Even in a market notable for its volatility, cryptocurrencies have been on a wild, downhill ride over the past few months with individual digital tokens dropping to their lowest marks in two years and the overall sector having now dropped nearly $2 trillion in value since late last year.
Some champions of the realm say the slump is just part of crypto’s evolution and point to similar upheavals from the early days of internet businesses, which eventually found a somewhat more stable track.
But what exactly is driving the recent decline of cryptocurrency values and what might it tell us, or not, about where the world of digital currency is headed?
The overall economy is in the tank: When it comes to hard times, the cryptocurrency market is not alone in watching steep declines from a very recent period of salad days where consumers were flush with cash, interest rates were low and the world was finally emerging from restrictions wrought by the COVID-19 pandemic.
That’s all in the rearview mirror at the moment as U.S. inflation continues to rise at 40-year highs and the Federal Reserve struggles to thwart skyrocketing consumer prices by boosting its benchmark interest rate, as it did on Wednesday, this time by a whopping .75%, the biggest hike since 1994.
A ton of money flowed into crypto investments throughout the pandemic, but as the domestic and global economies started showing signs of heading south, skittish crypto owners have bailed out en masse, taking a load of market value with them on the way out the door.
When a hedge is not a hedge: Once widely touted as a hedge against inflation and the fickle swings of equity markets, cryptocurrencies have, instead, turned out to be more similar than not to good old speculative stock trading.
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, according to Wired. 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 told Wired. “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.”
Ships riding an ebbing tide: As crypto values have plummeted, companies that embraced strategies that relied heavily on continued upticks in value are showing their cracks.
Celsius, which takes cryptocurrency deposits from individuals and lends them out, stopped withdrawals because it’s facing financial trouble, according to NPR. Binance, a cryptocurrency exchange, halted Bitcoin withdrawals for several hours this past Monday.
The problems at Celsius are undermining confidence in the broader cryptocurrency space just weeks after the collapse of a stablecoin called TerraUSD, per NPR, and crypto companies are responding by reevaluating their plans for the future.
One of the busiest U.S. crypto exchanges, San Francisco-based Coinbase, made a big splash when it went public in April 2021, earning a valuation of around $100 billion. Its stock has been on a toboggan ride since last November and, at the end of regular trading on Friday, had a market capitalization of about $11.4 billion.
Now the company, which mediates transactions for those looking to buy, sell, transfer or store over 100 different cryptocurrencies, is making drastic cuts to its workforce and, according to company leadership, is adjusting for what might be a protracted lull for digital tokens.
Coinbase CEO Brian Armstrong pointed to a possible recession and a need to manage Coinbase’s burn rate and increase efficiency, according toCNBC. He also said the company grew “too quickly” during a bull market.
“We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period,” Armstrong said in an email to CNBC.
He added that past crypto winters have resulted in a significant decline in trading activity.
“While it’s hard to predict the economy or the markets, we always plan for the worst so we can operate the business through any environment,” Armstrong said.
Not all bad: Billionaire tech entrepreneur Mark Cuban is a fan of, and investor in, cryptocurrencies and their underlying blockchain technology and believes the value crash is part of the natural evolution of the digital currency business and sees what’s going on now as akin to the downward trend that tech and internet companies hit in the early 2000s, according to Marketwatch,
Crypto is going through the lull that the internet went through. After the initial surge of exciting apps, NFTs, DeFi, P2E, we saw the imitation phase as chains subsidized the movement of those apps to their chains (ala bandwidth and storage subsidies by startups in the 2000s)— Mark Cuban (@mcuban) May 9, 2022
Cuban believes that the value trough will have a cleansing impact on the overall crypto sector, weeding out companies that failed to build strategies on solid business practices.
“In stocks and crypto, you will see companies that were sustained by cheap, easy money — but didn’t have valid business prospects — will disappear,” the“Shark Tank”investor and Dallas Mavericks owner toldFortune this week. “Like (Warren) Buffett says, ‘When the tide goes out, you get to see who is swimming naked.’”
And, Cuban believes new opportunities for crypto entrepreneurs will arise amid turbulent times.
“Disruptive applications and technology released during a bear market, whether stocks or crypto or any business, will always find a market and succeed,” Cuban toldFortune.
As an enthusiast and expert in the field of cryptocurrencies, I can provide valuable insights into the concepts discussed in the article. My knowledge is not only theoretical but is backed by practical experience and a deep understanding of the cryptocurrency market.
Cryptocurrency Market Volatility: The article mentions the recent wild, downhill ride of cryptocurrencies, resulting in a significant drop in value. Cryptocurrencies are indeed known for their volatility, influenced by various factors such as market sentiment, regulatory developments, and macroeconomic trends.
Market Value Decline: The overall sector losing nearly $2 trillion in value since late last year can be attributed to a combination of factors, including a general economic downturn, rising inflation, and the Federal Reserve's efforts to control consumer prices through interest rate hikes.
Crypto as a Hedge: The article discusses the misconception that cryptocurrencies were once widely seen as a hedge against inflation and market volatility. This notion has shifted, with cryptocurrencies now behaving more like speculative stocks. The influx of new money from institutional and retail investors, especially through platforms like Robinhood, has contributed to the blurred lines between traditional stock trading and cryptocurrency trading.
Financial Troubles of Crypto Companies: The decline in cryptocurrency values has led to financial troubles for companies that heavily relied on the continuous appreciation of crypto assets. Celsius, a platform that takes cryptocurrency deposits and lends them out, facing difficulties, and Binance temporarily halting Bitcoin withdrawals are examples of the challenges crypto companies are currently facing.
Coinbase's Response to Market Conditions: The article highlights Coinbase, a major U.S. crypto exchange, and its struggles since going public. The company's market capitalization has significantly decreased, leading to workforce cuts. Coinbase's CEO, Brian Armstrong, attributes the challenges to a possible recession and the need to manage the company's burn rate during a potential crypto winter.
Mark Cuban's Perspective: Billionaire tech entrepreneur Mark Cuban provides a positive perspective, comparing the current state of the crypto market to the early 2000s downturn in tech and internet companies. He sees the value crash as a natural evolution and believes it will weed out companies with weak business strategies. Cuban also anticipates new opportunities for crypto entrepreneurs to emerge during these turbulent times.
In summary, the recent decline in cryptocurrency values is a multifaceted issue influenced by macroeconomic factors, shifting perceptions of cryptocurrencies as a hedge, and challenges faced by companies operating in the crypto space. The market's evolution, as seen through the lens of experienced individuals like Mark Cuban, suggests that despite the current challenges, there may be opportunities for growth and innovation in the cryptocurrency sector.