Crypto Rout: The Dominos Are Beginning to Fall

Update June 17: Celsius Halts Transactions

Cryptocurrency lender Celsius has seen its fortunes change in a matter of days as the mayhem in the cryptoverse continues.

Celsius offers customers up to 18.63% annual percentage yield (APY) and lends out customer deposits to participants such as market makers and exchanges to generate a return. The company had nearly $12 billion in assets in May.

Only last year, Celsius raised about $750 million from a Canadian pension fund and a growth equity firm in series B funding.

However, in the last few days, Celsius has stopped allowing customers to make withdrawals, swaps, or transfers, and has hired restructuring attorneys, with the Texas State Securities Board investigating the company over its customer account freeze. The price of the Celsius cryptocurrency has plummeted from $4.4 at the beginning of 2022 to $0.55 today.

While recent job cuts at Coinbase (COIN) and BlockFi were negative, the developments at Celsius mean over $11 billion in assets are frozen for the company’s nearly 1.7 million customers.

Falling cryptocurrency prices have been affecting the value of holdings, which means names such as Celsius are finding it hard to meet their obligations.

In a vicious cycle, the developments at Celsius have contributed to a further fall in prices of cryptocurrencies, with Bitcoin and Ether down 30.5% and 38.7%, respectively, over the past week.

The next development at Celsius will be a key trigger for cryptocurrency prices globally.

It would not be an overstatement to say crypto investors are enduring more pain compared to their equity market brethren in the current broader market turmoil. On one hand, the S&P 500 index (SPX) has dropped 21.8% so far in 2022, while the crypto market capitalization has declined from near $3 trillion levels to under $1 trillion.

Rising interest rates and inflation have meant easy money getting sucked out of the system, and “to the moon” seems more and more out of reach for the crypto ride.

The gravity of the turmoil in crypto can be gauged from the magnitude of the plunge in the biggest names. Bitcoin (BTC-USD) is down 53.6% so far in 2022. The biggest cryptocurrency is hovering at $21,943 with a market cap of nearly $422 billion.

Likewise, Ethereum, Solana, and Cardano are down 68.7%, 83.7%, and 64.3%, respectively, in 2022. The combined market cap of these three currencies is now at around $169.7 billion.

What’s in Store for Microstrategy?

The rout in the crypto world is beginning to affect the next dominos in line as well. The looming troubles of Microstrategy (MSTR) are getting more and more visible as Bitcoin declines further.

MSTR has converted all its cash into Bitcoin and taken on debt to hoard a total of 129,218 bitcoin. While the company acquired these coins at an average price of $30,700, a margin call may be triggered if bitcoin falls below $21,000. These factors also increase MSTR’s susceptibility to adverse business conditions and impact its ability to raise additional funds.

The company has a total debt of $2.4 billion and its market capitalization now stands at about $2.3 billion. That’s after a 74.6% decline in its share price over the past year.

Tesla’s Bitcoin Kitty

Elon Musk’s Tesla (TSLA) is the other big bagholder after MSTR, with 43,000 Bitcoins acquired at an average price of $43,000. This puts the company’s cost of acquiring bitcoins at about $1.5 billion.

Tesla may not see a major impact due to the falling crypto prices, but the exact extent of impairment due to its bitcoin holdings will be a point of interest in the company’s next quarterly numbers.

The electric car maker has not been immune to the market selloff and has seen its market cap slide to around $722 billion due to a 45% drop in its share price so far in 2022.

Closing Note

As cryptocurrencies continue to take a beating more names can be expected to suffer. Crypto mining stocks are a case in point. In the meantime, MSTR has a short interest of about 34% indicating bears are already in charge.

Read full Disclosure