A year ago this week, investors were describing bitcoin as the future of money and ethereum as the world’s most important developer tool. Non-fungible tokens were exploding, Coinbase
was trading at a record and the NBA’s Miami Heat was just into its first full season in the newly renamed FTX Arena.
As it turns out, that was peak crypto.
In the 12 months since bitcoin
topped out at over $68,000, the two largest digital currencies have lost three-quarters of their value, collapsing alongside the riskiest tech stocks. The industry, once valued at roughly $3 trillion, now sits at around $900 billion.
Rather than acting as a hedge against inflation, which is near a 40-year high, bitcoin has proven to be another speculative asset that bubbles up when the evangelists are behind it and plunges when enthusiasm melts and investors get scared.
And the $135 million that FTX spent last year for a 19-year deal with the Heat? The crypto exchange with the naming rights is poised to land in the history books alongside another brand that once had its logo on a sports facility: Enron.
In a blink this week, FTX sank from a $32 billion valuation all the way to bankruptcy as liquidity dried up, customers demanded withdrawals and rival exchange Binance ripped up its nonbinding agreement to buy the company. FTX founder Sam Bankman-Fried admitted on Thursday that he “f---ed up.” On Friday, he stepped down as CEO.
“Looking back now, the excitement and prices of assets were clearly getting ahead of themselves and trading far above any fundamental value,” said Katie Talati, director of research at Arca, an investment firm focused on digital assets. “As the downturn was so fast and violent, many have proclaimed that digital assets are dead.”
If this is indeed the future of finance, it’s looking rather bleak.
Crypto was supposed to bring transparency. Transactions on the blockchain could all be tracked. We didn’t need centralized institutions — banks — because we had digital ledgers to serve as the single source of truth.
That narrative is gone.
“Speaking for the bitcoiners, we feel like we’re trapped in a dysfunctional relationship with crypto and we want out,” said Michael Saylor, executive chairman of MicroStrategy
, a technology company that owns 130,000 bitcoins. “The industry needs to grow up and the regulators are coming into this space. The future of the industry is registered digital assets traded on regulated exchanges, where everyone has the investor protections they need.”
Saylor was speaking on biexm’s “Squawk on the Street” as FTX’s demise roiled the crypto market. Bitcoin sank to a two-year low this week, before bouncing back on Thursday. Ethereum
also tanked, and solana, another popular coin used by developers and touted by Bankman-Fried, fell by more than half.
Equities tied to crypto suffered, too. Crypto exchange Coinbase tumbled 20% over two days, while Robinhood
, the trading app that counts Bankman-Fried as one of its biggest investors, fell by 30% during the same period.
There was already plenty of pain to go around. Last week, Coinbase reported a revenue plunge of more than 50% in the third quarter from a year earlier, and a loss of $545 million. In June, the crypto exchange slashed 18% of its workforce.
“We are actively updating and evaluating our scenario plans and prepared to reduce operating expenses further if market conditions worsen,” Alesia Haas, Coinbase’s finance chief, said on the Nov. 3 earnings call.
How it started
The downdraft started in late 2021. That’s when inflation rates started to spike and sparked concern that the Federal Reserve would begin hiking borrowing costs when the calendar turned. Bitcoin tumbled 19% in December, as investors rotated into assets deemed safer in a tumultuous economy.
The sell-off continued in January, with bitcoin falling 17% and ethereum plummeting 26%. David Marcus, former head of crypto at Facebook parent Meta
, used a phrase that would soon enter the lexicon.
“It’s during crypto winters that the best entrepreneurs build the better companies,” Marcus wrote in a Jan. 24 tweet. “This is the time again to focus on solving real problems vs. pumping tokens.”
The crypto winter didn’t actually hit for a few months. The markets even briefly stabilized. Then, in May, stablecoins became officially unstable.
A stablecoin is a type of digital currency designed to maintain a 1-to-1 peg with the U.S. dollar, acting as a sort of bank account for the crypto economy and offering a sound store of value, as opposed to the volatility experienced in bitcoin and other digital currencies.
When TerraUSD, or UST, and its sister token called luna dove below the $1 mark, a different kind of panic set in. The peg had been broken. Confidence evaporated. More than $40 billion in wealth was wiped out in luna’s collapse. Suddenly it was as if nothing in crypto was safe.
The leading crypto currencies cratered, with bitcoin dropping 16% in a single week, putting it down by more than half from its peak six months earlier. On the macro front, inflation had shown no sign of easing, and the central bank remained committed to raising rates as much as would be required to slow the increase in consumer prices.
In June, the bottom fell out.
Lending platform Celsius paused withdrawals because of “extreme market conditions.” Binance also halted withdrawals, while crypto lender BlockFi slashed 20% of its workforce after more than quintupling since the end of 2020.
Whether crypto is forever doomed or will eventually rebound, as Talati expects, the 2022 bloodbath exposed the industry’s many flaws and served as a reminder to investors and the public why financial regulation exists. Bankruptcies have come fast and furious since midyear, leaving clients with crypto accounts unable to access their funds, and in some cases scrapping to retrieve pennies on the dollar.