SAN FRANCISCO – No one wanted to miss out on the cryptocurrency craze.
Crypto startups have proliferated over the past two years as prices of bitcoin and other virtual currencies surged. Companies that market digital coins to investors flooded the airwaves with TV ads, newfangled lending deals offered sky-high interest rates on crypto deposits, and exchanges like Coinbase that allow investors to trade digital assets continued.
A global industry worth hundreds of billions of dollars emerged practically overnight. Now it crashes.
After weeks of plummeting cryptocurrency prices, Coinbase said Tuesday it would cut 18 percent of its workforce after being laid off at other crypto companies including Gemini, BlockFi and Crypto.com. High-profile startups like Terraform Labs have imploded, wiping out years of investments. On Sunday, an experimental crypto bank, Celsius, abruptly halted withdrawals.
The retreat in the crypto ecosystem highlights the insecurity of the structure built around these risky and unregulated digital assets. The overall value of the cryptocurrency market is down about 65 percent since the fall, and analysts are predicting the selloff will continue. Crypto company stock prices have plummeted, retailers are fleeing, and industry executives are predicting a prolonged slump that could put more companies at risk.
“The tide has receded in crypto, and what we are seeing is that many of these companies and platforms were 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 coins that are exchanged over computer networks that verify transactions, rather than through a centralized entity like a bank. For years they have 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 on its supply.
But now that stocks are plummeting, interest rates are soaring, and inflation is high, cryptocurrency prices are also collapsing, showing that they are tied to the broader market. And as people pull away from crypto investing, the outflow is exposing the shaky fundamentals of many of the industry’s most popular companies.
According to CB Insights, a company that tracks private funding, more than 62 crypto startups are now worth $1 billion or more. According to research by The Block, the industry raised more than $25 billion in venture capital for around 1,700 deals last year. OpenSea, the largest marketplace for the unique digital images known as non-fungible tokens, reached a staggering $13 billion valuation. And Wall Street banks like JPMorgan Chase, which have previously shunned crypto assets, and Fortune 500 companies like PayPal have launched crypto offerings.
Many of these companies are primed to weather a fall in cryptocurrency prices. But the cuts are likely to continue as they adjust their strategies after years of overgrowth. Perhaps among the most vulnerable are startups that have launched their own cryptocurrencies as prices plummet across the board.
Some industry experts have long said the exuberant growth of the past two years wouldn’t last forever, comparing it to the dot-com boom of the late 1990s. At the time, amidst the hysteria over the early promise of the internet, dozens of dot-com companies went public, although few of them made any money. As confidence evaporated in the early 2000s, many of the dot-coms went bust, leaving only the largest — like eBay, Amazon, and Yahoo — to survive.
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This time, investors predict there will be more survivors. “You certainly have some overhyped companies that don’t have the fundamentals,” said Mike Jones, an investor at venture firm Science Inc. “But you also have some really strong companies that are trading way below their price.”
There were warning signs that some crypto companies were not sustainable. Skeptics have pointed out that many of the most popular companies offered products backed by risky financial engineering.
For example, Terraform Labs offered TerraUSD, a so-called stablecoin with a fixed value pegged to the US dollar. The coin was hyped by its founder, Do Kwon, who raised more than $200 million from big investment firms like Lightspeed Venture Partners and Galaxy Digital, although critics warned the project was unstable.
The coin’s price was algorithmically linked to a sister cryptocurrency, Luna. When Luna’s price plummeted in May, TerraUSD fell with it – a “death spiral” that destabilized the broader market and plunged some investors into financial ruin.
This week, Celsius’s announcement that it would freeze withdrawals had a similar effect. Celsius had aggressively marketed its bank-like lending service to customers, promising returns of up to 18 percent for depositing their crypto holdings with the company.
For months, critics wondered how Celsius could sustain such high returns without jeopardizing its depositors’ funds by making risky investments. The company has come under scrutiny from several government regulators. In the end, a drop in crypto prices seemed to put more pressure on the company than it could handle.
With bitcoin price falling, Celsius announced on Sunday that it was freezing payouts “due to extreme market conditions.” The company did not respond to a request for comment.
Market instability has 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 its total, as crypto prices fell. The company’s net sales for the first three months of the year fell 27 percent year-on-year to $1.2 billion. The share price has fallen by 84 percent since the IPO last year.
This month Coinbase announced it was withdrawing job offers and extending a hiring freeze to combat the economic downturn. On Tuesday, it said it would cut about 1,100 workers.
Coinbase Chief Executive Brian Armstrong updated employees on the layoffs in a note Tuesday morning, saying the company was “growing too fast” as crypto products became popular.
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“I now realize we hired too much,” he wrote. A Coinbase spokesman declined to comment.
“In the past few years, it’s been growth at any cost,” said Ryan Coyne, Mizuho Group’s director of crypto companies and financial technology. “Now it’s all about profitable growth.”
Gemini, the crypto exchange run by billionaires Tyler and Cameron Winklevoss, also announced this month that it is laying off 10 percent of its workforce. In a memo to employees, the Winklevoss twins said the industry had entered a “crypto winter.”
But they also expressed optimism about the future of the industry. “The crypto revolution is well underway and its impact will continue to be profound,” they wrote in a memo. “But its trajectory was anything but gradual or predictable.”
Last year, Singapore-based exchange Crypto.com aired a now-infamous television commercial starring actor Matt Damon, who declared that “fortune favors the brave” as he encouraged investors to invest their money in the crypto market. Last week the CEO of Crypto.com announced that he laid off 5 percent of the staff, or 260 people. On Monday, BlockFi, a crypto lending company, announced that it would cut its workforce by about 20 percent.
Gemini and BlockFi declined to comment. A Crypto.com spokesperson said the company remains focused on “investing resources in product and engineering capabilities to create world-class products.”
Cryptocurrencies have long been volatile and prone to boom and bust cycles. In 2013, a Chinese ban on Bitcoin caused the price to plummet. In 2017, a surge in companies creating and selling their own tokens led to a surge in crypto prices, which plummeted after regulators cracked down on initial coin offerings.
These bubbles are built into the ecosystem, crypto enthusiasts said. They attract talented people to the industry who build valuable projects. Many of the most vocal cheerleaders encourage investors to “buy the dip” or invest more when prices are low.
“We’ve been in these downward spirals before and bounced back,” said Mr. Jones, the investor in Science Inc. “We all believe in the fundamentals.”
Some of the companies have also remained defiant. During Game 5 of the NBA Finals Monday night, Coinbase aired a commercial that alluded to past boom-and-bust cycles.
“Crypto is dead,” it declared. “Long live crypto.”