Why cryptocurrencies have gone from hot to full meltdown: NPR
A Bitcoin ATM is seen at a subway station in Brooklyn Heights in New York City on June 13. Bitcoin and other cryptocurrencies have plummeted in value in recent days.
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A Bitcoin ATM is seen at a subway station in Brooklyn Heights in New York City on June 13. Bitcoin and other cryptocurrencies have plummeted in value in recent days.
Michael M. Santiago/Getty Images
The cryptocurrency world is in chaos.
Just months ago, crypto companies announced a lot during the Super Bowl after virtual currencies had a dizzying rally in 2021.
Today, Bitcoin and other cryptos are plummeting, and companies like Coinbase, which runs the largest crypto exchange in the US, are announcing layoffs.
“The house of crypto is on fire and everyone is just rushing for the exits because there is a complete loss of confidence in the space,” said Ed Moya, a senior market strategist at financial firm Oanda.
Here’s what happens.
Why is crypto falling so sharply?
Because they are affected by the same factors that affect shares and other assets.
Consumer prices are rising at the fastest annual pace in more than four decades, and the Federal Reserve is aggressively raising interest rates to bring down inflation.
On Thursday, the Fed raised interest rates by three-quarters of a percentage point and indicated it could raise them again by the same amount at its next meeting in July if necessary to cool rates.
Higher interest rates make borrowing costs more expensive for people and businesses, raising concerns about an economic recession.
Stocks have fallen dramatically from records set in January, with the broad S&P 500 heading into a bear market this week (when an index falls 20% or more from its most recent high).
Cryptocurrencies have hardly been immune. Since Bitcoin hit an all-time high in November, the value of the world’s most popular digital currency has fallen by around 70%, and its rivals are also suffering. Ether is down about 70% this year and so is Dogecoin.
Bitcoin’s supporters have always claimed that the digital currency would be an “inflation hedge”, but in fact it has not behaved like that.
As stocks in tech companies have fallen, so has Bitcoin’s value.
“What this episode, this crash in crypto prices, shows is that cryptocurrencies are largely speculative financial assets that are subject to macroeconomic forces, such as changes in interest rates,” said Eswar Prasad, an economics professor at Cornell University.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City on Thursday. Fears of the Fed’s aggressive actions against inflation have raised concerns about the impact on the economy.
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Traders work on the floor of the New York Stock Exchange (NYSE) in New York City on Thursday. Fears of the Fed’s aggressive actions against inflation have raised concerns about the impact on the economy.
Spencer Platt/Getty Images
So what does this mean for cryptocurrency companies?
The sharp fall in cryptocurrencies is driving some companies into trouble.
Celsius, which takes cryptocurrency deposits from individuals and lends them out, stopped withdrawals because it is facing financial problems. Binance, a cryptocurrency exchange, halted Bitcoin withdrawals for several hours on Monday.
The problems at Celsius are undermining confidence in the broader cryptocurrency space just weeks after the collapse of a stablecoin called TerraUSD.
Crypto companies are responding by rethinking their plans for the future.
Coinbase, a cryptocurrency exchange platform, reduced its staff by almost a fifth.
In a memo to employees, the company’s CEO said Coinbase “grew too fast.”
“We look set to enter a recession,” wrote Brian Armstrong.
Some supporters of cryptocurrencies still believe that a “crypto winter” could lead to a “crypto sheep.” In the past, deep recessions have led to strong upswings.
But according to Moya, the analyst at Oanda, the economic landscape is different now, and so is crypto’s outlook.
In fact, with the Fed continuing to raise interest rates aggressively and with inflation still high, there is likely to be more pain ahead for all markets, including cryptocurrencies.
Fed Chairman Jerome Powell speaks during a news conference at the Federal Reserve Building in Washington, DC, on Wednesday. The central bank raised interest rates by three-quarters of a percentage point, the biggest increase since 1994.
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Fed Chairman Jerome Powell speaks during a news conference at the Federal Reserve Building in Washington, DC, on Wednesday. The central bank raised interest rates by three-quarters of a percentage point, the biggest increase since 1994.
Olivier Douliery/AFP via Getty Images
What dose does this mean for those who got into crypto?
It’s been a rude awakening for millions of people who bought cryptocurrencies, especially if they got into the craze last year.
Prasad says 2021 was “the height of cryptomania.”
The total value of all digital currencies in the world swelled to 3 trillion dollars. Crypto companies signed sponsorship deals with professional sports teams, and Coinbase, Crypto.com, eToro and FTX paid out millions of dollars to buy ads during the Super Bowl.
Crypto.com hired actor Matt Damon as a spokesperson, and an FTX ad featured the one and only comedian Larry David.
The message from these companies was that crypto represents the future of finance and it was best not to miss it.
“The technological dazzle of cryptocurrency swept in many retail investors who were unaware of the risks they were taking on,” says Prasad.
Today, the total value of the crypto market has shaved around $1 trillion. And if you bought Bitcoin on February 14th, the day after that Super Bowl ad, it’s now worth about half of what you paid for it.
The exterior of the Crypto.com Arena is seen in Los Angeles on January 26. Many cryptocurrency companies hired celebrities to present their products and signed sponsorship deals.
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The exterior of the Crypto.com Arena is seen in Los Angeles on January 26. Many cryptocurrency companies hired celebrities to present their products and signed sponsorship deals.
Rich Fury/Getty Images
What will this mean for the regulations in the sector?
The increase in amateur investors, combined with the increasing complexity of some of the cryptocurrency products, worries regulators.
Crypto markets are still quite new and there is a lack of clarity even about the most basic things, like who is responsible for monitoring the space.
Right now, both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) require oversight of parts of the crypto market.
“If there’s no guidance at all, people will be taken advantage of, and we want to prevent that,” says Cam Harvey, a finance professor at Duke University. – Right now, we basically have nothing.
The SEC is stepping up enforcement actions against crypto companies and considering new rules. Meanwhile, in an executive order, President Biden asked government agencies to make policy recommendations.
And in Congress, Senator Cynthia Lummis (R-WY) has teamed up with Senator Kirsten Gillibrand (D-NY), on the first comprehensive crypto legislation. The bill would give more regulatory authority to the Commodity Futures Trading Commission.
Still, for now, many analysts don’t think the broader financial system is at risk. The total value of the cryptocurrency market is still less than the total market value of a large company like Apple.
But this recent downturn has raised some serious concerns.
