The deepening rout in cryptocurrencies pushed the price of bitcoin down by almost a fifth to its lowest level since 2020, as part of a broader market selloff fanned by concerns about rising U.S. interest rates.
Digital currencies fell Monday after a fresh inflation shock heightened investors’ fears that the Federal Reserve might act more aggressively to tame surging prices. Bitcoin dropped 18% from its Friday evening level to trade at $23,824. Ethereum, another cryptocurrency, fell 27% to $1,222, according to CoinDesk.
As turbulence rippled through the crypto market, a widely used lender to the industry froze customer withdrawals. Celsius Network LLC said it was pausing all withdrawals, swaps between cryptocurrencies and transfers between accounts “due to extreme market conditions.”
Fueling the losses were expectations that the Fed would raise interest rates faster than previously signaled in a bid to control inflation running at its fastest pace in more than four decades. Data out Friday showed U.S. consumer-price inflation stood at 8.6% in May, surpassing estimates
The data sparked a selloff in riskier assets globally, while boosting yields on government bonds. Stock futures pointed Monday to the S&P 500 benchmark opening in bear-market territory, down more than 20% from its January peak. Equity indexes slid in Europe and Asia.
Rising U.S. rates have prompted investors to rethink yearslong bets on the direction of speculative assets. Few corners of the market benefited from low borrowing costs as much as cryptocurrencies—gains that are now rapidly unwinding.
The renaissance in day trading during the pandemic and the hunt for assets that could score returns while bond yields plumbed historic lows, led bitcoin to take off in the fall of 2020. The cryptocurrency surged to record highs in November last year. Since then, it has slumped 65% against the dollar, belying predictions of proponents who said the cryptocurrency could replace gold as a hedge against both inflation and turbulence in broader markets.
Cryptocurrencies have been moving in tandem with traditional markets in recent weeks but with even higher volatility.
“Risky and highly liquid cryptocurrencies are usually the first to be sold in a market selloff,” said Jeff Mei, chief marketing officer at blockchain-technology solutions provider ChainUp.
Amid the rout, Celsius said it had frozen withdrawals, swaps and transfers to put it in a better position to honor withdrawals down the line. The lender said it had activated a clause in its terms of use that would allow it to stabilize its operations. It didn’t specify which clause but said it had valuable assets and was working to meet its obligations.
The selloff took a toll on other cryptocurrency companies that had cashed in on their earlier gains. Shares of Coinbase Global Inc., an exchange that went public with a valuation of $85 billion in April 2021, fell 16% in premarket trading. The shares had lost 77% in 2022 through Friday.
Cryptocurrency traders have started to believe the Fed will move more aggressively if there are no clear signs inflation is slowing, said Markus Thielen, chief investment officer of IDEG Asset Management.
Mr. Thielen pointed to the University of Michigan consumer-sentiment survey, which showed the public’s expectation of inflation five years from now jumped to a reading of 3.3% from 3% in May, the highest level since 2008.
“The public is losing confidence that the U.S. central bank will be able to push inflation lower,” he said. It would likely take a shift in Fed policy for cryptocurrencies to become very attractive again, Mr. Thielen added.
Bitcoin’s slide since the fall has contributed to a roughly $2 trillion wipeout in the broader market. Crypto’s total market capitalization, which peaked in November at nearly $3 trillion, stood at around $996 billion in Asian hours Monday, data from CoinMarketCap showed.
Officials have sounded the alarm over the risks from crypto trading. Treasury Secretary Janet Yellen last week called cryptocurrencies a very risky investment for most retirement savers. In May, Securities and Exchange Commission Chairman Gary Gensler said he was worried a lot of people would be hurt in cryptocurrencies after the implosion of a stablecoin called TerraUSD.
Bitcoin and other cryptocurrencies have recovered from previous selloffs, including a protracted decline in 2018 and early 2019. Annabelle Huang, managing partner of digital-asset company Amber Group, said many more people have started to trade cryptocurrencies since that crash, changing the market dynamics.
“This suggests that the market is less susceptible to speculation from those who wanted to get in early to ‘get rich quick,’” she said, WSJ reports.
