Why cryptocurrencies went from the next hot thing to a complete meltdown

A Bitcoin ATM is seen at a Brooklyn Heights subway station in New York City on June 13. Bitcoin and other cryptocurrencies have fallen in value over the past few days.

Michael M Santiago/Getty Images


Hide caption

toggle caption

Michael M Santiago/Getty Images


A Bitcoin ATM is seen at a Brooklyn Heights subway station in New York City on June 13. Bitcoin and other cryptocurrencies have fallen in value over the past few days.

Michael M Santiago/Getty Images

The world of cryptocurrencies is in chaos.

Just a few months ago, crypto companies were heavily promoting during the Super Bowl after virtual currencies enjoyed a dizzying rally in 2021.

Today, Bitcoin and other cryptos are crashing, and companies like Coinbase, which operates the largest crypto exchange in the US, are announcing layoffs.

“The crypto house is on fire and everyone just rushes to the exits because trust in the space is completely lost,” says Ed Moya, a senior market strategist at finance firm Oanda.

Here’s what’s up.

Why are cryptos falling so much?

Because they are affected by the same factors that affect stocks and other assets.

Consumer prices are rising at the fastest annual pace in over 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 that it could hike them again by the same amount at its next meeting in July if needed to cool prices.

Higher interest rates make borrowing more expensive for people and businesses, raising concerns of an economic recession.

Stocks have fallen dramatically since records set in January, with the broad S&P 500 index entering a bear market this week (when an index falls 20% or more from its recent high).

Cryptocurrencies were hardly immune. Since bitcoin hit an all-time high in November, the world’s most popular digital currency has fallen in value by about 70%, and its peers are suffering too. Ether is down about 70% this year, as is Dogecoin.

Bitcoin supporters have always claimed that the digital currency is an “inflation hedge”, but in fact it has not behaved as such.

As tech company stocks plummet, Bitcoin’s value has also fallen.

“What this episode, this crash in crypto prices, shows is that, by and large, cryptocurrencies are speculative financial assets that are subject to macroeconomic forces like interest rate changes,” 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 about the Fed’s aggressive policy on inflation have raised concerns about the impact on the economy.

Spencer Platt/Getty Images


Hide caption

toggle caption

Spencer Platt/Getty Images


Traders work on the floor of the New York Stock Exchange (NYSE) in New York City on Thursday. Fears about the Fed’s aggressive policy on inflation have raised concerns about the impact on the economy.

Spencer Platt/Getty Images

So what does this mean for cryptocurrency companies?

The sharp decline in cryptocurrencies is causing trouble for some businesses.

Celsius, which accepts cryptocurrency deposits from individuals and lends them out, has halted withdrawals because it is facing financial difficulties. Binance, a cryptocurrency exchange, halted bitcoin withdrawals for several hours on Monday.

Celsius’ troubles are eroding confidence in the broader cryptocurrency space just weeks after the collapse of a stablecoin called TerraUSD.

Crypto companies are responding by reassessing their plans for the future.

Coinbase, a cryptocurrency exchange platform, reduced its staff by nearly a fifth.

In a memo to employees, the company’s CEO said Coinbase was “growing too fast.”

“We seem to be entering a recession,” wrote Brian Armstrong.

Some cryptocurrency advocates still believe that a “crypto winter” could lead to a “crypto spring.” In the past, deep downturns have led to strong recoveries.

But according to Moya, the analyst at Oanda, the economic landscape is different now, as are crypto’s prospects.

As the Fed continues to hike rates aggressively and inflation is still high, there is likely to be more pain in all markets, including cryptocurrencies.

Fed Chair Jerome Powell speaks during a news conference at the Federal Reserve Building in Washington, DC on Wednesday. The central bank hiked interest rates by three-quarters of a percentage point, the largest hike since 1994.

Olivier Douliery/AFP via Getty Images


Hide caption

toggle caption

Olivier Douliery/AFP via Getty Images


Fed Chair Jerome Powell speaks during a news conference at the Federal Reserve Building in Washington, DC on Wednesday. The central bank hiked interest rates by three-quarters of a percentage point, the largest hike since 1994.

Olivier Douliery/AFP via Getty Images

What dose does this take for those who got into cryptos?

It was a rude awakening for the millions of people who bought cryptocurrencies, especially if they went insane last year.

Prasad says 2021 was “the peak of cryptomania.”

The combined value of all digital currencies in the world rose to $3 trillion. Crypto companies have secured sponsorship deals with professional sports teams, and Coinbase, Crypto.com, eToro, and FTX have spent millions of dollars buying ads during the Super Bowl.

Crypto.com hired actor Matt Damon to narrate, and an FTX commercial featured grumpy comedian Larry David.

The message from these companies was that crypto represents the future of finance and it is best not to miss out.

“The technological muddle of cryptocurrency has sucked in many retail investors who were unaware of the kind of risks they were taking,” says Prasad.

Today, the total value of the crypto market has shrunk to around $1 trillion. And if you bought bitcoin on February 14th, the day after that Super Bowl ad bonanza, it’s now worth about half what you paid for it.

The exterior of the Crypto.com Arena is seen on January 26th in Los Angeles. Many cryptocurrency companies hired celebrities to showcase their products and signed sponsorship deals.

Rich Fury/Getty Images


Hide caption

toggle caption

Rich Fury/Getty Images


The exterior of the Crypto.com Arena is seen on January 26th in Los Angeles. Many cryptocurrency companies hired celebrities to showcase their products and signed sponsorship deals.

Rich Fury/Getty Images

What does this mean for the regulation of the sector?

The rise of amateur investors coupled with the growing sophistication of some cryptocurrency products are worrying regulators.

Crypto markets are still fairly new, and even the most basic things are unclear, such as who is responsible for monitoring the space.

Currently, both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) claim oversight over parts of the crypto market.

“If there’s no guidance at all, people will be taken advantage of, and we want to prevent that,” said Cam Harvey, professor of finance at Duke University. “Right now we basically have nothing.”

The SEC is stepping up enforcement action against crypto companies and considering new rules. Meanwhile, President Biden issued an executive order asking government agencies to make policy recommendations.

And in Congress, Sen. Cynthia Lummis (R-WY) has partnered with Sen. Kirsten Gillibrand (D-NY) on the first comprehensive crypto legislation. The bill would give the Commodity Futures Trading Commission more regulatory powers.

Still, for now, many analysts don’t think the broader financial system is at risk. The overall value of the cryptocurrency market is still less than the overall market value of a large company like Apple.

But this recent downturn has raised some serious concerns.

Leave a Comment