NEW YORK — The boom in bitcoin and other cryptocurrencies to create wealth has turned ruthless.
As prices plummet, companies fail, skepticism soars, and wealth and jobs disappear overnight, the frenetic speculation among investors has been replaced by icy calculations that industry leaders have dubbed the “crypto winter.”
It’s a dizzying turn of events for investments and companies that seem to be at their financial and cultural peak in early 2022. Companies promoting cryptocurrencies run ads during the Super Bowl and spend heavily to sponsor stadiums and baseball teams. The industry’s total assets are estimated to be worth more than $3 trillion; today, these assets are worth less than a third of that. Maybe.
Bitcoin was trading at $20,097 on Monday, more than 70 percent below its November peak of $69,000. The other leading cryptocurrency, Ethereum, was worth around $4,800 at its peak in November; it is now worth less than $1,000.
The price of bitcoin and other cryptocurrencies have slid throughout the year, a decline that accelerated as the Federal Reserve signaled higher interest rates in an attempt to curb inflation. What happened to cryptocurrencies was in a way an extreme version of what happened to stocks, as investors sold riskier assets at a time when recession risk was rising.
But experts say the crypto sell-off doesn’t stop there; it shows growing unease on Wall Street and on the high street about the industry’s fundamentals, which currently look shaky.
“There is this irrational exuberance,” said Mark Hays of the consumer advocacy group American Financial Reform. “They did something similar before the 2008 crisis: aggressively marketed these products, promising unreasonable returns, ignoring the risk, and treating any critics as someone who didn’t get it.”
Hays and others have also compared it to the housing market crash of 2008, as the collapse of bitcoin and other digital currencies coincided with the crypto industry’s version of a bank run and lack of regulation, raising concerns about how bad the damage could be. worry.
Unlike real estate, cryptocurrency is not an industry big enough to cause almost as much turmoil in the wider economy or financial system.
But recent events have shattered the confidence of many investors:
– The so-called stablecoin Terra collapsed in a matter of days in May, wiping out $40 billion in investor wealth. In the crypto market, stablecoins are often pegged to traditional financial instruments such as the U.S. dollar. Instead, Terra relies on an algorithm to stabilize its price around $1 — and it’s also partially backed by Bitcoin.
– A company called Celsius Network, which operates like a bank for cryptocurrency holders, froze the accounts of its 1.7 million customers last week. Celsius used its customers’ cryptocurrencies for deposits, interest payments, loans and other investments, which at one point were worth nearly $10 billion. Unlike real banks, there is no federal insurance to back the deposits of these customers.
– Shortly after Celsius froze accounts, the founder of Singapore-based cryptocurrency-focused hedge fund Arrows Capital responded to rumors of its imminent collapse with a cryptic tweet: “We are in communication with the relevant parties and Fully committed to addressing this issue.”
Periods of prolonged pessimism about stocks are called bear markets. In the world of cryptocurrencies, a flood of sales quickly referred to the HBO series “Game of Thrones,” which promoted 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 percent of its workforce, saying a broader recession could make the industry’s troubles worse. “A recession could lead to another crypto winter, and it could be prolonged,” CEO Brian Armstrong said.
This is not the first crypto winter. In 2018, Bitcoin fell from $20,000 to less than $4,000. But this time it feels different, analysts said.
American University law professor Hillary Allen, who has studied cryptocurrencies, said she is not concerned that the latest industry turmoil will spill over to the wider economy. Among crypto investors, however, problems may be brewing beneath the surface.
“For example, there are hedge funds that have bank loans and they bet on cryptocurrencies,” she said.
Anytime investors borrow money to expand their bets — this is known in financial circles as “leverage” — the fear is that losses will accumulate quickly.
“People are trying to do analytics, but there’s a lack of transparency and it’s hard to understand how much leverage is in the system,” said Stefan Coolican, a former investment banker who is now on the advisory board of Ether Capital.
For these reasons and others, Washington has been pushing for tighter regulation of the crypto industry, an effort that is gaining momentum.
“In our view, the recent upheaval has only highlighted the urgent need for a regulatory framework that mitigates the risks posed by digital assets,” the U.S. Treasury Department said in a statement.
Amid all the grim warnings, however, hope remains eternal for some crypto investors.
Jake Greenbaum, 31, known on Twitter as the Crypto King, said he recently lost at least $1 million on crypto investments — “a big chunk of my portfolio.” While he thinks things could get worse before they get better, he’s not throwing in the towel.
Right now it looks bad, he said, “so that’s where you want to start over with positioning.”
• Hussain reported from Washington.
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