Last week, crypto bank Celsius collapsed. The company no longer had enough capital to repay all customer deposits, and many people are therefore afraid of ‘contamination’ of the rest of the market. Sam Bankman-Fried of exchange FTX and market maker Alameda says he is considering stepping in to avoid contagion.
Crypto lower due to higher interest rates
He explains that in a interview with NPR† According to him, the Federal Reserve is the cause of the crash. The central bank is in the process of raising interest rates drastically. Two weeks ago, it raised interest rates by 0.75%, the biggest increase since 1994. That has led to a ‘recalibration’ of expectations of risk – lower prices of stocks and cryptocurrencies.
JYou can expect the trend of higher interest rates to continue for a while. The Federal Reserve is trying to bring inflation down. It is currently very high, and in principle the institution will continue to raise interest rates as a result until inflation falls or until ‘something breaks’, such as some part of the financial system or the job market. From that moment on, interest rates will probably fall again.
FTX comes to the rescue
That means crypto prices could fall much further. Celsius ran into trouble last week as the loan platform failed to make a profit on its investments. Hedge fund Three Arrows Capital (3AC) fell short of collateral and collapsed together with Celsius. Presumably both have a bailout necessary, but no company seems eager for the risk. Other companies that have invested in Celsius or 3AC can become ‘infected’ as a result.
The chief executive also told NPR that he is seriously considering stepping in to prevent this. FTX has done this several times before, such as with crypto exchange Liquid. It ran into financial trouble last year when hackers stole $100 million in tokens. FTX offered to help financially, and later bought the entire platform. The market is now perhaps in its most difficult period ever. So maybe FTX and Alameda will come to the rescue to stop the bleeding.
