Is another crypto crash possible?

Bitcoin sank below $21,000 on Tuesday, extending sharp declines from the previous day and sinking deeper into 18-month lows. The total value of all digital tokens combined also dipped below $1 trillion for the first time since early 2021.

A liquidity crisis at cryptocurrency lending firm Celsius has triggered investors’ worries about a broader infection that could bring down other major players in the cryptocurrency market. Celsius’ liquidity crunch has raised worries of possible knock-on effects in other financial markets.

The London-based Celsius Network, established in 2017 by Alex Mashinsky, decided to pause all account withdrawals, sparking fears that it may be about to go bankrupt. The company lends out clients’ funds similar to a bank, but without the strict insurance requirements imposed on traditional lenders.

Crypto investors fear the possible collapse of Celsius may lead to even more pain for the market that was already on shaky ground after the demise of $60 billion stablecoin venture Terra. Celsius was an investor in Terra, but says it had minimal exposure to the project.

Any liquidation of Celsius’ assets would further rock the valuation of crypto assets, leading to a wider round of contagion or even domino effect across the crypto markets.

Celsius has a large presence in the so-called decentralized finance space, which aims to recreate traditional financial products like loans without the involvement of intermediaries like banks. Celsius also owns numerous popular assets in the DeFi world, including staked ether, a version of the ether cryptocurrency that promises users rewards on their deposits.

If it goes into full liquidation mode, then it will have to close out these positions. It is noteworthy that USDD, a stablecoin that is meant to always be worth $1, fell as low as 97 cents Monday, echoing the woes of Terra’s UST stablecoin last month.

Justin Sun, the coin’s creator, accused unnamed investors of “shorting” the token and pledged $2 billion in financing to shore up its dollar peg.

Elsewhere, rival crypto lenders Nexo and BlockFi sought to downplay concerns over the health of their operations after Celsius announced its decision to halt withdrawals. On their part; Nexo said it had a “solid liquidity and equity position,” and had even offered to acquire some of Celsius’ loan portfolio; a proposal it says the company refused. BlockFi, meanwhile, said all its services continue to operate normally and that it has zero exposure to staked ether.

That doesn’t mean it hasn’t been impacted by the downturn, though BlockFi this month laid off about 20% of its workforce in response to a dramatic shift in macroeconomic conditions.

CDPQ, the manager of Canada’s second-biggest pension fund, co-led an equity investment in Celsius earlier this year. In a statement Monday, the company said it is “closely monitoring the situation.”

Many analysts agree any spillover effects from the Celsius debacle are likely to be limited to crypto. The biggest risk of contagion is within crypto markets themselves. Selloff in crypto prices reflected a shrinking of the entire crypto market and contagion with the broader centralized financial system will be limited.