Crypto

Crypto Firms Tremble as Prices Fall

SAN FRANCISCO — Nobody wanted to miss out on the cryptocurrency craze.

In the last two years, as the prices of Bitcoin and other virtual currencies have increased, crypto startups have proliferated. Companies that trade digital currencies for investors flooded the airwaves with TV commercials, novelty lending deals offered sky-high interest rates on crypto deposits, and exchanges like Coinbase that allow investors to trade digital assets continued to hire.

A global industry worth hundreds of billions of dollars emerged practically overnight. Now it is collapsing.

After weeks of plummeting cryptocurrency prices, Coinbase said on Tuesday it would cut 18 percent of its employees, following layoffs at other crypto firms like Gemini, BlockFi and Crypto.com. High-profile startups like Terraform Labs have collapsed, wiping out years of investment. On Sunday, an experimental crypto bank, Celsius, abruptly stopped withdrawals.

The pushback in the crypto ecosystem illustrates the precariousness of the structure built around these risky and unregulated digital assets. The total value of the cryptocurrency market is down 65 percent since the fall, with analysts predicting the sell-off will continue. Share prices of cryptocurrency companies have plummeted, retail traders are fleeing, and industry executives are predicting a prolonged decline that could put more companies in jeopardy.

“The tide has turned in crypto, and we are seeing 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 School of Law. “The music has stopped.”

Cryptocurrencies are digital currencies that are exchanged using computer networks that verify transactions, rather than 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 to its supply.

But now that stocks are crashing, interest rates are soaring and inflation is high, cryptocurrency prices are also crashing, showing that they have become tied to the broader market. And as people withdraw from cryptocurrency investments, the exit exposes the shaky foundations of many of the most popular companies in the industry.

According to CB Insights, a firm that tracks private funding, there are now more than 62 crypto startups worth $1 billion or more. Last year, the industry received more than $25 billion in venture funding across roughly 1,700 deals, according to research by The Block. OpenSea, the largest marketplace for unique digital images known as non-fungible tokens, reached a staggering valuation of $13 billion. And Wall Street banks like JPMorgan Chase, which previously shunned crypto assets, and Fortune 500 companies like PayPal launched crypto offerings.

Many of these companies are equipped to survive a drop in cryptocurrency prices. But the cuts are likely to continue as they adjust their strategies after years of excessive growth. Among the most vulnerable may be startups that launched their own cryptocurrencies, as prices plummet across the board.

Some industry insiders have long said the exuberant growth of the past two years wasn’t going to last forever, comparing it to the dot-com boom of the late 1990s. At the time, dozens of dot-com companies they were going public amid hysteria about the early promise of the Internet, though few of them were making any money. When confidence evaporated in the early 2000s, many of the dot-coms went bankrupt, leaving only the biggest ones like eBay, Amazon and Yahoo standing.

This time, investors predict that there will be more survivors. “There are certainly some overvalued companies that don’t have the fundamentals,” said Mike Jones, an investor at venture firm Science Inc. “But there are also some really strong companies that are trading well below what they should be.”

There have been 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.

Terraform Labs, for example, offered TerraUSD, a stablecoin with a fixed value pegged to the US dollar. The coin was promoted by its founder, Do Kwon, who raised more than $200 million from major investment firms such as Lightspeed Venture Partners and Galaxy Digital, even as critics warned the project was unstable.

The price of the coin was algorithmically pegged to a sister cryptocurrency, Luna. When Luna’s price crashed in May, TerraUSD fell in tandem: a “death spiral” that destabilized the broader market and plunged some investors into financial ruin.

This week, Celsius’s announcement to freeze withdrawals had a similar impact. Celsius had aggressively marketed its bank-like lending service to clients, promising returns of up to 18 percent if they deposited their cryptocurrencies with the company.

For months, critics wondered how Celsius could sustain such high returns without jeopardizing its depositors’ funds through risky investments. The company has drawn scrutiny from various state regulators. In the end, a drop in cryptocurrency prices seemed to put the company under more pressure than it could bear.

With the price of Bitcoin falling, Celsius announced on Sunday that it would freeze withdrawals “due to extreme market conditions.” The company did not respond to a request for comment.

The market instability has also triggered a crisis at Coinbase, the largest cryptocurrency exchange in the US. Between the end of 2021 and the end of March, Coinbase lost 2.2 million active customers, or 19 percent of its total , as cryptocurrency prices fell. The company’s net income in the first three months of the year was down 27 percent from a year earlier, to $1.2 billion. Its share price has plunged 84 percent since it went public last year.

This month, Coinbase said it would rescind job postings and extend a hiring freeze to combat the economic downturn. On Tuesday, he said he would lay off some 1,100 workers.

Coinbase CEO Brian Armstrong informed employees of the layoffs in a note Tuesday morning, saying the company was “growing too fast” as crypto products became popular.

“It is now clear to me that we over-hire,” he wrote. A Coinbase spokesperson declined to comment.

“There had been growth at all costs in recent years,” said Ryan Coyne, who covers crypto and fintech companies at Mizuho Group. “Now it has turned into profitable growth.”

Gemini, the cryptocurrency exchange led by billionaires Tyler and Cameron Winklevoss, also announced this month that it would be laying off 10 percent of its workforce. In a memo to staff, the Winklevoss twins said the industry had entered a “crypto winter.”

But they also expressed optimism about the future of the industry. “The cryptocurrency revolution is underway and its impact will continue to be profound,” they wrote in a memo. “But his trajectory has been anything but gradual or predictable.”

Last year, the Singapore-based exchange Crypto.com aired a now-notorious TV commercial starring actor Matt Damon, who declared that “fortune favors the brave” while encouraging investors to put their money into the crypto market. Last week, the CEO of Crypto.com Announced that he was laying off 5 percent of the staff, or 260 people. On Monday, BlockFi, a crypto lending operation, said it was reducing its staff 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 develop world-class products.”

Cryptocurrencies have long been volatile and prone to boom and bust cycles. In 2013, a Chinese ban on Bitcoin caused its price to drop. In 2017, a proliferation of companies creating and selling their own tokens caused a spike in cryptocurrency prices, which plummeted after regulators cracked down on so-called initial coin offerings.

These bubbles are built into the ecosystem, crypto enthusiasts said. They attract talented people to the industry, who continue to build worthwhile projects. Many of the more vocal cheerleaders encourage investors to “buy the dip” or invest more when prices are low.

“We’ve been in these downward spirals before and we bounced back,” said Jones, the investor at Science Inc. “We all believe in fundamentals.”

Some of the companies have also remained defiant. During Game 5 of the NBA Finals on Monday night, Coinbase ran a commercial that alluded to past cycles of boom and bust.

“Crypto is dead,” he declared. “Long live crypto.”

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