Depression-like crash inevitable without cryptocurrencies: expert

Over the weekend, the bitcoin price fell below the closely monitored $ 20,000 per bitcoin level, down more than 70 percent from the highest level ever at the end of last year.

Opaque trading in the back room

Ethereum and the other top 10 cryptocurrencies BNB, XRP, solana, cardano and dogecoin have also experienced similar declines.

Much of the carnage in recent weeks stems from the suspension of withdrawals from a centralized lending platform called Celsius, which is partly based on a traditional investment bank, but without a deposit guarantee.

Dr. Low said that Celsius’ collapse showed the dangers of opaque trading in backrooms and mirrored the damage caused when deposit-receiving institutions lend to each other in an insecure way by using excessive influence.

“Crypto banks are the ones that worry the most, mostly because they present themselves as the safer option for crypto investors, but what they do in the backend is not transparent,” said Dr Low.

Celsius accepted investor money in return for its CEL token. The US-based organization, founded by engineers Alex Mashinsky and S. Daniel Leon, would then lend this cryptocurrency to other companies willing to pay for liquidity.

The fees they received for lending that crypto reached as high as 18 percent, but as the global macro investment picture darkened earlier this year, the demand for crypto loans dried up.

Celsius, which enabled borrowers to exploit themselves to a great extent, began to suffer from extensive defaults on their loans and struggled to find new ways to generate returns for their token holders.

As such, holders of the CEL token began to sell, and the lending institution was forced to stop withdrawing while struggling to find funds to cover depositors.

“Essentially, this was a crypto bank robbery,” said Dr. Low. “And there was no requirement for Celsius to have a backstop of capital in reserve, so they were taken out.”

One of Celsius’ biggest investors, the Singapore-based hedge fund Three Arrows Capital, was ordered to liquidate after it was shown that it had invested heavily in everything from Celsius to Bitcoin to Luna, a cryptocurrency linked to the Terra stablecoin collapse in May.

Unlike stock markets, falling crypto markets have no “circuit breakers” to stop sharp falls in asset prices. Dr. Low compares this to the Great Depression of the 1930s, when the stock market plummeted.

Regulators cracked down and installed “circuit breakers” that would stop trading if asset prices were to fall too much.

“The difference between that and the cryptocurrency world is that the cryptocurrency world has thousands of exchanges around the world,” said Dr. Low.

Unlike stock quotes, which are listed on regulated exchanges such as the Australian Securities Exchange or the New York Stock Exchange, cryptocurrencies are largely a collection of thousands of stock exchange data points.

Unregulated securities lending

Dr. Low says that the lending practices of “crypto banks” such as Celsius, and another called BlockFi, reflected it for securities lending.

For decades, asset managers such as BlackRock, which owns thousands of shares through its ETF business, can lend them to short sellers and derivatives traders for a fee.

The securities are wrapped in financial products which are then sold by other banks, but BlackRock has a fiduciary duty to ensure that the lent securities can be replaced if the borrower defaults.

“It’s a way to make money on your holdings,” said Dr. Low, whose doctorate looked specifically at how much capital is required to support a securities lending business.

“But crypto-lending companies have no regulations or requirements to support the crypto they lend.”

Calls for cryptocurrencies have intensified recently as public collapses of widespread tokens such as TerraUST demonstrate the intrinsic function of these financially constructed products.

Until regulation is in place, many crypto-supported products that mimic those in the traditional financial world will cause extensive damage when they collapse, Dr Low said.

“This will just keep happening again and again,” he said.

“Until there are capital requirements, those who run these businesses will be enticed to take on more and more influence to generate more returns. When the market turns around, we will see them wiped out again.”