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Bitcoin price nears $20k, Ethereum $1k on more volatility, SEC's Gensler warning

Kitco News

(Kitco News) The massive selling pressure in the crypto space is far from over as Bitcoin neared $20,000 and Ethereum inched closer to $1,000.

Mid-week, the overall crypto market cap fell to $942 billion, with Bitcoin last at $21,226, down nearly 6% on the day and 32% on the week. Ethereum was last at $1,106, down 10% on the day and nearly 40% on the week.

The crypto space is getting hammered in light of unfavorable macro data — high inflation and expectations of a very aggressive Federal Reserve tightening over the summer.

On top of that, there is a contagion risk from within the crypto market itself. The crypto selloff accelerated after a lending company Celsius said it was halting all transactions on its platform.

The statement was made on Sunday, and there has been no update since then. Kitco News reached out for comment but did not hear back at the time of writing this article. There were also no updates on Celsius' website or Twitter feed.

But that's not all — just days after Celsius' announcement, a well-known crypto hedge fund, Three Arrows Capital, could be facing insolvency after being liquidated by its lenders, according to various reports. The Block reported Wednesday that the liquidation totaled at least $400 million.

The rumors about what's going on at Three Arrows grew after a tweet from co-founder Zhu Su: "We are in the process of communicating with relevant parties and fully committed to working this out."

This crypto collapse is not going unnoticed, with U.S. SEC Chair Gary Gensler warning investors to beware of crypto returns that seem "too good to be true."

Gensler was referring to crypto lending platforms, although he did not call any out by name.

"We've seen again that lending platforms are operating a little like banks. They're saying to investors, 'Give us your crypto. We'll give you a big return 7% or 4.5% return.' How does somebody offer (such large percentage of returns) in the market today and not give a lot of disclosure?" Gensler said at the RFK Human Rights Compass Summer Investors Conference Tuesday. "I caution the public. If it seems too good to be true, it just may well be too good to be true."

Celsius is one such lending platform, with around $11.8 billion in assets. It offers interest-bearing products to customers who deposit their own cryptocurrencies to its platform. Celsius lends out that crypto to get the best yield.

Some analysts say that a lot of the leverage is already out of the system, given how far prices have fallen. Still, there is always a risk of another firm like Celsius getting caught up in this volatility and triggering a new wave of selloffs.

"Everyone heard of MicroStrategy CEO Michael Saylor's Bitcoin position. His margin call price is right around where we are right now. I'd watch out for Saylor and the Celsius situation. But unless we really get one of those liquidation candles that sends us 20%, 30%, or 40% lower, a lot of the leverage has been flushed out at this point," Messari senior research analyst Tom Dunleavy told Kitco News Tuesday.

The one thing to watch is Bitcoin's performance versus Altcoins, Messari's analyst added. "If you look at Bitcoin prices during this selloff over the past 24 to 48 hours, it's been Bitcoin that's leading the way, rather than Altcoins, which is not typical. And that says to me that there are funds selling Bitcoin to clear out the leverage on their books," he said.

World's 500 wealthiest people just lost $206 billion Monday and $1.4 trillion in 2022

Crypto stress focuses on stETH versus ETH

One important element to understand about what's going on with Celsius and Three Arrows is a token known as "staked ether" or stETH, which is offered by crypto startup Lido Finance.

This token comes with a promise to be redeemable for 1 ETH (Ethereum), but only after Ethereum goes through with the Merge to the proof-of-stake protocol from the current proof-of-work protocol. To read more about Ethereum's upcoming Merge, click here.

What some companies and many investors have been doing is locking their Ethereum tokens in exchange for stETH, in order to lend it for better yield. And both Celsius and Three Arrows were reportedly involved in this.

According to Nansen Research, Celsius has at least $475 million worth of stETH in a public wallet.  But the problem now is that stETH has been de-pegging and hasn't been worth 1 ETH for some time. On Monday, stETH was trading 8% lower than ETH, according to Dune Analytics

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.