[Photo: AP News]
NEW YORK (AP) — The wealth-generating hot streak for bitcoin and other cryptocurrencies has turned brutally cold.
As prices plunge, companies collapse and scepticism soars, fortunes and jobs are disappearing overnight, and investors’ feverish speculation has been replaced by icy calculations, in what industry leaders are referring to as a “crypto winter.”
It’s a dizzying turn of events for investments and companies that at the start of 2022 seemed to be at their financial and cultural apex. Crypto-evangelizing companies ran commercials during the Super Bowl and spent heavily to sponsor sports arenas and baseball teams. The industry’s combined assets were estimated to be worth more than $3 trillion; today, those assets are worth less than a third of that. Maybe.
On Monday, the price of bitcoin traded at $20,097, more than 70% below its November peak of around $69,000. Another leading cryptocurrency, Ethereum, was worth around $4,800 at its peak in November; it is now worth less than $1,000.
Bitcoin and other cryptocurrency prices have been sliding all year, a decline that accelerated as the Federal Reserve signalled that interest rates would be moving higher to try and snuff 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 risk of recession is rising.
But the crypto sell-off is more than that, experts say; it signals growing trepidation on Wall Street and Main Street about the industry’s fundamentals, which right now are looking shaky.
“There was this irrational exuberance,” said Mark Hays at Americans for Financial Reform, a consumer advocacy group. “They did similar things leading up to the 2008 crisis: aggressively market these products, promise returns that were unreasonable, ignore the risks, and would dismiss any critics as folk who just didn’t get it.”
Hays and others are also drawing comparisons to the 2008 housing-market meltdown because the collapse in bitcoin and other digital coins has coincided with crypto industry versions of bank runs and a lack of regulatory oversight that is stirring fears about just how bad the damage could get.
Unlike housing, cryptocurrency isn’t a large enough industry to trigger nearly as much turmoil across the wider economy or financial system.
But recent events have nevertheless shattered many investors’ confidence:
— The so-called stablecoin Terra collapsed in a matter of days in May, wiping out $40 billion in investor wealth. In crypto markets, stablecoins are typically pegged to a traditional financial instrument, like the U.S. dollar. Terra instead relied on an algorithm to keep its price steady near $1 — and it was also backed in part by bitcoin.
— A company called Celsius Network, which operates like a bank for crypto holders, last week froze the accounts of its 1.7 million customers. Celsius took deposits, paid interest, and made loans and other investments with its customers’ cryptocurrencies, once valued at close to $10 billion. Unlike a real bank, there is no federal insurance backstopping these customers’ deposits.
Extended periods of pessimism for stocks are called bear markets. In the world of crypto, bouts of heavy selling prompt 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 crypto exchanges, announced that the company would be laying off roughly 18% of its employees, and he said a wider recession could make the industry’s troubles even worse. “A recession could lead to another crypto winter, and could last for an extended period,” the CEO, Brian Armstrong, said.
This isn’t the first crypto winter. In 2018, bitcoin fell from $20,000 to less than $4,000. But analysts say this time feels different.
Hilary Allen, a law professor at American University who has done research on cryptocurrencies, said she’s not worried about the latest industry turmoil spilling over into the broader economy. However, among crypto investors, problems may be brewing under the surface.