Cameron and Tyler Winklevoss, the Harvard-educated, Olympic-rowing, Mark Zuckerberg-suing twins that turned to championing crypto currencies in the past decade, may have been trying to shore up confidence on flailing digital assets when they belted out a cover of rock band Journey’s Don’t Stop Believin’ on a New Jersey bar stage last week.
Their off-key vocals and screeching electric guitar work, a clip of which has been doing the rounds on social media, may have had groupies covering their ears.
But it was nothing on the accusations of general tone deafness levelled against the duo, who had only announced earlier this month that they were laying off 10 per cent of the workforce of Gemini, the crypto currency exchange they set up in 2015.
The “crypto winter” is upon us, they warned at the time, saying the industry was going through a “contraction phase”, which has been compounded by “macroeconomic and geopolitical turmoil”. The Winklevosses, who used a chunk of the $65 million (€62 million) settlement received in 2008 following a lengthy battle with Zuckerberg over the origins of Facebook to start investing in bitcoin four years later, have felt the chill, too. A slump in crypto assets in the past six months is estimated to have wiped about $4 billion off their combined wealth, reducing it to less than $6.5 billion.
Still, they expressed optimism about the future of the crypto industry. “The crypto revolution is well under way and its impact will continue to be profound,” they wrote in a memo. “But its trajectory has been anything but gradual or predictable.”
The overall market value of crypto currencies, led by bitcoin (the 14-year-old grandad of the sector), ethereum and tether, has slumped by more than two-thirds from a peak of $3 trillion last November to under $1 trillion.
Cryptos have proven to be one of the riskier investments out there, as assets from stocks to bonds have been hammered over the same period, with soaring inflation globally spurring central banks into action with rate hikes – stoking fears that we are heading for a global recession.
Elsewhere, Wall Street’s S&P 500 index fell into bear territory – defined as a 20 per cent drop from recent highs – earlier this week as investors bet, correctly as it turned out, that the US Federal Reserve would hike rates by an aggressive 0.75 percentage points on Wednesday. The Nasdaq, laden with technology and other growth-dependent stocks, has slumped almost 32 per cent from its November highs.
Government bonds
Declining government bonds globally have seen the market interest rate, or yield, on 10-year US Treasury Notes jump from 1.41 per cent in the past six months to 3.49 per cent earlier this week. Closer to home, the yield on Ireland’s 10-year bonds has spiralled from 0.15 per cent to 2.55 per cent over the same period.
But the turmoil in the unregulated crypto markets has been in a league of its own.
Coinbase, an online platform for trading and storing cryptocurrencies that itself floated on the Nasdaq last year, sent a ripple through the market five weeks ago when it disclosed in its latest quarterly report that, in the event of bankruptcy, crypto assets held by the exchange could be considered property of the bankruptcy proceedings and customers could be treated as unsecured creditors.
It was compounded days later when terra, a so-called stablecoin that was supposed to move in tandem with the US dollar, and its sister currency, luna, crashed in a matter of days.
Meanwhile, last Sunday, a company called Celsius Network, a crypto alternative to a regular bank, which was offering eye-watering yields of up to 18.6 per cent for cryptocurrency holders to deposit digital savings so it could lend on and invest in the equivalent of the wholesale crypto market, stopped customers’ withdrawals after experiencing an old-fashioned bank run. The move froze almost $12 billion of customer assets.
Celsius founder and chief executive Alex Mashinsky tweeted on Wednesday that the company was “working non-stop” to resolve the matter.
“Celsius is a real worry. It [initially] denied that there were problems with withdrawals, an effect that – deliberate or not – would cause some investors to stay put and not liquidate their holdings. And then Celsius suspends withdrawals, transfers and swaps,” said Peter Oakes, founder of Fintech Ireland and former Central Bank of Ireland enforcement director. “That behaviour in a regulated market would cause an immediate investigation.”
Faith in cash
Bitcoin, the original cryptocurrency, was set up in 2009 by an as-yet unidentified person using the alias of Satoshi Nakamoto and gained traction in a post-crash world where faith in cash had plummeted. The whole concept was about cutting out central banks, which can print money and control exchange rates to a large extent, by creating a finite 21 million units of the new currency. Currently, about 18 million bitcoins are in existence.
A bitcoin can be divided out to eight decimal places, so 0.00000001 is the smallest amount that can be handled in a transaction. Unlike regular fiat currencies, which are centralised and guaranteed by central banks that control their supply and where valuations are influenced by economic and monetary policy dynamics, bitcoin is run by a decentralised network of computers around the world that keep track of all bitcoin transactions.
The record of bitcoin transactions is constantly being updated on an open public file – or ledger – known as blockchain, making it much faster than traditional bank clearing systems. It is a bit like Wikipedia, the online encyclopedia, which is maintained by a decentralised network of writers and editors around the world.
There are now more than 19,000 cryptocurrencies worldwide – compared to 180 fiat currencies like the euro, US dollar and British pound.
While the original attraction of bitcoin was that it could not be influenced by central bank actions, the almost-fourteenfold surge in its market value between the start of the Covid-19 crisis in March 2020 and its peak at almost $69,000 last November was fuelled by the trillions of dollars that central banks pumped into the financial system in response to the pandemic. It has subsequently plunged by 70 per cent.
“I think a lot of the money that was invested in crypto has been impacted by the move higher in rates, the move higher in yields, which increases the cost of funding on leveraged positions,” said David Beaton, chief investment officer with Cantor Fitzgerald Ireland, on a videocast for clients this week. “A lot of retail investors probably have borrowed to take their position in crypto currencies. And as the price of the asset falls, and as the funding costs of that leverage increase, they end up being squeezed and probably forced sellers of the asset.”
A survey published by the Winklevoss twins’ Gemini in April suggested that 18 per cent of Irish adults currently own or have previously invested in a cryptocurrency – broadly in line with figures from the UK, US and Australia, though well off the 41 per cent rates in Brazil and Indonesia.
Analysts at Glassnode, the blockchain data analytics firm, wrote this week that the bitcoin bear market is now entering its “deepest and darkest phase”, with even long-term holders feeling the pain.
Risk assets
It estimates that bitcoin’s realised price – the estimated average purchase price of all bitcoins in circulation – currently stands at $23,430. That compared to the price of a little over $20,300 at which it was changing hands on Thursday. Many of the investors that got on board during the fear-of-missing-out (Fomo) phase are now underwater.
“Cryptocurrencies stand at a vulnerable place right now for two reasons,” according to Ipek Ozkardeskaya, a senior analyst with Swissquote Bank in Switzerland. First, he said, cryptos – which were originally touted as not behaving like other assets – are clearly acting as “risk assets” at a time when investors are generally very nervous.
“And, two, we start seeing some [red] flags in some parts of this new market: the terra-luna’s collapse, the Coinbase warnings about ‘unsecured creditors’, and Celsius’s decision to halt activity on accounts are signs that the industry may not be ready for the storm,” he said.
Mark Gough, a Co Louth-based investor who first dipped into bitcoin a decade ago, says he is looking forward to taking a break from the market next month, having made “good profits” cashing in many of his chips before the recent sell-off.
“Cypto is 24/7, so it’ll be nice to get a break,” he told The Irish Times, declining to comment on the size of this holdings.
He has been wary about getting into the thousands of copycat cryptocurrencies that have cropped up in recent years, for fear of being caught up in scams or fraud.
“The crypto market right now is very similar to the dotcom bubble of 2000 and pink slip penny stocks Jordan Belford peddled in the 1980′s as [dramatised] in The Wolf of Wall Street,” he said, noting how crypto companies were the biggest TV advertisers during the Super Bowl in the US in February.
Hollywood actor Matt Damon, narrator of Inside Job, the Oscar-winning documentary on the origins of 2008 financial crash, fronted a particularly slick ad for the Crypto.com digital currency exchange, urging viewers to pile into cryptos with the tagline “Fortune Favours the Brave”. He has since been skewered by the writers of South Park and countless Twitter users.
Last week, Crypto.com said it was laying off 260 employees, or 5 per cent of its workforce, joining Gemini, Coinbase and BlockFi, a crypto savings and lending platform backed by venture capitalist Peter Thiel, in taking red pens to their cost bases in recent times.
`Swimming naked’
Many market observers predict that, while the rapidly retreating tide will expose the overhyped crypto assets and companies that have no real future, others will stand firm, just as the likes of Amazon and eBay survived the dotcom clearout at the start of the millennium. The Warren Buffett quote that “it’s only when the tide goes out that you learn who’s been swimming naked” is, once again, being paraphrased to death by commentators.
“There are very useful applications for crypto at one end, and there are crypto charlatans pumping and dumping at the other end,” says Oakes. “What confuses consumers is that many crypto firms market currencies like they are regulated and use celebrity endorsements to appeal to the masses.”
While the European Union is trying to lead the way internationally by establishing a specific regulatory framework for cryptos, its planned Markets in Crypto Assets (MiCA) rules, aimed at being in place in 2024, have their own shortcomings. For instance, while it is proposed that only crypto coins authorised in the EU can be offered to investors, the assets themselves and exchanges on which they are traded will be subject to much less oversight than is in place for other financial instruments and exchanges.
Still, European commissioner for financial services Mairead McGuinness insisted to members of the European Parliament on Tuesday that the planned rules were “the right tool to address the concerns about consumer protection, market integrity and financial stability” – amid a push for a final Bill text before the end of the month.
“This is something that is so urgent,” the Irish politician said, “given recent developments.”
