Crypto Investors’ Hot Streak Ends As Harsh ‘Winter’ Rolls In

As prices plunge, businesses collapse and skepticism soars, fortunes and jobs vanish overnight, and feverish investor speculation has been replaced by icy calculations, in what industry leaders industry are calling a “crypto winter”.

This is a dizzying turn for investments and companies which, at the start of 2022, seemed to be at their financial and cultural peak.

Crypto-evangelism companies ran ads during the Super Bowl and spent big on sponsoring sports arenas and baseball teams.

The industry’s combined assets at the time were estimated at over $4.3 trillion; today they are worth less than a third. Maybe.

The prices of bitcoin and other cryptocurrencies have fallen all year, a decline that accelerated when the Federal Reserve signaled that interest rates would rise in an attempt to stifle 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 increases.

But selling crypto is more than that, experts say; this signals growing apprehension on Wall Street and Main Street about industry fundamentals, which currently appear fragile.

“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: aggressively market these products, promise unreasonable returns, ignore the risks, and dismiss all reviews as people who just don’t get it.”

Hays and others also draw comparisons to the housing market crash of 2008, as the collapse of Bitcoin and other digital coins coincided with crypto industry versions of bank runs and a lack of regulatory oversight. which raises fears about the extent of the damage. .

Unlike housing, the crypto industry is not large enough to trigger major turbulence in the broader economy or financial system, analysts say.

But recent events have nevertheless shaken the confidence of many investors:

– So-called stablecoin Terra collapsed in a matter of days in May, wiping out $57.5 billion in investor wealth. In the crypto industry, stablecoins are marketed as a safe investment, and the price of each is usually pegged to a traditional financial instrument, such as the US dollar. Terra instead relied on an algorithm to keep its price stable near US$1 – and partly backed its 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, no federal insurance guarantees the deposits of these customers.

– Shortly after Celsius froze the 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 Communicating with relevant parties and fully engaged. to resolve this problem.

Prolonged periods of pessimism for stocks are called bear markets.

In the world of crypto, heavy-selling episodes invite reference to the HBO series game of throneswho popularized the ominous warning: “winter is coming”.

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

This is not the first crypto winter.

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

But analysts say this time is different.

Hilary Allen, a law professor at American University who has researched cryptocurrencies, said she isn’t worried about the latest industry turmoil rippling through the broader economy.

However, among crypto investors, problems may be developing below the surface.

“There are hedge funds that have bank loans that have made crypto bets, for example,” she said.

And whenever investors borrow money to increase the size of their bets – known in the financial world as “leverage” – the concern is that losses can pile up quickly.

“People are trying to do analysis, but there’s a lack of transparency and it’s hard to understand the extent of leverage in the system,” said Stefan Coolican, a former investment banker and now a fellow. of the Ether Capital advisory board.

For these and other reasons, there has been pressure in Washington to regulate the crypto industry more tightly, 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.

Amid all the cold warnings, however, there is still hope for some crypto investors.

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

Although he thinks things might get worse before they get better, he isn’t giving up.

Things look bad now, he said, “so that’s where you want to start positioning yourself.”