Crypto Investors Hot Streak Ends As Severe ‘Winter’ Drops

The wealth-generating hot streak for Bitcoin and other cryptocurrencies have gone brutally cold.

As prices plummet, companies collapse and skepticism mounts, fortunes and jobs disappear overnight, and feverish investor speculation has been replaced by frigid calculations in what industry leaders are calling a “crypto winter.”

It’s a dizzying turnaround for investments and businesses that appeared to be at their financial and cultural peak in early 2022.

The massive crypto collapse is part of a wider market downturn caused by high inflation, rising interest rates, war in Ukraine, coronavirus lockdowns and supply chain chaos.
The massive crypto collapse is part of a wider market downturn caused by high inflation, rising interest rates, war in Ukraine, coronavirus lockdowns and supply chain chaos. (AP)

Crypto-evangelizing companies advertised during the Super Bowl and spent a lot of money sponsoring sports arenas and baseball teams.

The combined assets of the industry were estimated at over $4.3 trillion at the time; today they are worth less than a third of that. Could be.

Another leading cryptocurrency, Ethereum, traded near $6900 at its November high; it is now less than $1400.

The prices of Bitcoin and other cryptocurrencies have fallen throughout the year, a decline that accelerated when the Federal Reserve indicated interest rates would rise to try to stamp out inflation.

What is happening to crypto is in part an extreme version of what is happening to stocks as investors sell riskier assets at a time when the threat of a recession is mounting.

But the crypto sell-off is more than that, experts say; it signals growing anxiety on Wall Street and Main Street about the fundamentals of the industry, which currently look shaky.

“There was an irrational exuberance,” said Mark Hays of Americans for Financial Reform, a consumer advocacy group.

“They did similar things in the run-up to the 2008 crisis: aggressively market these products, promise returns that were unreasonable, ignore the risks, and dismiss critics as people who just don’t get it.”

Hays and others also draw comparisons to the 2008 housing collapse as the collapse of Bitcoin and other digital coins has coincided with crypto-industry versions of bank runs and a lack of regulatory oversight that sparked fears about how bad the damage could get.

The pandemic brought about a period of hypergrowth in the crypto sector, as young investors were suddenly inundated with stimulus money and tried to invest in digital currencies and meme stocks.  Between March 2020 and November 2021, the price of bitcoin rose by a factor of twelve to $64,000.
The pandemic brought about a period of hypergrowth in the crypto sector, as young investors were suddenly inundated with stimulus money and tried to invest in digital currencies and meme stocks. Between March 2020 and November 2021, the price of bitcoin rose by a factor of twelve to $64,000. (AP)

Unlike housing, the crypto industry isn’t big enough to cause major turmoil in the wider economy or financial system, analysts say.

But recent events have nonetheless damaged the confidence of many investors:

— The so-called stablecoin Terra collapsed within days in May, wiping out $57.5 billion in investor wealth. In the crypto business, stablecoins are marketed as a safe investment, and the price of each coin is typically pegged to a traditional financial instrument, such as the US dollar. Terra instead relied on an algorithm to keep the price stable near $1 – partially backing the value with bitcoin.

— A company called Celsius Network, which operates as a bank for crypto 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 clients’ cryptocurrencies, once valued at nearly $14.3 billion. Unlike a real bank, there is no federal insurance against these customers’ deposits.

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

Longer periods of pessimism for stocks are called bear markets.

In the world of crypto, periods of heavy sales, prompt references to the HBO series Game of Throneswho 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 lay off about 18 percent of its employeesand he said a wider recession could make the industry’s problems worse.

“A recession could lead to another crypto winter and could last for an extended period of time,” said CEO Brian Armstrong.

This is not the first crypto winter.

In 2018, Bitcoin fell from $28,700 to less than $5,700.

But analysts say this time feels different.

Hilary Allen, a law professor at American University who has researched cryptocurrencies, said she’s not worried about the latest industry turmoil spilling over into the broader economy.

Even at US$20,000, about half of all Bitcoin wallets are still on a profit, according to analysis by Columbia Business School.  The study also found that 61 percent of Bitcoin addresses had not sold anything in the past 12 months, suggesting a total run on crypto is avoidable.
Even at US$20,000, about half of all Bitcoin wallets are still on a profit, according to analysis by Columbia Business School. The study also found that 61 percent of Bitcoin addresses had not sold anything in the past 12 months, suggesting a total run on crypto is avoidable. (AP)

However, problems can arise beneath the surface among crypto investors.

“There are hedge funds that have bank loans that have bets on crypto, for example,” she 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 could quickly add up.

“People are trying to do analytics, but there’s a lack of transparency and it’s hard to understand how much influence the system has,” said Stefan Coolican, a former investment banker and now a member of the advisory board at Ether Capital.

For these and other reasons, pressure has been put in Washington to more closely regulate the crypto industry, 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, amid all the chilly warnings, there is still hope for some crypto investors.

The Financial Review Young Rich List 2021

Australia’s top 10 richest under 40

Jake Greenbaum, a 31-year-old known on Twitter as Crypto King, said he recently lost at least $1.4 million on his crypto investments — “a decent chunk of my portfolio.”

While he believes things can get worse before they get better, he’s not throwing in the towel.

It’s looking bad now, he said, “so this is where you want to position yourself again.”

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