Crypto investors’ hot streak ends as harsh ‘winter’ descends

The hot streak that generates wealth for bitcoin and other cryptocurrencies has become brutally cold.

As prices fall, companies collapse and skepticism skyrockets, fortunes and jobs disappear overnight, and feverish investor speculation has been replaced by icy calculations, which industry leaders refer to as a ” cryptographic winter “.

It’s a dizzying turnaround for investors and businesses that in early 2022 seemed to be at their financial and cultural peaks. Cryptoevangelization companies made advertisements during the Super Bowl and spent a lot of money sponsoring sports stadiums and baseball teams. The combined assets of the industry at the time were estimated at more than $ 3 trillion; today they are worth less than a third of that. Can be.

On Monday, the price of bitcoin was trading at $ 20,097, more than 70% below its November peak of about $ 69,000. Another leading cryptocurrency, Ethereum, was trading at about $ 4,800 at its November peak; it is now around $ 1,100.

Prices for bitcoin and other cryptocurrencies have been falling year-round, a decline that accelerated as the Federal Reserve signaled that interest rates would rise to try to eliminate inflation. What’s happening with cryptography is, in part, an extreme version of what’s happening with stocks, as investors sell riskier assets at a time when the threat of recession is mounting.

But cryptocurrency sales are more than that, experts say; indicates a growing concern on Wall Street and Main Street about the fundamentals of the industry, which seem unstable.

“There was this irrational exuberance,” said Mark Hays of Americans for Financial Reform, a consumer advocacy group. “They did similar things before the 2008 crisis: market these products aggressively, promise returns that were unreasonable, ignore the risks, and dismiss any critics as people who simply didn’t get it.”

Hays and others are also making comparisons with the 2008 real estate market crash because the collapse of bitcoin and other digital currencies has coincided with the cryptocurrency industry’s versions of banking operations and a lack of regulatory oversight that is causing fears about how serious the damage.

Unlike housing, the crypto industry is not large enough to cause major turmoil throughout the economy or financial system, analysts say.

But recent events have broken the confidence of many investors:

– The so-called stablecoin Earth collapsed in a matter of days in May, removing $ 40 billion in wealth from investors. In the cryptocurrency business, stablecoins are marketed as a safe investment and the price of each is often tied to a traditional financial instrument, such as the US dollar. Instead, Terra relied on an algorithm to keep its price stable around $ 1, and in part backed up its value with bitcoins.

– A company called Celsius Network, which operates as a bank for cryptocurrency holders, froze the accounts of its 1.7 million customers last week. Celsius took deposits, paid interest, and made loans and other investments with its customers’ cryptocurrencies, once valued at about $ 10 billion. Unlike a real bank, there is no federal insurance that backs the deposits of these customers.

– Shortly after Celsius froze the accounts, the founder of Three Arrows Capital, a Singapore-based hedge fund specializing in cryptocurrencies, addressed rumors of his impending collapse with a mysterious tweet: “We are in the process of communicating with relevant parties and we are fully committed to solving this “.

Prolonged periods of pessimism for stocks are called bear markets. In the world of cryptography, high-selling episodes indicate references to the HBO series “Game of Thrones,” which popularized the ominous warning: “Winter is coming.”

Last week, the CEO and co-founder of Coinbase, one of the largest cryptocurrency exchanges, announced that the company would lay off about 18% of its employees and said a wider recession could further worsen the industry’s problems. “A recession could lead to another cryptocurrency winter and could last for a long time,” said CEO Brian Armstrong.

This is not the first cryptographic winter. In 2018, bitcoin fell from $ 20,000 to less than $ 4,000. But analysts say it feels different this time around.

Hilary Allen, a law professor at American University who has done research on cryptocurrencies, said she is not worried that the latest turmoil in the industry will spill over into the wider economy. However, among cryptocurrency investors, problems may be emerging beneath the surface.

“There are hedge funds that have bank loans that have opted for crypto, for example,” he said.

And whenever investors borrow money to increase the size of their bets, something known in the financial world as “leverage,” the concern is that losses can build up quickly.

“People are trying to do analysis, but there is a lack of transparency and it is difficult to understand how much leverage there is in the system,” said Stefan Coolican, a former investment banker and now a member of Ether Capital’s advisory board.

For these and other reasons, there has been a push in Washington to regulate the crypto industry more closely, an effort that is gaining momentum.

“We believe the recent turmoil only underscores the urgent need for regulatory frameworks that mitigate the risks posed by digital assets,” the Treasury Department said in a statement.

However, amidst all the warnings, hope still springs up forever for some crypto investors.

Jake Greenbaum, a 31-year-old known on Twitter as Crypto King, said he recently lost at least $ 1 million in his cryptocurrency investments: “a good chunk of my portfolio.” While he believes things can get worse before they get better, he’s not throwing in the towel.

Things look bad now, he said, “so this is where you want to reposition yourself.”

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