NEW YORK – The wealth-generating hot streak for bitcoin and other cryptocurrencies has turned 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collapse and skepticism skyrockets, fortunes and jobs disappear overnight, and feverish investor speculation has been replaced by icy calculations, which industry leaders refer to as a ” cryptographic winter “.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 peak. 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 are estimated to be worth more than $ 3 trillion; today, those assets 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 worth around $ 4,800 at its peak in November; now worth less than $ 1,000.
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 is happening with cryptography is, in part, an extreme version of what is happening with stocks, as investors sell riskier assets at a time when the risk of recession increases.
But cryptocurrency sales are more than that, experts say; points to a growing concern on Wall Street and Main Street about the fundamentals of the industry, which right now 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 collapse of the real estate market in 2008 because the collapse of bitcoin and other digital currencies coincided with the cryptocurrency industry’s versions of banking and the lack of regulatory oversight that is causing fears about how serious the damage could be. . .
Unlike housing, cryptocurrency is not an industry large enough to cause almost as much turmoil in the economy or financial system.
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 cryptocurrencies, stable currencies are often linked to a traditional financial instrument, such as the US dollar. Instead, Terra relied on an algorithm to keep its price stable near $ 1, and was also supported in part by 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 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 working on 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 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 every time 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 cryptography 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 cold warnings, hope still springs up forever for some cryptocurrency investors.
Jake Greenbaum, a 31-year-old known as Crypto King on Twitter, 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.”
• Hussein reported from Washington.
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