Investors in cryptocurrency have struggled this year as Bitcoin, Ether and other well-known alternative currencies have tumbled.
Despite hopes that these could provide protection from rampant inflation, which is taking hold across the world, instead they have sold off.
Bitcoin has lost 30% against sterling since the beginning of the year, while Ether plunged 51% against the dollar.
Both nosedived on Friday, when the respective prices went from £24,078 to £19,368 and from $1,787 to $1,227. It was the first time that Bitcoin had sunk below the $24,000 mark since December 2020.
Bitcoin’s and Ether’s value over 1 year
Source: Google Finance
If this was not enough to scare crypto holders, Celsius, one of the biggest lending platforms, announced this morning that it has paused all withdrawals, swaps and transfers between accounts, in order to stabilise liquidity and to protect assets.
Marcus Sotiriou, analyst at the UK-based digital asset broker GlobalBlock, suggested Celsius has five weeks before it runs out of funds, if clients keep trying to redeem positions at the same pace as they have been in recent weeks.
To be able to pay, the platform is currently taking “massive loans” against their illiquid positions, he said.
Analysts mostly attribute the crypto debacle to the current inflationary environment, as Trustnet recently reported. Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explained cryptocurrencies are “prime victims” of the flight away from risky assets, as investors fret about spiralling consumer prices around the world.
In particular, the Friday fall was prompted by the release of the US Consumer Prices Index (CPI) rate, which was 8.6% higher year-on-year in May.
This is an increase of 0.3% compared to April, resulting in a more hawkish Federal Reserve, and “is a bigger contributor to the decline we have seen” said Sotiriou.
What crypto asset holders should expect now, is less clear. Sotiriou paints a rosier future in which the persistent inflation of today should pass and the crypto industry will have become more efficient, as poorly run firms are “weeded out bit by bit”.
Myron Jobson, senior personal finance campaigner at interactive investor, also noted that cryptocurrencies have typically rebounded from steep falls in the past, although “the market environment now is very different”.
The consensus was that this is a timely reminder of much and how quickly the value of cryptocurrencies can change unexpectedly, and that, in Jobson’s words, “whatever your approach to risk, cryptocurrency should be treated with caution”.
Indeed, in April, Ben Seager-Scott, head of multi-asset funds at Tilney Smith & Williamson, said that investors would be better off avoiding crypto currency altogether. However, research by Boring Money earlier in the year revealed that investors were moving away from traditional assets and into crypto, with younger people in particular turning towards the asset class.