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NEW YORK >> The wealth-generating hot streak for bitcoin and other cryptocurrencies has turned brutally cold.<\/p>\n
As prices plunge, companies collapse and skepticism soars, fortunes and jobs are disappearing overnight, and investors\u2019 feverish speculation has been replaced by icy calculation, in what industry leaders are referring to as a \u201ccrypto winter.\u201d<\/p>\n
It\u2019s a dizzying turn of events for investments and companies that at the start of 2022 seemed to be at their financial and cultural apex. Crypto-evangelizing companies ran commercials during the Super Bowl and spent heavily to sponsor sports arenas and baseball teams. The industry\u2019s combined assets back then were estimated to be worth more than $3 trillion; today, they are worth less than a third of that. Maybe.<\/p>\n
The price of bitcoin today traded at $20,097, more than 70% below its November peak of around $69,000. Another leading cryptocurrency, Ethereum, was trading near $4,800 at its November peak; it is now less than $1,000.<\/p>\n
Bitcoin and other cryptocurrency prices have been sliding all year, a decline that accelerated as the Federal Reserve signaled that interest rates would be moving higher to try and snuff out inflation. What is happening to crypto is, in part, an extreme version of what is happening to stocks, as investors sell riskier assets at a time when the threat of recession is rising.<\/p>\n
But the crypto sell-off is more than that, experts say; it signals growing trepidation on Wall Street and Main Street about the industry\u2019s fundamentals, which right now are looking shaky.<\/p>\n
\u201cThere was this irrational exuberance,\u201d said Mark Hays at Americans for Financial Reform, a consumer advocacy group. \u201cThey did similar things leading up to the 2008 crisis: aggressively market these products, promise returns that were unreasonable, ignore the risks, and would dismiss any critics as folk who just didn\u2019t get it.\u201d<\/p>\n
Hays and others are also drawing comparisons to the 2008 housing-market meltdown because the collapse in bitcoin and other digital coins has coincided with crypto industry versions of bank runs and a lack of regulatory oversight that is stirring fears about just how bad the damage could get.<\/p>\n
Unlike housing, the crypto industry isn\u2019t large enough to trigger major turmoil across the wider economy or financial system, analysts say.<\/p>\n
But recent events have nevertheless shattered many investors\u2019 confidence:<\/p>\n
\u2014 The so-called stablecoin Terra collapsed in a matter of days in May, wiping out $40 billion in investor wealth. In the crypto business, stablecoins are marketed as a safe investment and the price of each one is typically pegged to a traditional financial instrument, like the U.S. dollar. Terra instead relied on an algorithm to keep its price steady near $1 \u2014 and partly backed up its value with bitcoin.<\/p>\n
\u2014 A company called Celsius Network, which operates like a bank for crypto holders, last week froze the accounts of its 1.7 million customers. Celsius took deposits, paid interest, and made loans and other investments with its customers\u2019 cryptocurrencies, once valued at close to $10 billion. Unlike a real bank, there is no federal insurance backstopping these customers\u2019 deposits.<\/p>\n
\u2014 Shortly after Celsius froze accounts, the founder of Three Arrows Capital, a Singapore-based hedge fund that specializes in cryptocurrencies, addressed rumors of its imminent collapse with a mysterious tweet: \u201cWe are in the process of communicating with relevant parties and fully committed to working this out.\u201d<\/p>\n
Extended periods of pessimism for stocks are called bear markets. In the world of crypto, bouts of heavy selling prompt references to the HBO series \u201cGame of Thrones,\u201d which popularized the ominous warning: \u201cwinter is coming.\u201d<\/p>\n
Last week, the CEO and co-founder of Coinbase, one of the largest crypto exchanges, announced that the company would be laying off roughly 18% of its employees, and he said a wider recession could make the industry\u2019s troubles even worse. \u201cA recession could lead to another crypto winter, and could last for an extended period,\u201d the CEO, Brian Armstrong, said.<\/p>\n
This isn\u2019t the first crypto winter. In 2018, bitcoin fell from $20,000 to less than $4,000. But analysts say this time feels different.<\/p>\n
Hilary Allen, a law professor at American University who has done research on cryptocurrencies, said she\u2019s not worried about the latest industry turmoil spilling over into the broader economy. However, among crypto investors, problems may be brewing under the surface.<\/p>\n
\u201cThere are hedge funds who have bank loans who have made bets on crypto, for example,\u201d she said.<\/p>\n
And anytime investors borrow money to magnify the size of their bets \u2014 something known in the financial world as \u201dleverage\u201d \u2014 the concern is that losses can pile up fast.<\/p>\n
\u201cPeople are trying to do analytics, but there\u2019s a lack of transparency and it\u2019s hard to understand how much leverage is in the system,\u201d said Stefan Coolican, a former investment banker and now advisory board member at Ether Capital.<\/p>\n
For these reasons, and others, there has been a push in Washington to more closely regulate the crypto industry, an effort that is gaining steam.<\/p>\n
\u201cWe believe the recent turmoil only underscores the urgent need for regulatory frameworks that mitigate the risks that digital assets pose,\u201d the Treasury Department said in a statement.<\/p>\n
Amid all the chilly warnings, though, hope still springs eternal for some crypto investors.<\/p>\n
Jake Greenbaum, a 31-year-old known as Crypto King on Twitter, said he has recently lost at least $1 million on his crypto investments \u2014 \u201ca nice chunk of my portfolio.\u201d While he believes things could get worse before they get better, he is not throwing in the towel.<\/p>\n
Things look bad now, he said, \u201cso this is where you want to start positioning back in.\u201d<\/p>\n<\/div>\n
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