By KEN SWEET and FATIMA HUSSEIN, The Associated Press
NEW YORK (AP) — The wealth-generating hot streak of bitcoin and other cryptocurrencies has turned brutally cold.
As prices fall, businesses collapse and skepticism soars, fortunes and jobs disappear overnight, and feverish investor speculation has been replaced by icy calculations, as industry leaders industry refer to as a “crypto winter”.
It’s a dizzying turn of events for investments and companies that in early 2022 seemed to be at their financial and cultural apex. Crypto evangelism companies ran commercials during the Super Bowl and spent heavily to sponsor sports stadiums and baseball teams. The combined assets of the industry at the time were estimated to be worth more than $3 trillion; today, they are worth less than a third of that. Maybe.
On Monday, the bitcoin price traded at $20,097, more than 70% below its November high of around $69,000. Another leading cryptocurrency, Ethereum, was trading near $4,800 at its November high; now it is less than $1,000.
The prices of Bitcoin and other cryptocurrencies have been falling throughout the year, a drop that accelerated when the Federal Reserve signaled that interest rates would rise to try to ward off inflation. What is happening to cryptocurrencies is, in part, an extreme version of what is happening to stocks, as investors sell riskier assets at a time when the threat of recession is rising.
But the cryptocurrency selloff is more than that, experts say; it indicates a growing concern on Wall Street and Main Street about the industry’s fundamentals, which at the moment appear shaky.
“There was this irrational exuberance,” said Mark Hays of Americans for Financial Reform, a consumer advocacy group. “They did similar things before the 2008 crash: They aggressively promoted these products, promised unreasonable returns, ignored the risks, and dismissed any critics as people who just didn’t get it.”
Hays and others are also drawing comparisons to the 2008 housing market crash because the crash of bitcoin and other digital currencies has coincided with crypto industry versions of bank runs and lack of regulatory oversight raising fears about how serious the crash could be. damage. .
Unlike housing, the crypto industry is not big enough to trigger major turmoil in the economy or financial system in general, analysts say.
However, recent events have shattered the confidence of many investors:
— The so-called Terra stablecoin collapsed in a matter of days in May, wiping out $40 billion in investor wealth. In the cryptocurrency business, 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. Instead, Terra relied on an algorithm to keep its price stable near $1, backing its value in part with bitcoin.
— A company called Celsius Network, which operates as a bank for cryptocurrency 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 clients’ cryptocurrencies, once valued at close to $10 billion. Unlike a real bank, there is no federal insurance backing these customers’ deposits.
— Shortly after Celsius froze the accounts, the founder of Three Arrows Capital, a Singapore-based hedge fund that specializes in cryptocurrencies, addressed rumors of its impending collapse with a mysterious tweet: “We are in the process of contacting the relevant parties and we are fully committed. To solve this.”
Extended periods of pessimism for stocks are called bear markets. In the world of cryptocurrency, sell-off episodes reference 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 cryptocurrency exchanges, announced that the company would lay off roughly 18% of its employees, saying a broader recession could make the industry’s woes even worse. “A recession could lead to another crypto winter and could last for an extended period,” CEO Brian Armstrong said.
This is not the first crypto winter. In 2018, bitcoin fell from $20,000 to below $4,000. But analysts say this time it feels different.
Hilary Allen, a law professor at American University who has done research on cryptocurrencies, said she is not concerned that the latest industry turmoil will spill over into the broader economy. However, among crypto investors, problems may be brewing under the surface.
“There are hedge funds that have bank loans that have made bets in cryptocurrencies, for example,” he said.
And whenever 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 mount up.
“People are trying to do analysis, but there is a lack of transparency and it is difficult to understand how much leverage is in the system,” said Stefan Coolican, a former investment banker and now an advisory board member at Ether Capital.
For these reasons, and others, there has been a push in Washington to more closely regulate the cryptocurrency industry, an effort that is gathering momentum.
“We believe that 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, amidst all the cold warnings, hope remains eternal for some crypto investors.
Jake Greenbaum, a 31-year-old known as the Crypto King on Twitter, said that he recently lost at least $1 million in his cryptocurrency investments, “a good chunk of my portfolio.” While he believes things could get worse before they get better, he’s not throwing in the towel.
Things look bad right now, he said, “so this is where you want to start positioning yourself again.”
Hussein reported from Washington.
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