SAN FRANCISCO – No one wanted to miss the cryptocurrency craze.
In the last two years, crypto startups have proliferated as the prices of Bitcoin and other virtual currencies have skyrocketed. Companies marketing digital currencies to investors filled the airwaves with television commercials, trendy credit operations offered very high interest rates on cryptocurrency deposits, and exchanges like Coinbase that allow investors to trade digital assets continued the hiring spree.
A global industry worth hundreds of billions of dollars sprang up almost overnight. It crashes now.
After weeks of falling cryptocurrency prices, Coinbase said on Tuesday it has laid off 18 percent of its employees following layoffs at other crypto companies such as Gemini, BlockFi and Crypto.com. High-profile start-ups like Terraform Labs have exploded, wiping out years of investment. On Sunday, Celsius, an experimental crypto bank, abruptly stopped withdrawals.
The pullback in the crypto ecosystem demonstrates the precariousness of the structure built around these risky and unregulated digital assets. The overall value of the cryptocurrency market has dropped about 65 percent since the fall, and analysts predict the sell-off will continue. Stock prices of crypto companies have plummeted, retail traders are fleeing and industry executives are predicting a prolonged decline that could endanger more companies.
“The tide in crypto has subsided, and we see many of these businesses and platforms resting on shaky and unsustainable foundations,” said Lee Reiners, a former Federal Reserve official who teaches at Duke University Law School. “The music has stopped.”
Cryptocurrencies are digital currencies that are exchanged using computer networks that verify transactions, rather than a centralized entity such as a bank. For years, they’ve been marketed as a hedge against inflation caused by central banks flooding the economy with money. Bitcoin, the most valuable cryptocurrency, has a built-in limit to its supply.
But now, as stocks crash, interest rates soar, and inflation soar, cryptocurrency prices are also collapsing, suggesting that they are tied to the overall market. And as people pull back from their crypto investments, the exit exposes the volatile foundations of many of the industry’s most popular companies.
According to CB Insights, a firm that tracks private finance, more than 62 crypto startups are currently valued at $1 billion or more. Last year, the industry received more than $25 billion in venture funding in nearly 1,700 deals, according to research by The Block. OpenSea, the largest marketplace for unique digital images known as immutable tokens, has reached a staggering $13 billion valuation. And Wall Street banks like JPMorgan Chase, which had previously shunned crypto assets, and Fortune 500 companies like PayPal have submitted crypto offerings.
Most of these companies are equipped to survive a drop in cryptocurrency prices. However, the cuts are likely to continue as they adjust their strategy after years of extreme growth. Among the most vulnerable may be start-ups that are launching their own cryptocurrencies as prices generally fall.
Compared to the dot-com boom of the late 1990s, some industry experts have long said that the exuberant growth of the past two years won’t last forever. At the time, amid the hysteria about the early promise of the internet, dozens of dot-com companies were going public, though few were making any money. When trust evaporated in the early 2000s, most of the dot-coms went bankrupt, and only the largest – like eBay, Amazon and Yahoo – survived.
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This time around, investors predict there will be more survivors. “You have some over-hyped companies that definitely don’t have a foundation,” said Mike Jones, an investor in venture firm Science Inc. “But there are also some really strong companies that are trading well below what they should be.”
There are warning signs that some crypto companies are not sustainable. Skeptics pointed out that many of the most popular firms offer products backed by risky financial engineering.
For example, Terraform Labs has offered TerraUSD, a so-called stablecoin with a fixed value pegged to the US dollar. The cryptocurrency was excited by its founder Do Kwon, who has raised more than $200 million from major investment firms like Lightspeed Venture Partners and Galaxy Digital.
The price of the coin was algorithmically linked to a sister cryptocurrency, Luna. When Luna’s price fell in May, TerraUSD fell together – a “death spiral” that destabilized the broader market and plunged some investors into financial ruin.
This week, Celsius’ announcement that it was freezing withdrawals had a similar effect. Celsius aggressively marketed its bank-like loan service to customers, promising returns of up to 18 percent if they invested their crypto assets in the company.
For months, critics wondered how Celsius could sustain such high returns without jeopardizing depositors’ funds through risky investments. The company has received scrutiny from several state regulators. In the end, it turned out that the fall in crypto prices put the company under more pressure than it could bear.
With the Bitcoin price plummeting, Celsius announced on Sunday that it is freezing withdrawals “due to extreme market conditions”. The company did not respond to a request for comment.
Market instability also triggered a crisis at Coinbase, the largest US crypto exchange. Between the end of 2021 and the end of March, Coinbase lost 2.2 million active customers, or 19 percent of the total, as crypto prices plummeted. The company’s net income in the first three months of the year decreased by 27 percent compared to the previous year, falling to $ 1.2 billion. The stock price has dropped 84 percent since going public last year.
This month, Coinbase said it would cancel job offers and freeze hiring to combat the economic downturn. On Tuesday, it said it would lay off about 1,100 workers.
Coinbase CEO Brian Armstrong informed employees of the layoffs in a note Tuesday morning, saying that the company is “growing very quickly” as crypto products become popular.
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“I realize now that we’re over-hiring,” he wrote. A Coinbase spokesperson declined to comment.
“There has been growth at all costs over the last few years,” said Ryan Coyne, who covers crypto companies and financial technology at Mizuho Group. “It has now turned into profitable growth.”
Crypto exchange Gemini, run by billionaires Tyler and Cameron Winklevoss, also announced this month that it is laying off 10 percent of its workforce. The Winklevoss twins said in a note to staff that the industry is entering a “crypto winter.”
However, they also expressed that they are optimistic about the future of the industry. “The crypto revolution is on its way and its impact will continue to be profound,” they wrote in a note. “But its trajectory has been anything but gradual or predictable.”
Last year, Singapore-based exchange Crypto.com aired a now-notorious TV spot starring actor Matt Damon, who said “fortunate favors the brave” while encouraging investors to put their money in the crypto market. Last week, CEO of Crypto.com announced He said he laid off 5 percent of the staff, or 260 people. On Monday, BlockFi, a crypto lending operation, said it had cut its staff by nearly 20 percent.
Gemini and BlockFi declined to comment. A Crypto.com spokesperson said the company continues to focus on “investing resources in product and engineering talent to develop world-class products.”
Cryptocurrencies have been volatile for a long time and are prone to bullish and bearish cycles. In 2013, China’s ban on Bitcoin caused its price to plummet. In 2017, the proliferation of companies creating and selling their own tokens led to a surge in crypto prices, which collapsed after regulators crashed their supposed initial coin offerings.
Crypto enthusiasts said that these bubbles are embedded in the ecosystem. They attract talented people who continue to build valuable projects. Many of the loudest cheerleaders encourage investors to “buy low” or invest more when prices are low.
Science Inc. “We’ve been in these downward spirals before and we’ve rebounded,” said investor Mr Jones. “We all believe in the fundamentals.”
Some companies also continued to challenge. In Game 5 of the NBA finals on Monday night, Coinbase ran an ad that hinted at past cycles of ups and downs.
“Crypto is dead,” he declared. “Long live crypto.”