsius Network? The Celsius Network is one of the largest crypto lending platforms. Similar to a bank, members can deposit cryptocurrencies in exchange for an interest payment, or take out “crypto collateralized loans”. The platform also operates its native token CEL (CEL-USD) – the costs and earnings related to borrowing or lending crypto assets on the Celsius Network can be facilitated by CEL, which guarantees more rewards for lenders (up to 30% in weekly returns, which beats the 20% interest on UST deposits) and less capital costs for borrowers (up to 25% discount on loans).

Why did Celsius suspend withdrawals? Citing “extreme market conditions”, Celsius has temporarily suspended “withdrawals, Swap, and transfers between accounts” until further notice. This largely defies the mission statement which the “Celsius team has worked hard to define”: “To put unparalleled economic freedom in the hands of the people”.

While the situation begs questions about whether Celsius is about to become another implosion within the crypto community like the Terra/Luna system, the network has promised “customers will continue to accrue rewards during the pause”. But this has done little to calm members’ nerves if the withdrawal of the accrued amount is currently a big question mark. The CEL token has lost more than half of its value today, underscoring investors and users’ angst over the still-developing situation.

What does it mean for Bitcoin? Celsius’ latest suspension of withdrawals has only heightened jitters across the crypto investing and DeFi community. With repeated mention of the need to “stabilize liquidity”, but no mention of pausing new loans, requirements for collaterals or repayments, fears of another collapse due to solvency issues and consequent spill-over risks to Bitcoin are intensifying.

Locked user funds are also risking defaults elsewhere, with some indicating that they are in need of the amounts deposited into Celsius to settle other outstanding obligations. Just one day prior to stopping all withdrawals, Celsius CEO Alex Mashinsky had countered “speculation about a freeze on withdrawals” on Twitter, while data elsewhere showed Celsius had possibly transferred “$320 million worth of crypto to FTX” right before suspending withdrawals and transfers on the network.

For now, trust in the platform is wavering, and so is the will to “HODL” Bitcoin. As mentioned in earlier sections, Bitcoin has continued to dip below $23,500 and is approaching $23,000 as we write (it has rapidly deteriorated to the $22,600-level at the time of article submission). The broader cryptocurrency market cap has also “dropped below $1 trillion for the first time since January 2021″. The broad-based market turmoil triggered by mounting macroeconomic challenges spanning record inflation, tightening monetary policy, protracted pandemic disruptions, and an ongoing war in Ukraine is also making investors “much more risk averse and turning their backs on crypto assets”.

Final Thoughts on Bitcoin’s Outlook

Despite intense selling pressure due to brewing macro headwinds and shaky investors’ confidence in the current development of DeFi platforms, Bitcoin’s pullback this year is likely temporary, though volatility will likely remain the theme for a while longer. Whether DeFi and blockchain technology is here to stay is no longer a question up for debate and Bitcoin remains the bedrock of the expansive innovation.

The emergence of blockchain technology has shown capability in eliminating inefficiencies (e.g., high costs, time delays, opaqueness of corporate regulations, etc.) in traditional transactions, while Bitcoin’s role in the nascent technology’s continued development is further corroborated by milestones such as the ongoing surge in institutional interest, as well as its accelerating market share gains as a “global settlement network”. The favourable trends continue to underpin Bitcoin’s imminent breakout, given adoption has already reached an inflection point.

Unlike crypto platforms and systems like Celsius or Terra where an “administrator” can still interfere with transactions that should have been “decentralized”, Bitcoin is also currently one of the few “level 1 blockchain tokens” that is free from third-party interference and relies strictly “on a global network of peers to enforce rules”. As observed in the foregoing analysis, Bitcoin remains a common token used in “backing” secondary crypto assets, while its blockchain is a core layer 1 main chain used in ensuring the scalability and security of additional layer 2 protocols and/or sidechains built on it. The Bitcoin blockchain remains the Bitcoin token’s biggest hedge against a total demise like Terra’s – it encourages the continued development of DeFi, while also ensuring that any and all changes to its infrastructure are voted on and agreed by its network of Bitcoin holders to secure their best interests.

Although Bitcoin’s currently high correlation to equities is stoking persistent volatility, worsened by troubles brewing across its crypto peers, its infrastructure is here to stay and remains a critical role in supporting the continued development of DeFi, as well as other blockchain-enabled advancements like Web3. While there are no immediate catalysts in sight to trigger a turnaround in Bitcoin’s latest declines, we remain optimistic on the token’s long-term prospects.