Why the cryptocurrency market has been choppy this summer

After the two recent crypto crashes, the cryptocurrency market has not had a summer free of twists and turns. Decryption.

After the last two crypto crashes, the crypto market did not have time to breathe this summer. BFM Crypto invites you to take stock of the main events that have undermined investor confidence over the past two months.

• The Tornado Cash case disrupts the ecosystem

It’s probably the most iconic case of the summer. On August 8, Tornado Cash, a cryptocurrency “mixing” service, was blacklisted by US authorities. The company is accused of having laundered more than $7 billion worth of cryptocurrency since its creation in 2019. Tornado Cash allows a user to deposit funds into a smart contract that end up “mixed” with other funds. After this shuffling, Tornado Cash generates a private key to the user which allows them to withdraw their funds anonymously.

However, some voices point to an invasion of user privacy following the decision of the OFAC (office of foreign assets control), like the boss of the Ethereum blockchain, Vitalik Buterin. In support of the platform, he admitted to using it to make an anonymous donation to Ukraine. More frontally, the American association Coin Center, which defends the crypto sector, considers that OFAC has “exceeded its legal authority by adding certain addresses of Tornado Cash smart contracts to the blacklist”. The matter is therefore far from over.

• Bitcoin and Ether under pressure from the Fed

Several events in July could have had a significant impact on the price of cryptocurrencies. But the crypto market had been resilient so far. On the other hand, at the end of the summer, it seems to have lost strength, in particular in the face of the major macro-economic trends.

Indeed, in minutes published last Wednesday, the Federal Reserve (Fed) indicated that it planned to continue to raise its key interest rates in September. While officials said it will “certainly be necessary at some point to slow the pace of rate hikes”, they also raised the “risk that (the Fed) may tighten policy more than necessary”, and stressed that bringing inflation down “will certainly take time”. Similarly, as spotted by the specialized media The Block210 million dollars of long positions (in other words investors betting on a rise in price) in bitcoin were liquidated on Friday.

Result of the races: the two main cryptocurrencies saw their value drop last week, returning to levels they had not seen for two months. According to data from Coinmarketcap, within a week, bitcoin lost more than 13% and ether lost more than 18%. Figures that are beginning to worry investors.

• The Merge, between good and bad news

This is probably the event of the year 2022, if not delayed yet. The Merge event is for the Ethereum blockchain to move from a so-called “proof of work” operation to that of “proof of stake”. The Ethereum Foundation, via its blog, keeps its community informed of its progress towards this transition. The “good” news is that after months of delays by the developer teams, a date has finally been found for the official transition: September 15.

But the “bad” news, from a community perspective, is that contrary to popular belief, The Merge will not reduce “gas” fees on ether. As a reminder, “gas” fees are fees for carrying out a transaction on Ethereum, and they are currently high. These high fees have notably led some users to move towards blockchains with reduced fees, such as Cardano or Solana.

“Gas fees are a product of network demand versus network capacity. The Merge deprecates the use of proof-of-work, moving to proof-of-stake for consensus, but does not significantly change significantly the parameters that directly influence the capacity or throughput of the network”, can we read on the blog of the foundation.

A news that had a negative impact on the price of ether, which had regained strength after the crypto-crashes and in perspective of The Merge.

• The situation of Celsius would be much worse than expected

Bad news for the 1.7 million users of Celsius. The financial horizon of the cryptocurrency lending platform, which declared bankruptcy a month ago, is worse than expected. Celsius’s law firm, Kirkland & Ellis, has indeed published a document that reports on the economic health of the company. We thus learn that contrary to the announcement in mid-July of a $1.2 billion hole in its cryptocurrency holdings, the latter would ultimately be $2.84 billion.

In addition, the company expects to have a cash balance of 130 million dollars at the beginning of August, which should increase to 90 million at the beginning of September and then 40 million at the beginning of October. The law firm expects the company to run out of cash by the end of October. As a reminder, on June 12, in a context of strong tension on the cryptocurrency market, the lending platform for 1.7 million users froze withdrawals on its platform. Desperate, some customers have sent letters to the judge in charge of the case over the past few weeks, hoping to get their funds back.

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