Tide turns on cryptocurrencies when the recession fears stalk markets

Tide turns on cryptocurrencies when the recession fears stalk markets

Cameron and Tyler Winklevoss, the Harvard-educated, Olympic-rowing, Mark Zuckerberg-tuned twins who turned to fighting for cryptocurrencies over the past decade, may have tried to bolster confidence in winding digital assets when they belted out a coat of rock the band Journey’s Don’t Stop Believin ‘on a bar scene in New Jersey last week.

Their off-key vocals and screaming electric guitar work, whose clips have rolled around on social media, may have had groupies in their ears.

But there was nothing about the allegations of general tone deafness directed against the duo, which had only announced earlier this month that they would lay off 10 percent of the workforce on Gemini, the cryptocurrency exchange they started in 2015.

The “crypto winter” is upon us, they warned then, saying that the industry was going through a “contraction phase”, which has been exacerbated by “macroeconomic and geopolitical turbulence”. The Winklevosses, who used part of the $ 65 million (€ 62 million) settlement obtained in 2008 after a long battle with Zuckerberg over the origins of Facebook to start investing in bitcoin four years later, have also felt the cold. A decline in cryptocurrencies over the past six months is estimated to have wiped out about $ 4 billion of their total wealth, reducing it to less than $ 6.5 billion.

Nevertheless, they expressed optimism about the future of the crypto industry. “The cryptocurrency 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 total market value of cryptocurrencies, led by bitcoin (the sector’s 14-year-old grandfather), ethereum and tether, has fallen by more than two-thirds from a peak of $ 3 trillion in November last year to below $ 1 trillion.

Cryptor has proven to be one of the more risky investments out there, as assets from equities to bonds have hammered out over the same period, with soaring global inflation spurring central banks into action with rate hikes – raising 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 percent drop from recent highs – earlier this week as investors invested, as it turned out, the US Federal Reserve would raise interest rates by an aggressive 0 , 75 percentage points on Wednesday. Nasdaq, loaded with technology and other growth-dependent stocks, has fallen nearly 32 percent from its November highs.

Government bonds

Falling global government bonds have seen market interest rates, or yields, on 10-year US government bonds jump from 1.41 percent over the past six months to 3.49 percent earlier this week. Closer to home, interest rates on Ireland’s 10-year bonds have risen from 0.15 per cent to 2.55 per cent over the same period.

But the turbulence in the unregulated crypto markets has been in a league of its own.

Coinbase, an online platform for trading and storing cryptocurrencies that floated on the Nasdaq last year, sent a ripple through the market five weeks ago when it revealed in its latest quarterly report that, in the event of bankruptcy, cryptocurrencies held by the stock exchange could be considered property in bankruptcy proceedings and customers could be treated as creditors without security.

It worsened days later when terra, a so-called stablecoin that was supposed to move in step with the US dollar, and its sister currency, luna, crashed in a few days.

At the same time, on Sunday, a company called Celsius Network, a crypto alternative to a regular bank, offered a noticeable return of up to 18.6 percent for cryptocurrency holders to deposit digital savings so they could lend and invest in the corresponding wholesale market. for the crypto market, stopped customers’ withdrawals after experiencing an old-fashioned bank run. The move froze nearly $ 12 billion in customer assets.

Celsius founder and CEO Alex Mashinsky tweeted on Wednesday that the company “worked non-stop” to solve the problem.

“Celsius is a real concern [initially] denied that there were problems with withdrawals, an effect that – consciously or not – would make some investors stay and not liquidate their holdings. And then Celsius cancels withdrawals, transfers and swaps, ”says Peter Oakes, founder of Fintech Ireland and former CEO of the Central Bank of Ireland. “That behavior in a regulated market would cause an immediate investigation.”

Believe in cash

Bitcoin, the original cryptocurrency, was created in 2009 by an as yet unidentified person who used the alias Satoshi Nakamoto and got traction in a world after the crash where the belief in cash had collapsed. 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. There are currently about 18 million bitcoins.

A bitcoin can be divided by eight decimal places, so 0.00000001 is the smallest amount that can be handled in one transaction. Unlike ordinary fiat currencies, which are centralized and guaranteed by central banks that control their offerings and where values ​​are influenced by economic and monetary policy dynamics, bitcoin is powered by a decentralized network of computers around the world that keeps track of all bitcoin transactions.

The register of bitcoin transactions is constantly updated in an open public file – or ledger – known as blockchain, which makes it much faster than traditional bank clearing systems. It’s a bit like Wikipedia, the online encyclopedia, maintained by a decentralized network of writers and editors around the world.

There are now more than 19,000 cryptocurrencies worldwide – compared to 180 fiat currencies such as the euro, the US dollar and the British pound.

Although Bitcoin’s original attraction was that it could not be affected by central bank action, the nearly fourteen-fold increase in its market value between the start of the Covid-19 crisis in March 2020 and its peak of almost $ 69,000 in November last year was driven by the trillions of dollars pumped into the financial system in response to the pandemic. It has since fallen by 70 percent.

“I think a lot of the money invested in crypto has been affected by the rise in interest rates, the rise in returns, which increases the cost of financing on leverage positions,” David Beaton, chief investment officer at Cantor Fitzgerald Ireland, said in a client videocast this week. “Many private investors have probably borrowed to take their position in cryptocurrencies. And when the price of the asset falls, and when the financing costs of that leverage increase, they end up in pressure and are probably forced to sell the asset.”

A survey published by the Winklevoss twins’ Gemini in April indicated 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, although they are far from 41 percent. in Brazil and Indonesia.

Analysts at Glassnode, the blockchain data analysis company, 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 the realized price of bitcoins – the estimated average purchase price of all bitcoins in circulation – is currently $ 23,430. That compared to the price of just over $ 20,300 that it changed owners to on Thursday. Many of the investors who came on board for fear of the miss-out (Fomo) phase are now underwater.

“Cryptocurrencies are in a vulnerable position right now for two reasons,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank in Switzerland. First, he said, cryptocurrencies – originally hailed as not behaving like other assets – clearly act as “risk assets” at a time when investors are generally very nervous.

“And two, we’re starting to see some [red] “Flags in some parts of this new market: the collapse of terra-lunas, the Coinbase warnings about” unsecured creditors “and Celsius’ decision to stop 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 bitcoin a decade ago, says he is looking forward to taking a break from the market next month, after making “good profits” by redeeming many of his chips before the last sale. of.

“Cypto is 24/7, so it will be nice to have a break,” he told The Irish Times, declining to comment on the size of this holding.

He has been wary of getting into the thousands of copied cryptocurrencies that have emerged in recent years, for fear of getting caught up in scams or frauds.

“The cryptocurrency market right now is very similar to the dotcom bubble of 2000 and the pink slippenny stocks that Jordan Belford bought in the 1980s as [dramatised] in The Wolf of Wall Street, ”he said, noting how crypto companies were the biggest TV advertisers during the US Super Bowl in February.

Hollywood actor Matt Damon, narrator of Inside Job, the Oscar-winning documentary about the origins of the 2008 financial crash, faced a particularly clever ad for Crypto.com digital currency exchange, which urges viewers to gather in crypts with the tagline “Fortune Favors the Brave”. He has since caught a cold from South Park writers and countless Twitter users.

Last week, Crypto.com said it was laying off 260 employees, or 5 percent of its workforce, and joined Gemini, Coinbase and BlockFi, a cryptocurrency-saving and lending platform backed by venture capitalist Peter Thiel, to take red pencils to its cost bases recently.

“Swimming naked”

Many market observers predict that while the fast-moving stream will reveal the over-hyped cryptocurrencies and companies that have no real future, others will stand firm, just as Amazon and eBay survived the dotcom cleanup in the early millennium. The Warren Buffett quotes that “it is only when the tide goes out that you learn who has swum naked” is again paraphrased to death by commentators.

“There are very useful crypto applications at one end, and there are cryptocurrencies that pump and dump at the other end,” says Oakes. “What confuses consumers is that many crypto companies market currencies as they are regulated and use celebrity support to appeal to the masses.”

While the European Union is trying to lead the way internationally by establishing a specific regulatory framework for crypto, its planned rules for Markets in Crypto Assets (MiCA), which aims to be in place by 2024, have their own shortcomings. For example, while it is proposed that only cryptocurrencies authorized in the EU can be offered to investors, the assets and exchanges where they are traded will be subject to much less supervision than those in place for other financial instruments and exchanges.

Still, EU Financial Services Commissioner Mairead McGuinness insisted to MEPs on Tuesday that the planned rules were “the right tool to address consumer protection, market integrity and financial stability concerns” – amid pressure for a final bill. before the end of the month.

“This is something that is so urgent,” said the Irish politician, “given the latest developments.”

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