CRYPTO WINTER CROAKS : MASTER MARKET ESSAY

 

'The music has stopped' : Crypto firms quake as prices drop. But some of the companies remained defiant. During Game 5 of the N.B.A. finals on Monday night, Coinbase aired a commercial that alluded to past boom-and-bust cycles.

''Crypto is dead,'' it declared. ''Long Live crypto.''

Cryptocurrencies are digital coins exchanged using networks of computers that verify transactions, rather than a centralized entity like a bank.

They have been marketed as a hedge against inflation caused by central bank's flooding the economy with money. Bitcoin, the most valuable cryptocurrency, has a built-in limit to its supply.

But now with stocks crashing, interest rates soaring and inflation high, cryptocurrency prices are also collapsing, showing they have become tied to the overall market. And as people pull back from crypto investments, the outflow is exposing the unstable foundations of many of the industry's most popular companies.

MORE than 62 crypto start-ups now worth $1 billion or more, according to CB Insights, a firm that tracks private financing. Last year, the industry received more than $25 billion in venture funding across 1,700 deals, according to research from The Block.

OpenSea, the largest marketplace for unique digital images known as nonfungible tokens, reached a staggering $13 billion valuation. And Wall Street banks such as JP Morgan Chase, which previously shunned crypto assets, and Fortune 500 companies like PayPal rolled out crypto offerings.

Many of these companies are equipped to survive a downturn in cryptocurrency prices. But cutbacks likely to continue as they adjust their strategies after years of excessive growth. Among the most vulnerable may be start-ups that introduced their own cryptocurrencies, as prices plummeted across the board.

There were signs that some crypto companies were not sustainable. Skeptics pointed out that many of the most popular firms offered products underpinned by risky financial engineering.

Terraform Labs, for example, offered TerraUSD, a so-called stablecoin with a fixed value linked to the U.S. Dollar. The coin was hyped by its founder, Do Kwon, who raised more than $200 million from major investment firms such as Lightspeed Ventures and Galaxy Digital, even as critics warned that the project was unstable.

The coin's price was algorithmically linked to sister cryptocurrency, Luna. When the price of Luna plummeted last month, TerraUSD also fell - a ''death spiral'' that destabilized the market and plunged some investors into ruin.

This week's Celsius's announcement that it was freezing withdrawals had a similar effect. Celsius had aggressively marketed its banklike lending services to customers, promising yields as high as 18 percent if they deposited their crypto holding with the company.

FOR months, critics wondered how Celsius could sustain such high yields without putting its depositors' funds in jeopardy through risky investments. The company attracted scrutiny from several state regulators. In the end, a drop in crypto prices appeared to put the company under more pressure than it could withstand.

With the price of Bitcoin tumbling, Celsius announced over the weekend that it was freezing withdrawals. The company did not respond to a request for comment.

The market instability has also brought a crisis at Coinbase, the largest U.S. crypto exchange. Between the end of 2021 and late March, Coinbase lost 2.2 million active customers, or 19 percent of its total, as crypto prices dropped. 

The company's net revenue in the first three months of the year shrank 27 percent from a year earlier, to $1.2 billion. Its stock price has plunged 64 percent since it went public last year.

This month, Coinbase said it would rescind job offers and extend a hiring freeze to battle the economic downturn. On Tuesday, it said it would cut about 1,100 workers.

Gemini, the crypto exchange led by the billionaires Tyler and Cameron Winklevoss, also announced this month that it was laying off 10 percent of its work force. In a memo to staff, the Winklevoss twins said the industry had entered a ''crypto winter''.

The Publishing continues. The World Students Society thanks authors David Yaffe-Bellany and Erin Griffith.