After a Crazy Week in Crypto, Investors Wonder What’s Next

Celsius customers panicked, and people holding money in other crypto platforms began to wonder if they would be next.

The panic spread rapidly. The price of bitcoin and ether fell nearly 15% on Monday and continued to fall throughout the week, which has plagued them throughout the year. According to data from CoinDesk, digital currencies are down 54% and 70% respectively.

on Tuesday,

coinbase global Inc.,

Largest crypto exchange in the US, said It will cut its workforce by about 18%, In a letter, Chief Executive Officer Brian Armstrong said that the company has grown too quickly and that a potential slowdown “could lead to another crypto winter.”

Two other major crypto companies, Crypto.com and BlockFi, also announced layoffs.

“Right now it sucks,” said Jeff Dorman, chief investment officer at digital-asset investment firm Arca. “Companies are laying off people, activity is down, crypto has become the laughing stock of Wall Street.”

The crazy week in crypto is playing with the turmoil in the broader market. The Federal Reserve is trying to beat decades of high inflation, and this week it announced Its biggest interest rate hike since 1994, While the question of whether the US will enter a recession is not yet settled, many investors are concerned that higher interest rates will turn it into one. Those concerns have underperformed the stock throughout the year, and the S&P 500 entered a bear market this week,

In crypto, the industry is keeping pace with both a dramatic change in macroeconomic conditions and a decrease in investor interest. Higher rates make speculative investments such as crypto less attractive, as investors can find other options to earn returns. The Celsius issue could prompt regulatory action on cryptocurrency lenders, which could continue to drag down the price of the cryptocurrency.

On Wednesday afternoon, Celsius CEO Alex Mashinsky said the company was working “nonstop” to resolve the issue, but gave no clue about when withdrawals would begin.

Crypto lenders like Celsius accept customer deposits of cryptocurrencies and lend them to other users such as market makers and exchanges to earn returns. Celsius also pumps client funds into high-risk decentralized-finance projects to generate returns. DeFi, as is known, is a parallel financial system for crypto with its own version of banks and lending.

Individual investors were attracted to Celsius because the company paid customers an annual percentage yield of up to 18.6% on cryptocurrency deposits – more than they could get from a regular bank account. but Many people are only now feeling It is that while crypto companies like Celsius look like banks in some ways, they lack the legal protections built into the traditional financial system.

In April, Celsius stopped offering interest-bearing accounts to “unaccredited” investors, or those who do not meet a certain funding limit, after being pressed by regulators.

In February, Celsius competitor BlockFi Paid $100 million to settle claims Securities and Exchange Commission officials said at the time that its product violated investor-protection laws, the largest ever fined by a cryptocurrency company. The company neither acknowledged nor denied wrongdoing.

On Thursday, the Texas State Securities Board said it has opened an investigation into Celsius over its decision to freeze customer accounts. The board is working closely with New Jersey, Kentucky, Alabama and Washington.

“Regulators were already looking at the space—they’re probably going to move even faster now,” said Frank Downing, an analyst at ARK Investment Management.

“The market sentiment here is very, very gloomy,” Mr. Downing said. “Given the larger context here, we are not ruling out another leg down.”

Mr. Dorman, Arca’s chief investment officer, said his firm maintains a high cash balance, but isn’t afraid to put money to work for good opportunities.

“As long-term investors, we are looking for things that, over the next 12 to 36 months, we believe will trade substantially higher than where they are trading today.”

write to Vicky Gay Huang vicky.huang@wsj.com