Investors Worried About Another Possible Crypto Crash Can Bring Down Other Players

The liquidity crisis at crypto lending firm Celsius has investors worrying about a broader financial contagion that could bring down other big players in the market.

Celsius recently took action to pause all account withdrawals, fueling fears that it might be on the verge of bankruptcy. The company lends clients' funds much like a bank - but without the strict insurance requirements imposed on traditional lenders. Bitcoin slumped below $21,000 on Tuesday, falling sharply from the previous day and hitting 18-month lows. The combined value of all digital tokens has also dropped below $1 trillion for the first time since the start of 2021, according to CoinMarketCap data. Crypto investors fear the possible collapse of Celsius could cause more pain for a market that was already shaky after the collapse of the $60 billion stablecoin startup Terra. Celsius was an investor in Terra, but says it was "slightly" included in the project. Celsius did not respond to multiple calls for comment from CNBC. “In the medium term, everyone is really preparing for a decline,” said Mikkel Morch, managing director of crypto hedge fund ARK36. "Bear markets have a way of revealing previously hidden weaknesses and overly leveraged projects, so it's possible that we may see a repeat of events like the Terra ecosystem dissolving last month." Monsur Hussain, senior director of financial institutions at Fitch Ratings, said the liquidation of Celsius's assets would "further undermine the value of crypto assets and lead to a wider contagion in the crypto space." Celsius has a large presence in finance to produce traditional financial products such as loans, called DeFi, without intermediaries such as banks. Celsius has a number of 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, it will have to close those positions," said Omid Malekan, assistant professor at Columbia Business School. The so-called stablecoin USDD, which should always be worth $1, fell as much as 97 cents on Monday, reflecting the woes of Terra's UST stablecoin last month. The creator of the coin, Justin Sun, accused unnamed investors of “shorting” and promised $2 billion in funding to support the dollar pair. Elsewhere, rival crypto lenders Nexo and BlockFi tried to downplay concerns over the health of their operations after Celsius announced its decision to halt withdrawals. Nexo says it has a "solid liquidity and equity position" and has even offered to take part of Celsius' loan portfolio—an offer the company says it has "rejected." Meanwhile, BlockFi said all its services are "continuing to operate normally" and have "zero exposure" to staked ether. That doesn't mean it hasn't been affected by the downturn, though – BlockFi laid off about 20% of its workforce this month in response to a "dramatic change in macroeconomic conditions." Celsius's liquidity crunch has raised concerns about possible knock-on effects in other financial markets. CDPQ, the manager of Canada's second-largest pension fund, led an equity investment in Celsius earlier this year. In a statement Monday, the company said it was "monitoring the situation closely". Many analysts agree that any spillover effects from the Celsius collapse will likely be limited to crypto. “The biggest risk of financial contagion is in the crypto markets themselves,” Malekan said. Hussain of Fitch said the selloff in crypto prices reflects the “shrinking of the entire crypto market,” adding that “contamination in the broader central financial system will be limited.”