Why Crypto Prices Crashed on Saturday

What happened

After a terrible week for cryptocurrencies, the weekend isn’t off to a good start either. Fear that there will be continuing fallout from the potential collapse of the Celsius Network and Three Arrows Capital, which have been facing challenges all week.

It doesn’t help that Bitcoin (CRYPTO: BTC) has fallen 7.5% in the last 24 hours as of noon ET, Ethereum (CRYPTO: ETH) has dropped 7.9%, and BNB (CRYPTO: BNB) is down 7.4%. Bitcoin has fallen below the $20,000 mark and is trading at $19,043 as I’m writing and Ethereum is below $1,000 at $993.24. These may only be psychological levels, but traders see them as important milestones for crypto values.

So what

The news continues to center around Celsius Network’s collapse, which was driven by the platform’s aggressive search for yield. Early reports are showing that Celsius lost money on the collapse of Luna as well as Stakehound as it tried to offer users higher yields for their cryptocurrency than were available anywhere else on the market. Unwinding the web of positions has led to increased selling and panic in the market.

Related is the apparent collapse of Three Arrows Capital, a fund that invested in a variety of cryptocurrencies. It lost money on Luna’s downfall, which ultimately contributed to the company having to unwind leveraged positions across the crypto market. In some cases, exchanges have liquidated the company’s positions to make sure they aren’t caught up in the fund’s risks.

These are the two biggest companies unwinding positions right now that we know about, but there could be additional funds or decentralized finance applications that are facing risks as crypto values fall. This is a little like the banking crisis in 2007 and 2008 when risks cascaded across the industry and was very difficult to stop.

Now what

Volatility may be normal in cryptocurrencies but this is different. Groups that held a tremendous amount of cryptocurrency have come under financial distress and have been forced to sell their digital assets because they became illiquid or had too much leverage.

One of the challenges with the rapid decline in asset values is that it’s exposing risks that we didn’t know were there. Leveraged positions are being unwound and the illiquidity of some assets is coming to light in ways that weren’t obvious before.

I think there’s still a lot to like about the crypto market long-term, but this is clearly what’s known as a crypto winter and that could mean an extended downturn in asset values. Until leverage and speculation is reduced in the market we may be in for falling values. But for long-term investors this is a time to accumulate while everyone else sells.

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Travis Hoium has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.