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‘The Music Has Stopped’: Crypto Firms Tremble as Prices Fall


SAN FRANCISCO — No one wanted to miss the cryptocurrency mania.

In the past two years, as the prices of Bitcoin and other virtual currencies soared, crypto startups grew. Companies marketing digital coins to investors flooded the airwaves with TV commercials, newfangled lending transactions offered skyrocketing interest rates on crypto deposits, and exchanges like Coinbase that allow investors to trade digital assets continued to hire sprees.

A global industry worth hundreds of billions of dollars emerged almost overnight. Now it collapses.

After weeks of plummeting cryptocurrency prices, Coinbase said on Tuesday it was cutting 18 percent of its employees, following layoffs at other crypto firms such as Gemini, BlockFi and Crypto.com. High-profile start-ups like Terraform Labs have imploded, wiping out years of investment. On Sunday, an experimental crypto bank, Celsius, abruptly stopped withdrawing.

The downturn in the crypto ecosystem illustrates the uncertainty of the structure built around these high-risk and unregulated digital assets. The total value of the cryptocurrency market has decreased by about 65 percent since the fall, and analysts predict the sell-off will continue. Share prices of crypto companies have plunged, retailers flee and industry executives predict a prolonged slump that could put more companies at risk.

“The tide has subsided in crypto and we see many of these companies and platforms 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 using networks of computers that verify transactions, rather than a centralized entity such as 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 with stocks crashing, interest rates rising and inflation high, cryptocurrency prices are also collapsing, showing that they have become tied to the general market. And as people pull out of crypto investments, the outflow is exposing the unstable foundations of many of the industry’s most popular companies.

More than 62 crypto startups are now worth $1 billion or more, according to CB Insights, a company that tracks private finance. Last year, according to research by The Block, the industry received more than $25 billion in venture capital for about 1,700 deals. OpenSea, the largest marketplace for the unique digital images known as non-replaceable tokens, hit a staggering $13 billion valuation. And Wall Street banks like JPMorgan Chase, which previously eschewed crypto assets, and Fortune 500 firms like PayPal have been rolling out crypto offerings.

Many of these companies are equipped to survive a drop in cryptocurrency prices. But the austerity measures are likely to continue as they adjust their strategies after years of excessive growth. One of the most vulnerable could be start-ups that have launched their own cryptocurrencies as prices plummet across the board.

Some industry experts have long said that the buoyant growth of the past two years wouldn’t last forever, compared to the dotcom boom of the late 1990s. At the time, dozens of dotcom companies went public amid hysteria over the early promise of the Internet, though few of them made any money. When confidence evaporated in the early 2000s, many of the dotcoms went bankrupt, leaving only the largest, such as eBay, Amazon and Yahoo, afloat.

This time, investors predict that there will be more survivors. “You definitely have some overhyped companies that don’t have the fundamentals,” said Mike Jones, an investor at the venture firm Science Inc. “But you also have some really strong companies that trade way below par.”

There are warning signs that some crypto companies were not sustainable. Skeptics have pointed out that many of the most popular companies offered products based on 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 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. As Luna’s price plummeted in May, TerraUSD collapsed – a “death spiral” that destabilized the broader market and plunged some investors into financial ruin.

This week, Celsius’s announcement that it would freeze footage had a similar impact. Celsius had aggressively marketed its bank-like lending service to customers, promising returns of up to 18 percent if they deposited their crypto holdings with the company.

For months, critics wondered how Celsius could sustain such high returns without endangering its depositors’ money through risky investments. Company examined of various state regulators. In the end, a drop in crypto prices turned out to be putting more pressure on the company 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 led to 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 the total, as crypto prices fell. The company’s net sales in the first three months of the year shrank 27 percent from a year earlier, to $1.2 billion. The share price has fallen 84 percent since it went public last year.

This month, Coinbase said it would withdraw job offers and extend a hiring freeze to fight the economic downturn. On Tuesday, it said it would cut about 1,100 employees.

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

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

“It had grown at all costs in recent years,” said Ryan Coyne, who handles crypto firms and financial technology at the Mizuho Group. “It has now turned into profitable growth.”

Gemini, the crypto exchange headed by billionaires Tyler and Cameron Winklevoss, also announced this month that it would lay off 10 percent of its staff. 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 crypto revolution is well underway and its impact will continue to be significant,” they wrote in a memo. “But the trajectory has been anything but gradual or predictable.”

Last year, Singapore-based exchange Crypto.com broadcast a now-infamous TV commercial break starring actor Matt Damon, who stated that “fortune favors the brave” while encouraging investors to put their money into the crypto market. Last week, the CEO of Crypto.com said announced that he laid off 5 percent of the workforce, or 260 people. On Monday, BlockFi, a crypto lending operation, said it reduced its workforce by about 20 percent.

Gemini and BlockFi declined to comment. A Crypto.com spokesperson said the company continues to focus 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 the price to fall. In 2017, a proliferation of companies creating and selling their own tokens led to a surge in crypto prices, which crashed after regulators cracked down on the so-called initial coin offering.

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

“We have been in this downward spiral before and have recovered,” said Science Inc. investor Mr. Jones. “We all believe in the basics.”

Some companies also remained challenging. During Game 5 of the NBA Finals on Monday night, Coinbase aired a commercial that hinted at past boom-and-bust cycles.

“Crypto is dead,” it declared. “Long live cryptocurrency.”

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