Cryptocurrency Price Crashes Due To Inflation As Investors Lose Savings

In five years of aerial and aerial mining work in Far North Queensland, Joel had saved almost enough for a first home deposit.

Then, about six months ago, the price of bitcoin began a long decline.

Now he’s lost most of his savings – and this week his luck got even worse.

The company that manages its cryptocurrency in exchange for rewards has frozen withdrawals for all of its customers, meaning Joel can’t even access his money.

“Before the prices went down, it was starting to look like a house,” the 24-year-old electrician said.

Joel is one of many Australians whose financial fate will be decided over the next few days, after the price of bitcoin plunged around 30% in the past week, shaking confidence and raising fears of further declines.

The value of bitcoin (AUD) is at an 18-month low.(Provided: Google)

On popular Australian cryptocurrency Facebook groups, moderators have posted links to helplines.

“There are a lot of people in great distress,” said Luke Torsello, moderator of the Facebook group Crypto Australia, which has 99,000 members.

“Everyone is in damage control right now.”

What causes the fall?

Inflation, said Chris Berg, co-director of RMIT’s Blockchain Innovation Hub.

Central banks around the world have raised interest rates to fight inflation, leading investors to withdraw from what are known as “risky assets”, i.e. assets with a high degree of private volatility.

“Crypto is the ultimate risk asset, so it’s the first to go down,” Dr. Berg said.

This surprised some. Cryptocurrencies had been promoted in some quarters as an “inflation hedge,” meaning they would hold or increase in value as inflation rose.

It didn’t work that way.

“Bitcoin is not an inflation hedge,” Dr. Berg said.

The combined market value of all cryptocurrencies is now believed to be less than US$1 trillion ($1.43 trillion), about a third of its November value.

So that’s roughly US$2 trillion ($2.86 billion) cleared from cryptocurrency in just over six months.

As the price drops, investors get nervous.

Last month, Terra, which was one of the most valuable and stable digital currencies in the world, crashed, losing 95% of its value in 48 hours and triggering a widespread loss of confidence.

A month later, this created problems for Joel’s crypto-lender Celsius.

Why is Celsius in trouble?

About six months ago, Joel deposited the crypto he had accumulated over the past five years into a crypto savings account operated by US-based Celsius, which was founded around 2017.

Celsius was set up to be a bit like a bank, but promised much higher interest rates of up to 18% per annum.

He said he was able to afford such high rates by lending long terms and earning even higher returns.

It may sound too good to be true, but many people have jumped at the chance. As of May this year, Celsius had 1.7 million users and nearly $12 billion ($17.17 billion) in assets under management.

Celsius CEO Alex Mashinsky in November 2021
Celsius CEO Alex Mashinsky in November 2021 when bitcoin was on the rise.(Getty: Piaras O Midheach)

The business model worked well while the market was strong.

But when Terra crashed spectacularly last month, rumors spread that Celsius was facing a liquidity crunch, meaning it wouldn’t have the cash for customers to perform. their withdrawals.

An old-fashioned bank rush ensues: customers rush to withdraw their money.

At the time, Celsius CEO Alex Mashinsky called the collapse in trust “FUD,” or fear, uncertainty and doubt.

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But the very next day, Monday in Australia, Celsius abruptly announced that it was “pausing all withdrawals”.

Joel was caught off guard.

“It’s most of my net worth,” he said.

Theo, a 32-year-old Sydney working in logistics and freight forwarding, has most of his savings locked away at Celsius.

“I feel like my money is being held hostage,” he said.

He was also saving for a first house deposit, as well as an engagement ring.

What happens now?

It’s unclear what will happen to Celsius, what the company’s plan is to remedy the situation, or if customers will get their money back.

The company’s CEO, Alex Mashinsky, broke a three-day silence on Thursday.

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What happens next depends in part on several unknowns, including where Celsius has invested its clients’ money and how much money it had previously set aside to be available for client withdrawals.

We don’t know these things because, although it’s like a bank, Celsius is not regulated like a bank, which must have a certain capitalization (i.e. money set aside for customer withdrawals).

“We don’t know Celsius’ position,” Dr. Berg said.

“We don’t know if he’s gone bankrupt and maybe he hasn’t – there are all sorts of rumors going around.”

Now the regulators are closing in. The security councils of four US states have reportedly launched probes into Celsius.

Pushed To Crypto By Inflation And Unaffordable Housing

On a page like Crypto Australia, a common refrain on Celsius news has been “Not your keys, not your coins”, meaning those who apparently lost money shouldn’t have stored their coins with an exchange. centralized or a company that can be hacked, or otherwise go under.

In 2014, hackers stole more than $660 million ($945 million) of user funds from the world’s largest exchange, Mt Gox.

“I come from the days of Mt Gox, so I learned my lesson: ‘Not your keys, not your crypto,’” said Luke Torsello of Crypto Australia.

New members were learning about it for the first time, Torsello said.

One in nine Australians have purchased cryptocurrency in the past year, according to consumer advocacy group Choice.

For years, bitcoin and other currencies have boomed, fueling a culture of wild speculative investing.

Stories of young investors going big and getting rich have inspired a generation struggling with the high cost of living, unaffordable housing and stagnant wage growth.

Now dreams of crypto riches seem to be crumbling.

Joel invested in crypto because he felt he couldn’t get ahead otherwise.

“I don’t want to hold my wealth in cash.”

Karl, a young Australian with most of his savings totaling thousands of dollars locked away in Celsius, said the same.

“It looks like an endless battle when you look at the cost of living, stagnant wages, cost of food, cost of fuel and inflation.

“I don’t want cash in a bank account because with inflation you earn 0.5% interest. You just can’t earn.”

Time to regulate?

The Celsius issues will bolster calls for regulation, Dr Berg said.

“The movement for consumer protection, especially with centralized businesses like exchanges, will no doubt become more salient as a result,” he said.

The Australian Prudential Regulation Authority (APRA) recently set out a policy roadmap to regulate financial entities engaged in business with crypto-assets and aims to have it in place by 2025.

Meanwhile, the crypto crash could get worse.

Previous downturns in 2013 and 2017 saw the price drop more than 80% from then-record highs.

So far, bitcoin is down about 70% from its peak in November 2021.

Either way, Dr. Berg said the fall would not shake the foundations of crypto like previous downturns, when the technology was less widely used.

“Long term, crypto as a technology, blockchain as a technology, as an infrastructure for financial assets – it’s locked in now.

“It’s a normal part of the economy.”

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About Kristina McManus

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