By KEN SWEET and FATIMA HUSSEIN, The Associated Press
NEW YORK (AP) – The wealth-creating hot streak for bitcoin and other cryptocurrencies has gone brutally cold.
As prices fall, businesses collapse and skepticism rises, fortunes and jobs vanish overnight, and investors’ frenzied speculation has been replaced by frigid calculations in what industry leaders dub “crypto winter.”
It’s a dizzying turn of events for investments and businesses that appeared to be at their financial and cultural peak in early 2022. Crypto evangelism companies ran commercials during the Super Bowl and spent big bucks sponsoring sports arenas and baseball teams. The industry’s combined fortune was then valued at more than $3 trillion; today they are worth less than a third of that. Maybe.
On Monday, bitcoin price was trading at $20,097, more than 70% below its November peak of around $69,000. Another leading cryptocurrency, Ethereum, traded at nearly $4,800 from its November peak; it’s now less than $1,000.
Bitcoin and other cryptocurrency prices have been falling all year, a decline that accelerated when the Federal Reserve signaled that interest rates would rise to try to wipe out inflation. What’s happening to crypto is in part an extreme version of what’s happening to stocks, as investors sell off riskier assets at a time when the risk of a recession is rising.
But the crypto sell-off is more than that, experts say; it signals growing concern on Wall Street and Main Street over industry fundamentals, which currently look shaky.
“There was this irrational exuberance,” said Mark Hays of Americans for Financial Reform, a consumer advocacy group. “They were doing similar things before the 2008 crisis: aggressively marketing these products, promising unreasonable returns, ignoring the risks, and dismissing all the critics as people who just didn’t get it.”
Hays and others are also drawing comparisons to the 2008 real estate market meltdown because the collapse of bitcoin and other digital coins coincided with versions of bank runs in the crypto industry and a lack of regulatory oversight, raising concerns about how bad the damage could get .
Unlike housing, the crypto industry isn’t big enough to trigger major turmoil in the economy or the financial system at large, analysts say.
Still, recent events have shaken the confidence of many investors:
– The so-called stablecoin Terra collapsed in a matter of days in May, wiping out $40 billion in investor assets. In the crypto business, stablecoins are marketed as a safe haven asset and the price of each is typically pegged to a traditional financial instrument like the US dollar. Terra instead relied on an algorithm to keep its price constant at $1 – partially underpinning its value with Bitcoin.
— A company called Celsius Network, which operates like a bank for crypto owners, froze the accounts of its 1.7 million customers last week. Celsius took deposits, paid interest, and made loans and other investments with its customers’ cryptocurrencies, which were once worth nearly $10 billion. Unlike a real bank, there is no federal insurance to protect these customers’ deposits.
— Shortly after Celsius froze accounts, the founder of Three Arrows Capital, a Singapore-based cryptocurrency hedge fund, addressed rumors of its impending collapse with a mysterious tweet: “We are in the process of communicating with relevant parties, and are fully committed to working this out.”
Long periods of stock pessimism are referred to as bear markets. In the world of cryptos, spree selling leads to 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 lay off about 18% of its employees, saying a broader recession could exacerbate the industry’s woes. “A recession could result in another crypto winter and last for an extended period of time,” said CEO Brian Armstrong.
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 is not concerned that the recent turmoil in the industry will spill over into the broader economy. However, problems could be brewing beneath the surface among crypto investors.
“There are hedge funds that have bank loans that have bet on crypto, for example,” she said.
And whenever investors borrow money to increase their stakes — something known in the financial world as “leverage” — there’s concern that losses can quickly pile up.
“People are trying to do analysis but there is a lack of transparency and it’s hard to understand how much leverage there 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 regulate the crypto industry more tightly, an attempt 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.
Despite all the frosty warnings, hope still remains forever for some crypto investors.
Jake Greenbaum, a 31-year-old known as the Crypto King on Twitter, said he’s recently lost at least $1 million on his crypto investments — “a nice part of my portfolio.” Though he believes things could get worse before they get better, he’s not throwing in the towel.
Things are looking bad now, he said, “so this is where you want to start repositioning yourself.”
Hussein reported from Washington.
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