Bitcoin came close to falling below $20,000 as investors continue to flee cryptocurrencies

The sell-off in cryptocurrencies deepened even further on Wednesday, with bitcoin sinking very close to the key level of $20,000.

Bitcoin plunged as much as 10% to an intraday low of $20,166, according to Coinbase data. It was last trading at $21,658, down about 3%. The world's largest digital currency has plunged nearly 70% since the peak of the crypto craze in November 2021.

Charlie Morris, founder of digital asset management firm ByteTree, said $20,000 was close to the peak of bitcoin's last major bull run in 2017 and so "might prove to be a support level."

"At $20k, bitcoin has made no money since the 2017 high, but that disguises the outsized returns over all prior time frames," he told CNBC.

Digital tokens are in free fall as fears of climbing inflation, aggressive interest rate rises and liquidity issues at a key player in the crypto space have plagued crypto markets.

The Federal Reserve is widely expected to hike rates by 75 basis points this week, a move that has spooked stocks and other risky assets — including crypto.

Mostafa Al-Mashita, executive vice president of Canadian crypto firm SDM, said crypto has been caught up in the broader "risk-off environment" affecting markets.

Earlier this week, crypto lending firm Celsius began blocking users from accessing their funds, stoking speculation that the company may soon become insolvent.

Investors worry a possible liquidation of Celsius may lead to even more pain for crypto, potentially knocking down other major players.

"If Celsius collapses, a liquid cascade could occur where whales who have leveraged bets on Bitcoin and Ethereum become liquidated," said Marcus Sotiriou, analyst at U.K. based digital asset broker GlobalBlock.

Celsius holds a lot of assets in the decentralized finance space, including staked ether, a token offered by crypto start-up Lido Finance that is meant to be worth the same as ether, the second-biggest cryptocurrency.

Staked ether is essentially an IOU that investors buy to earn rewards on their ether holdings. The original ether is kept locked in the crypto equivalent of a vault, and can't be accessed until the Ethereum blockchain successfully passes a long-awaited upgrade.

Celsius "may be forced to sell their holdings to satisfy redemptions since the underlying ETH is locked up with no withdrawal date in sight," Marc-Thomas Arjoon, research associate at CoinShares, said in a note published Monday.

The crypto market was already on shaky ground after the $60 billion collapse of two popular tokens last month. Now, key players in the space are bracing for a long-term bear market known as "crypto winter."

Numerous companies have cut back on costs dramatically, with Coinbase on Tuesday announcing it would lay off around 1,100 people.

There's now also speculation that Three Arrows Capital, a crypto hedge fund, is on the brink of collapse. Zu Shu, the firm's co-founder, said it was "in the process of communicating with relevant parties and fully committed to working this out."

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