The wealth-generating hot streak for bitcoin and other cryptocurrencies has ruthlessly cooled
The wealth-generating hot streak for bitcoin and other cryptocurrencies has ruthlessly cooled
The wealth-generating hot streak for bitcoin and other cryptocurrencies has ruthlessly cooled.
As prices fall, companies fall, and doubts mount, fortunes and jobs are disappearing overnight, and investors’ flamboyant speculation has been replaced by icy calculations, which industry leaders refer to as one. are doing. “Crypto winter.”
This is an exciting turn of events for investments and companies that seemed to be at their financial and cultural apex in early 2022. Crypto-promotional companies ran ads during the Super Bowl and spent heavily to sponsor playgrounds and baseball teams. The combined assets of the industry at the time were estimated to be more than $3 trillion; Today, they are worth less than a third of that. Perhaps.
On Monday, the price of bitcoin was trading at $20,097, down more than 70% from its November peak of $69,000. Ether, another major cryptocurrency, was trading near $4,800 at its November peak; It is now less than $1,000.
Prices of bitcoin and other cryptocurrencies have been sliding throughout the year, a decline that accelerated as the Federal Reserve signaled that interest rates would move higher to try and stave off inflation. What is happening with crypto is partly an extreme version of what is happening with stocks, as investors tend to sell riskier assets at a time when the risk of a recession is rising.
But the crypto sell-off is much more than that, say experts; It signals growing panic on Wall Street and Main Street of industry The infrastructure, which looks shaky right now.
“It was irrational enthusiasm,” said Mark Hays at American for Financial Reform, a consumer advocacy group. “They did the same things that led to the 2008 crisis: aggressively market these products, promise returns that were unfair, ignore the risks, and dismiss any critics as such. give to those who do not receive it.”
Hayes and others are also comparing 2008 housing-Market The recession, as the decline in bitcoin and other digital coins coincides with crypto industry volumes of bank runs and a lack of regulatory oversight, is raising fears about how bad the losses could be.
Analysts say that unlike housing, the crypto industry is not strong enough to trigger major turmoil in the broader economy or financial system.
But recent events have nevertheless shattered the confidence of many investors:
– The so-called stablecoin Terra collapsed in a matter of days in May, wiping away $40 billion in investor wealth. In the crypto business, stablecoins are marketed as a safe investment and each is usually priced against a traditional financial instrument such as the US dollar. Instead Terra relied on an algorithm to keep its price stable near $1 – and partly backed its value with bitcoin.
– A company called Celsius Network, which acts like a bank for crypto holders, frozen the accounts of its 1.7 million customers last week. Celsius took deposits, paid interest, and made loans and other investments with his clients’ cryptocurrencies, which were once valued at close to $10 billion. Unlike a real bank, there is no federal insurance covering these customers’ deposits.
– Shortly after the freezing of Celsius accounts, the founder of Three Arrows Capital, a Singapore-based hedge fund that specializes in cryptocurrencies, addressed rumors of its imminent collapse with a mysterious tweet: “We are in dialogue with relevant parties are in the process of doing and are fully committed to make it work.”
An extended period of pessimism for stocks is called a bear market. In the crypto world, the huge selling quick reference to the HBO series “Game of Thrones” popularized the ominous warning: “Winter is coming.”
Last week, the CEO and co-founder of Coinbase, one of the largest crypto exchanges, announced that the company would lay off about 18% of its workforce, adding that a widespread recession could make the industry’s troubles worse. .
“The downturn could lead to another crypto winter and could last longer,” said CEO Brian Armstrong.
This is not the first crypto winter. In 2018, Bitcoin fell from $20,000 to less than $4,000. But analysts say something is looking different this time around.
Hilary Allen, a law professor at American University who has researched cryptocurrencies, said she is not worried about the latest industry turmoil in the broader economy. However, among crypto investors, problems can arise beneath the surface.
“There are hedge funds that have bank loans that have bet on crypto, for example,” she said.
And whenever investors borrow money to increase the size of their bets – known in the financial world as ‘leverage’ – there is concern that losses can pile up quickly.
“People are trying to analyze, but there is a lack of transparency and it is difficult to understand how much leverage is in the system,” said Stephen Coolican, a former investment banker and now a member of the advisory board at Ether Capital.
For these reasons, and other reasons, there has been a push in Washington to more closely regulate the crypto industry, an effort that is gaining steam.
“We believe the recent turmoil only underscores the urgent need for a regulatory framework that mitigates the risks of digital assets,” the Treasury Department said in a statement.
However, amidst all the chill warnings, hope is still eternal for some crypto investors.
Jake Greenbaum, 31, known as the Crypto King on Twitter, said he recently lost at least $1 million on his crypto investments – “a good chunk of my portfolio.” While he believes that things can get worse before they get better, he is not throwing in the towel.
Things are looking bad now, he said, “so this is where you want to start positioning back.”