The cryptocurrency market took a beating over the past week. The total capitalization is down below $1 trillion for the first time since January 2021, losing a staggering $300 billion in seven days alone.
ETH is one of the cryptocurrencies that has performed particularly poorly. It is down 40% over the same period and is trading at around $1,000, after briefly dipping below that level.
Without any further ado, here are three possible reasons for ETH’s decline over the past week.
General market decline
When looking at the cryptocurrency market, in general, it is evident that the entirety of it has been plunging over the past couple of weeks. This decline has accelerated over the past week, leading to the removal of $300 billion from all capitalization – as mentioned above.
But it’s not just crypto. Wall Street is also in shambles, with the S&P 500 trading for a 4.25% loss in the past week. The Dow Jones Industrial Average (DJIA) is also down 4% over the same period, whereas the NASDAQ Composite tumbled slightly less than 2%.
The broader macroeconomic picture doesn’t look good, with the global economy plagued by runaway inflation, an ongoing war in Europe and more. Just this week, the US Federal Reserve announced another rate hike – this time by 75 basis points – the biggest hike in 28 years. The country’s Bureau of Labor Statistics also released the Consumer Price Index (CPI) figures – the metric used to measure inflation (although many argue that actual inflation is higher) – s’ standing at 8.6% for the month of May.
Cryptocurrencies are a risk-on asset, and as such, it’s no wonder that investors are disposing of them first, bringing distress to the entire market.
ETH is not immune. For comparison, the following heatmap reveals that all major cryptocurrencies are well into the red over the past seven days:
And yet, it’s also evident that ETH is amongst the worst performers. This has to do with the other two potential reasons.
Celsius Network in Distress
It’s important to note that almost everything that’s happening with Celsius Network right now comes from industry analysts. There is no official information from the company on the current state of its affairs. The first signs of major distress came when the platform halted all withdrawals, transfers and trades outright, citing extreme market conditions. This essentially left users stranded with no access to their funds.
Celsius Network, although centralized, is also one of the largest participants in DeFi markets. CryptoPotato covered what’s currently known and why this could be a huge risk for the cryptocurrency industry in general.
In short, Celsius is a lending platform that allows users to deposit crypto and earn a return. They, in turn, would use the money to generate higher returns in any way they saw fit. It may have turned out that they weren’t particularly diligent about their risk management, as one of their purported public addresses revealed that they were less than 4% away from being liquidated for a just under $500 million on-chain. This position has since been strengthened and appears secure.
However, Celsius Network is also suspected to be a massive holder of stETH – staked ETH on Lido’s platform. stETH currently trades at a 4% discount to ETH, and coupled with huge withdrawal demand, this may have had a role in increasing the massive selling pressure that ETH saw over the past week. Also, the cryptocurrency started declining a lot more seriously than the rest of the market exactly when rumors about Celsius started going rampant.
Three Arrows Capital (3AC) supposedly insolvent
As if the above weren’t enough, Three Arrows Capital – one of the largest cryptocurrency hedge funds with a huge amount of assets under management (AUM) – is also going through a tough time, to say the least. we can say.
A few days ago, rumors started circling that the fund has faced massive liquidations and is supposedly insolvent. Somewhat cryptically confirming it was Zhu Su, one of the fund’s co-founders, who said:
We are in the process of communicating with the affected parties and are fully committed to resolving this issue.
Yesterday, Kyle Davis, another co-founder, said that the company is exploring various options to stay afloat, some of which include asset sales and getting rescued by another firm.
3AC supposedly has a lot of ETH. Multiple reports stated that the company had liquidated millions of ETH in the past few days just in an effort to repay existing loans and prevent further liquidations.
