“Grab your conviction and stay with it.” That piece of advice, doled out on Tuesday by the hosts of popular cryptocurrency podcast Bankless, Ryan Sean Adams and David Hoffman, encapsulates the mindset prevalent in crypto circles these days.
Crypto is in a bad place. In the past seven days, the price of bitcoin has slumped by over 29 percent, while ethereum dropped by 38 percent and essentially every other cryptocurrency followed suit. According to cryptocurrency data provider Coinmarketcap, the combined value of the cryptocurrency market has fallen by about 70 percent from its high in November 2021, when the rise of crypto and Web3 looked irresistible. The tether stablecoin, a cryptocurrency designed to maintain parity with the US dollar and reputedly backed by dollar reserves (although there are questions regarding the composition of those reserves) has lost its peg and at the time of writing trades for 99 cents a unit. Major crypto companies, starting with exchange Coinbase, have announced big layoffs. The latest victim of the crypto crunch is Celsius, a lending platform that insights company Kaiko says has put $475 million of its customers’ money into stETH—a synthetic asset theoretically redeemable for leading cryptocurrency ethereum at some point in the future. That follows the meltdown of stablecoin terra luna last month, which sent shockwaves across the industry. The S&P 500 index dropped by 3.5 percent on Monday, and the Nasdaq crashed even further by 4.2 percent.
If you are one of the 16 percent of Americans who bought cryptocurrency over the past couple of years, this might look like the moment to start freaking out. But among crypto heavyweights, the general response to this drop ranges from zen to blasé. A meme posted on Bankless’ Twitter handle features a noose-wearing James Franco at the gallows—a stand-in for crypterati who weathered the 2018 crypto crash—asking two weeping crypto holders from 2022 whether it is their “first time” there. A less charitable meme shared by Twitter crypto skeptics compares self-assured crypto investors to a serene dog sipping coffee in a burning shack. “This is fine,” the dog says, as flames threaten to engulf it. This too shall pass.
“If you look at the fundamentals—blockchain adoptions, user expansion, real use cases being unearthed, you wouldn’t think the industry is going anywhere down,” says His Excellency Justin Sun, Grenada’s ambassador to the World Trade Organization and creator of the TRON blockchain, whose stablecoin usdd also lost its peg to the dollar last week. “The market is full of FUD [fear uncertainty and doubt] right now; the crash of [terra luna] and the more recent insolvency issues of some DeFi platforms and funds out there are not helping either. But I’m a believer in rational expectations and the market correcting itself. There’s always been cycles, and we are sitting on the slippery slope of the current one.”
Speaking last week, Paolo Ardoino, Tether’s chief technical officer, spotted a silver lining in the crisis, at least where bitcoin is concerned. “Bitcoin might have already proven to be more solid and be less subject to volatility than other coins. Bitcoin went down 60 percent—but the other altcoins went down much farther than that. So bitcoin is showing much more resiliency,” Ardoino says. “We might see a scenario where bitcoin starts to rally in the next months, while the rest of the ‘alt-coins’ remain down.”
The elephant in the room, however, is the fact that cryptocurrencies—assets routinely touted as a hedge against inflation and the vagaries of the financial system—are behaving exactly like the rest of the stock market. Ardoino himself drew a parallel between Bitcoin’s misfortunes and the recent disastrous performance of Netflix stock, which tanked by 40 percent in a single day in April over disappointing subscriber figures.
Jamie Burke, the CEO of crypto venture fund Outlier Ventures, says that crypto has been behaving exactly like a stock and that the two are moving in lockstep because the lines between them have blurred. The vertiginous price highs and feverish hype around crypto have sucked in a lot of new money as institutional and retail investors spend their stimulus money on stock-trading platform Robinhood. “Digital assets began to be linked to the wider macro environment,” Burke says. “There’s a whole lot of money that came into the financial system: They began to use that to speculate, and so crypto definitely benefited from that. But similarly, when the wider macro environment changes you see that negatively reflected in digital assets.”
“I also think crypto might enjoy more extreme highs on good news and extreme lows on bad news. So for example—if peace were declared by Russia, I think crypto would pump. Why? It doesn’t really make any sense, but it probably would,” he says.
Another way to look at it is that crypto was never a hedge against inflation—or against anything, for that matter. Instead, it was always bound to become just another piece of the wider financial ecosystem. Sam Doctor, chief strategy officer at consultancy BitOoda, says that crypto is now used as one of many possible “risk-on” assets. People looking for a place to park their capital, and who have possibly already put money into the stock of high-risk technology companies, would naturally move up the ladder to bitcoin, and then to more obscure crypto assets. “With interest rates close to zero, the market essentially said, ‘let's go ahead and take some risk, it’s fine,’” Doctor says. Now that the rates are going up and inflation is biting, crypto is the first thing that gets ditched from a portfolio, he argues. “This is the only time now we’re actually looking at bitcoin and asking whether it really is an inflation hedge. And the answer that the markets are telling us is: no.”
But one can only place so much blame on general macroeconomic conditions and stock market upheavals for affecting cryptocurrencies’ downward trend. Some of the pain is doubtless self-inflicted. Look at the meltdown of terra luna, an “algorithmic stablecoin” project whose value was also supposedly pegged to the dollar, which lost nearly 99 percent of its value in May, pulverizing $42 billion dollars of investor money in the process, according to cryptocurrency forensics company Elliptic. Terra’s dollar parity relied on economic incentives and code, as opposed to hard cash. That mechanism, economists had pointed out, could not work, barring a continuously increasing demand for the asset. When people started cashing out in droves, the currency crumbled. (Terra’s creator, Do Kwon, did not respond to several requests for an interview.) Celsius, which had a sizable investment in Terra, is now dealing with liquidity issues, and over the weekend it suspended all withdrawals. (Celsius executives did not respond to emails, texts, or voicemail messages.) In other words, in the past couple of years, as an anything-goes market awash in cash looked for new places to pour money into, schemes that have tenuous economic fundamentals attracted capital—until the tide turned.
But it would be unfair to pin the blame of the downturn solely on the teams behind terra luna and celsius for what is a wider industry problem. In the absence of strong regulation, several major crypto players went along with ventures that, even at face value, were peddling dubious products. Jeremy Allaire, the creator of Circle—a stablecoin company licensed as a money transmitter in 46 US states, which usually styles itself as the adult in the room—is scathing. “For instance, what responsibility do exchanges have? Their philosophy is, if customers want it, they’ll put it on,” he says. “That’s wrong—they have a responsibility for what they put on their shelves. Do you put baby formula next to rat poison on the same shelf?”
Changpeng “CZ” Zhao, CEO of the world’s first exchange, Binance, disagrees. “Should we list everything? I don't know,” he tells me, a week after the terra luna meltdown. “I mean, Netflix dropped on Nasdaq. Should we not have a stock exchange?” He says that he did not see any “intentional scamming behavior” from the terra luna team, and he still believes in the potential of algorithmic stablecoins. Binance invested $3 million in the terra luna project in 2018.
“Let’s take a longer view. No currency we use today has lasted longer than 300 years,” CZ says. (Terra luna lasted about three years.)
In many circles, the hope is that the current market collapse will end up teaching people some valuable lessons about who to trust and who not to. Some hope it could also cleanse the industry of the weaker, frothier projects. An oft-repeated analogy is to what happened when the dotcom bubble popped: Legions of shonky startups fizzled out of existence, leaving behind the Amazons and the eBays. “These down markets are good for crypto because they’re humbling,” says Kristin Smith, executive director of cryptocurrency lobbying group the Blockchain Association. “This is ultimately going to make everyone better and stronger.” Furthermore, she says, regulators are taking notice, and they’ll act more swiftly now that they have clear examples of what can go wrong.
That does not necessarily mean that we have heard the last of cuckoo crypto finance. “People are stupid,” Ardoino says. “They will make the same mistakes again. That happens in the traditional financial industry: People go long and short on futures all the time everywhere, not just in crypto. There is only so much you can teach people.”
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