‘The Music Has Stopped’: Crypto Firms Shake as Prices Crash

SAN FRANCISCO – No one wanted to miss the cryptocurrency craze.

Over the past two years, as the prices of Bitcoin and other virtual currencies have risen, crypto start-ups have proliferated. Companies marketing digital coins to investors have flooded the airwaves with TV ads, groundbreaking lending deals have offered sky-high interest rates on crypto deposits, and exchanges like Coinbase that allow investors to trade digital assets have continued to hire.

A global industry worth hundreds of billions of dollars has grown almost overnight. Now it is collapsing.

After weeks of falling cryptocurrency prices, Coinbase said on Tuesday it was cutting 18% of its employees, following layoffs at other crypto companies like Gemini, BlockFi and Crypto.com. Leading start-ups like Terraform Labs have imploded, wiping out years of investment. On Sunday, an experimental crypto bank, Celsius, abruptly halted withdrawals.

The decline of the crypto ecosystem illustrates the precariousness of the structure built around these risky and unregulated digital assets. The total value of the cryptocurrency market has fallen around 65% since the fall, and analysts predict the selloff will continue. Crypto company stock prices have crashed, retail traders are fleeing, and industry executives are predicting a prolonged recession that could put more businesses at risk.

“The tide has gone out in crypto, and we see that many of these companies and platforms were built on shaky and unsustainable foundations,” said Lee Reiners, a former Federal Reserve official who teaches at the Duke University Law School. “The music has stopped.”

Cryptocurrencies are digital coins exchanged using networks of computers 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 limit built into its supply.

But now that stocks are collapsing, interest rates are skyrocketing, and inflation is high, cryptocurrency prices are also collapsing, showing that they have become tied to the overall market. And as people pull back from crypto investments, cash outflows expose the shaky foundations of many of the most popular companies in the industry.

More than 62 crypto startups are now worth $1 billion or more, according to CB Insights, a firm that tracks private funding. Last year, the industry received more than $25 billion in venture capital funding in about 1,700 deals, according to research by The Block. OpenSea, the largest marketplace for unique digital images known as non-fungible tokens, has reached a staggering $13 billion valuation. And Wall Street banks such as JPMorgan Chase, which previously shunned crypto assets, and Fortune 500 companies like PayPal have rolled out 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. Perhaps among the most vulnerable are start-ups that have launched their own cryptocurrencies, as prices plummet across the board.

Some industry experts have long said that the exuberant growth of the past two years won’t last forever, likening it to the dot-com boom of the late 1990s. At the time, dozens of dot-com companies com were going public amid hysteria over early internet promises, even though few of them were making money. When trust evaporated in the early 2000s, many dot-coms went bankrupt, leaving only the big ones – such as eBay, Amazon and Yahoo – standing.

This time, investors predict there will be more survivors. “You definitely have overhyped companies that don’t have the fundamentals,” said Mike Jones, an investor at venture capital firm Science Inc. “But you also have very strong companies that are trading well below that. they should.”

There have been warning signs that some crypto companies are unsustainable. Skeptics pointed out that many of the most popular companies offered products based on risky financial engineering.

Terraform Labs, for example, offered TerraUSD, a so-called stablecoin with a fixed value tied to the US dollar. The coin was hyped by its founder, Do Kwon, who has raised over $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 linked to a sister cryptocurrency, Luna. When Luna’s price fell in May, TerraUSD fell in tandem – a “death spiral” that destabilized the entire market and sent some investors into financial ruin.

This week, Celsius’ announcement of a withdrawal freeze had a similar impact. Celsius had aggressively marketed its bank-like loan service to customers, promising returns of up to 18% if they deposited their crypto holdings with the company.

For months, critics have wondered how Celsius could maintain such high returns without jeopardizing its depositors’ funds with risky investments. The company has caught the eye of several state regulators. Ultimately, a drop in crypto prices seemed to put the company under more pressure than it could handle.

With Bitcoin’s price plummeting, Celsius announced on Sunday that it was freezing withdrawals “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% of its total, as crypto prices fell. The company’s net revenue in the first three months of the year fell 27% from a year earlier to $1.2 billion. Its share price has fallen 84% since its IPO last year.

This month, Coinbase announced that it would rescind job postings and extend the hiring freeze to combat the economic downturn. On Tuesday, he announced he would cut about 1,100 workers.

Brian Armstrong, chief executive of Coinbase, informed employees of the layoffs in a memo Tuesday morning, saying the company “grew too quickly” as crypto products became popular.

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

“It’s been growth at all costs over the past few years,” said Ryan Coyne, who covers crypto companies and fintech at Mizuho Group. “It is now focused on profitable growth.”

Gemini, the crypto exchange run by billionaires Tyler and Cameron Winklevoss, also announced this month that it was laying off 10% of its workforce. In a memo to staff, the Winklevoss twins said the industry has entered a “crypto winter.”

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

Last year, Singapore-based exchange Crypto.com aired a now-notorious TV advert featuring actor Matt Damon, who said ‘fortune smiles on the brave’ as he encouraged investors to place their money in the crypto market. Last week, the chief executive of Crypto.com announcement that he was laying off 5% of the staff, or 260 people. On Monday, BlockFi, a crypto lending operation, announced that it was reducing its staff by around 20%.

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 plummet. In 2017, a proliferation of companies creating and selling their own tokens led to a spike in crypto prices, which crashed after regulators clamped down on so-called initial coin offerings.

These bubbles are built into the ecosystem, crypto enthusiasts said. They attract talented people into the industry, who then 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 we’ve recovered,” said Mr. Jones, the Science Inc. investor. “We all believe in fundamentals.”

Some of the companies also remained defiant. During Game 5 of the NBA Finals on Monday night, Coinbase ran an ad alluding to past boom and bust cycles.

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

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