As Crypto Crash Erases Approx. $1 Trillion in Market Value Users Say, “Thanks But No Thanks” To Bailouts

As Crypto Crash Erases Approx. $1 Trillion In Market Value Users Say Thanks But No Thanks To Bailouts, Bail-ins, Executive Orders, Circuit Breakers, Federal Reserve Stimulus Or Even A Need To Panic! As Crypto Crash Erases Approx. $1 Trillion in Market Value User Say Thanks But No Thanks To Bailouts

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For Bitcoin, there’s only been one constant recently: decline after decline after decline. And the superlatives have piled up really quickly.

With the Federal Reserve intending to withdraw stimulus from the market, riskier assets the world over have suffered. Bitcoin, the largest digital asset, lost more than 12% Friday and dropped below $36,000 to its lowest level since July.

Since its peak in November, it has lost over 45% of its value. Other digital currencies have suffered just as much, if not more, with Ether and meme coins mired in similar drawdowns.

Bitcoin’s decline since that November high has wiped out more than $600 billion in market value, and over $1 trillion has been lost from the aggregate crypto market. While there have been much larger percentage drawdowns for both Bitcoin and the aggregate market, this marks the second-largest ever decline in dollar terms for both, according to Bespoke Investment Group.

“It gives an idea of the scale of value destruction that percentage declines can mask,” wrote Bespoke analysts in a note. “Crypto is, of course, vulnerable to these sorts of selloffs given its naturally higher volatility historically, but given how large market caps have gotten, the volatility is worth thinking about both in raw dollar terms as well as in percentage terms.”

With the Fed’s intentions rocking both cryptocurrencies and stocks, a dominant theme has emerged in the digital-asset space: cryptos have twisted and turned in nearly exactly the same way as equities have.

“Crypto is reacting to the same kind of dynamics that are weighing on risk-assets globally,” said Stephane Ouellette, chief executive and co-founder of institutional crypto-platform FRNT Financial. “Unfortunately for some of the mature projects like BTC, there is so much cross-correlation within the crypto asset class it’s almost a certainty that it falls, at least temporarily in a broader alt-coin valuation contraction.”

Crypto-centric stocks also dropped on Friday, with Coinbase Global Inc. at one point losing nearly 16% and falling to its lowest level since its public debut in the spring of 2021, Bloomberg data show.

MicroStrategy Inc. tumbled 18% while the Securities and Exchange Commission said the company can’t strip out Bitcoin’s wild swings from the unofficial accounting measures it touts to investors. The enterprise software company’s pile of Bitcoin has effectively made its shares a proxy for the digital asset.

Meanwhile, the Biden administration is preparing to release an initial government-wide strategy for digital assets as soon as next month and task federal agencies with assessing the risks and opportunities that they pose, according to people familiar with the matter.

Antoni Trenchev,, Nexo co-founder and managing partner, cites Bitcoin’s correlation to the tech-heavy Nasdaq 100, which right now is near the highest in a decade.

“Bitcoin is being battered by a wave of risk-off sentiment. For further cues, keep an eye on traditional markets,” he said. “Fear and unease among investors is palpable.”

Take also the correlation between Bitcoin and Cathie Wood’s ARK Innovation ETF (ticker ARKK), a pandemic poster-child of speculative risk-taking. That correlation stands at around 60% year-to-date, versus about 14% for the price of gold, according to Katie Stockton, founder and managing partner of Fairlead Strategies, a research firm focused on technical analysis. It’s “reminding us to categorize Bitcoin and altcoins as risk assets rather than safe havens,” she said.

Meanwhile, more than 239,000 traders had their positions closed over the past 24 hours, with liquidations totaling roughly $874 million, according to data from Coinglass, a cryptocurrency futures trading and information platform.

Though liquidations have spiked, the numbers are relatively muted when compared to previous declines, according to Noelle Acheson, head of market insights at Genesis Global Trading.

Acheson points out that Bitcoin’s one-week skew, which compares the cost of bearish options to bullish ones, spiked to almost 15% on Wednesday compared to an average of about 6% in the past seven days.

“This flagged a jump in bearish sentiment, in line with overall market jitters given the current macro uncertainty,” she said.

Kara Murphy, chief investment officer at Kestra Investment Management, said cryptocurrencies have a life of their own but that the recent slump is rational.

“It makes sense as people start to retrench a little bit, look for something that’s a little bit more solid, they’re gonna move away from crypto,” she said. “On the margin, with folks becoming more risk averse, crypto will suffer from that.”

Crypto Collapse Fails To Sway Faithful’s Infinite Supply of Optimism

* Market Could See Some Capitulation Before Long: Miller Tabak
* Proponents Say Liquidations Often Serve To Cut Out The Froth

With the blink of an eye, more than a trillion dollars in crypto-market value has evaporated.

The jarring downturn that’s been a hallmark of digital assets in recent weeks continued to play out this week and into Saturday, with Bitcoin at one point losing more than 15% during that stretch. The coin, which is the largest digital token, has dropped more than 50% from a recent peak, and many other cryptocurrencies have lost just as much, if not more.

The carnage superlatives have been easy to come by: Friday’s decline led to the liquidation of more than $1.1 billion in crypto futures positions and overall more than $1 trillion in market value has been destroyed since the last peak. In other words, the meltdown is pouring salt on an already-deep wound.

“Digital-currency markets in total have been challenged this month,” said Jonathan Padilla, co-founder of Snickerdoodle Labs, a blockchain company focused on data privacy. “There’s definitely some pain there.”

HODLing #Bitcoin is painful.

If you survive the journey, you will truly know what HODL means.

— Dan Held (@danheld) January 21, 2022

Even long-time bulls are starting to wonder out loud at what point the battering might end. Famed crypto investor Mike Novogratz mused on Twitter that “this will be a year where people realize being an investor is a difficult job.”

But, crypto fans have an infinite supply of optimism and many are confident that with Bitcoin already spending two-thirds of the year in the red, better times could come soon.

At some point, sellers will become exhausted and the market could see some capitulation soon, said Matt Maley, chief market strategist for Miller Tabak + Co.

“When that happens, the institutions will come back in in a meaningful way,” he said. “Once the asset class becomes more washed-out, they’ll have a lot more confidence to come back in and buy them. They know that cryptos are not going away, so they’ll have to move back into them before long.”

The news cycle has been relentless. Regulators from Russia, the U.K., Singapore and Spain all announced interventions that could undermine crypto companies looking to grow in those regions, while tightening U.S. monetary policy left traders anticipating several interest rate hikes this year.

The Bloomberg Galaxy DeFi Index of digital coins involved in decentralized finance fell 14% in the past week.

That weighed on Bitcoin enough to send it to within a whisker of $34,000 on Saturday.

Bitcoin’s decline since its November high has wiped out roughly $600 billion and greater than $1 trillion has been lost from the aggregate crypto market.

While there have been much larger percentage drawdowns for both Bitcoin and the aggregate market, this marks the second-largest ever decline in dollar terms for both, according to a Friday note from Bespoke Investment Group. The largest ever occurred last summer, when a decline that peaked at the end of July wiped out $646 billion for Bitcoin.

Roughly 290,000 traders had their positions closed over the 24 hours through Friday evening in New York, with liquidations totaling more than $1.1 billion, according to data from Coinglass.

Crypto Liquidations Leave Their Mark

Bitcoin price fall pushes out traders as crypto seeks a new baseline.

As Crypto Crash Erases Approx. $1 Trillion in Market Value Users Say, "Thanks But No Thanks" To Bailouts

It remains to be seen if Bitcoin’s tumble below the psychological level of $40,000 will serve as an inflection point. Crypto proponents say heavy liquidations often serve to cut out the froth in easy-win asset speculation, helping to solidify new bottoms in the market.

“Fear and unease among investors is palpable,” said Antoni Trenchev, managing partner at Nexo. “If we see a bigger selloff in equities, expect the Fed to verbally intervene to calm nerves and that’s when Bitcoin and other cryptos will bounce.”

As the dust settles, key technical indicators show things could be about to look up for Bitcoin. The fall in the crypto’s price on Friday triggered a drop below the lower band of its trading envelope. Traditionally, this has been a sign that the selloff might be overdone, and a reversion to the mean is in play but Saturday’s nudge lower suggests the bears remain in charge.

“For now, Bitcoin is up against the wall after falling below $40,000. A swift bounce above that key technical and psychological level can’t be ruled out,” added Trenchev. “Failing a quick reversal, I’m not excluding Bitcoin re-tests $30,000 before the Fed changes tack, but that ought to be the bottom, at least in the mid-term. And from there, I think we can have a nice leg up.”

Bitcoin has been trading largely in tandem with the Nasdaq 100, whose members include high-growth tech stocks that have been dinged during this year’s selloff.

That makes sense to Art Hogan, chief market strategist at National Securities, who said that it’s useful to think of cryptocurrencies as living in the same space as other speculative sectors, including special-purpose acquisition companies (SPACs) and electric-vehicle makers.

“When we’re in an environment where all of those riskier assets are selling off, crypto is going to find itself doing the same,” Hogan said. “When the Nasdaq 100 or any of the other more-speculative, rapid-growth, momentum-type asset classes start to gain some traction, so will cryptocurrencies.”

Updated: 1-27-2022

The Crypto Crash Strengthens The Case For Crypto

The plunge shows that prices can fall sharply and suddenly without inducing a more general contagion.

Crypto prices are tumbling. By one account, crypto assets have lost about $1.35 trillion globally since November, with some falling in price by 80% or more. Many investors feel a real pinch.

The good news is that the global economy, or for that matter American society, is not poorer. And thus there need not be much of an economic response to adjust to these new prices. (The flipside is that if crypto prices see another steep increase, there won’t be much cause to celebrate.)

Over time I have moved from crypto-skeptical to what I call crypto-hopeful. So this is a good moment to assess how radically lower crypto prices will affect how socially valuable crypto will prove to be.

One possibility is that crypto prices, even at current levels, are mostly a bubble and that crypto won’t do much that is useful. In that case lower crypto prices mean less purchasing power for crypto holders, but that doesn’t translate into less wealth for the economy as a whole.

People who don’t own much crypto will, over the longer run, have greater command over goods and services. The crypto holders who were bidding against them will, over time, spend less. Purchasing power will shift to the non-crypto holders.

In these scenarios the psychological losses are felt before the psychological gains. Most crypto holders are unhappy right now, but few non-holders are celebrating their (modest) boost in purchasing power.

Over time, however, these non-crypto-holders will be able to buy more at better prices than they had been expecting. What the crypto holders lose will be roughly about what the non-crypto holders gain.

Consider another scenario — one where crypto is poised to provide a lot of useful services. Perhaps crypto assets will underpin useful savings and lending through DeFi, execute online smart contracts at low cost, and provide useful currencies and stores of value for the pending metaverse.

Most of these services are not yet available, at least not in a way that they will be eventually. So if a lower crypto price is a signal that these services won’t be as valuable as expected, that means society will be somewhat less wealthy in the future. This doesn’t much harm living standards today.

That is a worst-case scenario that I think is unlikely, even granted that the crypto revolution succeeds. Instead, it is more likely that the long-term value of crypto is robust and that the current crypto price declines are driven by risk and liquidity issues.

The plunge in crypto prices doesn’t seem to be the result of a newfound understanding that crypto institutions are irrevocably flawed. Instead it is due to an unpleasant mix of persistent inflation, higher real interest rates, lower equity prices for the major technology companies and geopolitical fears.

All of that is bad news — but not necessarily bad news about crypto. The same crypto fundamentals are in place. Higher real interest rates make the future less valuable in present discounted value terms, but crypto has no special place in that misfortune.

The bottom line is that even a large fall in crypto prices won’t create a lot of social worries. The Federal Reserve doesn’t have to panic, and the regulators don’t have to take action. Regardless of whether you are a crypto optimist or a crypto pessimist, at the social level the loss of that $1.35 trillion in value is largely imaginary.

This lack of correlation between major disasters and the decline in crypto prices could prove to be good news for crypto in the longer run. For one thing, it shows crypto prices can fall sharply and suddenly without inducing a more general contagion. And while some blockchains have been slow to process transactions, overall the crypto world has taken this major shock in stride.

Another lesson is not to confuse high prices with high social usefulness. Food prices plummeted during most of the 20th century, for example, even as food continued to provide increasing value to consumers. More vigorous competition in crypto markets could, in similar fashion, bring lower rather than higher prices, even as crypto-enabled services proved increasingly valuable.

It’s a good thing that crypto price volatility is so manageable at the social level — because we’re probably in for a lot more of it.

Updated: 4-27-2022

Hacked Crypto Startups Get Capital Infusions From Investors (No Federal Bailouts Needed)

Venture capitalists aim to protect investments and restore user trust.

Recent high-profile heists targeting cryptocurrency projects haven’t scared away venture capitalists and other investors. In fact, some backers are doubling down, investing more in hack victims.

Crypto platform Wormhole received a $320 million infusion from owner Jump Trading LLC in February, just a day after a hack. Game developer Sky Mavis Ltd. quickly put together $150 million from investors to help reimburse victims of a March hack targeting the online game “Axie Infinity.”

Now, a decentralized financial platform known as Beanstalk aims to raise more than $76 million to fill the hole from a theft this month.

Such infusions can prop up blockchain projects in crisis and protect investors’ equity. Lawyers and security experts warn that such funding in a largely unregulated sector increasingly targeted by criminals carries risks that can be amplified by the fear of missing out on the next bitcoin.

For crypto investors, however, occasional bailouts are seen as the cost of doing business, said Richard Muirhead, chairman of London-based venture-capital firm Fabric Ventures LLP. “If the prospects for growth and everybody’s success were not so great, people would feel that this is good money after bad,” said Mr. Muirhead, whose firm previously helped fund Sky Mavis.

Mr. Muirhead compared such hacks to other setbacks for startups, such as key executives’ departures or missed revenue projections. Investors and users “are attuned to the fact that they have to stomach these situations,” he added.

Software underpinning “Axie Infinity” was hacked in March, allowing attackers to siphon off cryptocurrency valued at roughly $540 million on the date of the theft. Eight days after the hack was discovered, Sky Mavis announced funding from crypto companies and venture-capital firms to help reimburse users who saw funds they can earn in the game evaporate.

Venture-capital firms Andreessen Horowitz and Accel participated in Sky Mavis’s new funding round. Andrei Brasoveanu, a partner at Accel, said the post-hack investment was aimed at restoring “Axie Infinity” users’ trust and protecting his firm’s earlier funding of Sky Mavis.

“If you don’t take care of your early community, it’s hard to inspire trust in new users for onboarding,” said Mr. Brasoveanu, adding that he doesn’t consult with Accel’s limited partners before cutting such checks.

Mr. Muirhead said his firm wasn’t asked to participate in the new funding round. Andreessen Horowitz didn’t respond to requests for comment.

Sky Mavis declined to comment on whether the new funding affected its valuation.

The Federal Bureau of Investigation has attributed the “Axie Infinity” incident to North Korea-linked hackers and U.S. officials later issued an alert about a broader effort by Pyongyang to target crypto projects. The warning said hackers could go after such organizations or their investors—including venture capitalists—through cyberattacks including highly targeted phishing campaigns.

VCs can fund crypto projects through traditional equity investments or by buying digital assets themselves, giving victims multiple ways to get help after incidents.

According to blockchain-analytics firm Elliptic, Beanstalk was the victim of a hacker who borrowed about $1 billion in different stablecoins and then added the money to Beanstalk, gaining an overwhelming percentage of voting power over the decentralized platform’s governance.

The hacker proposed donating money to Ukraine, and voted to approve the idea. The proposal, however, included code that instead sent all the funds to a wallet controlled by the hacker, according to Elliptic. Once the attacker stole the funds, they repaid the loan and pocketed the difference—about $76 million.

After the attack, the Beanstalk protocol’s founding developers told users on their Discord channel, “This project has not had any venture backing, so it is highly unlikely there is any sort of bail out coming.”

Users panicked after seeing losses that reached hundreds of thousands of dollars and watching the price of the platform’s stablecoins, known as Beans, plummet. One user shared a link to the suicide-prevention hotline’s website.

But Beanstalk’s leaders are now more optimistic about another potential solution, a mechanism similar to issuing bonds. Ben Weintraub, a co-founder of the project, said Beanstalk is preparing to sell debt in the form of so-called Pods to make previous lenders whole and restore the value of the platform’s tokens.

Interest rates for lenders will start at 20%, he said, with victims who receive the reimbursements subject to a vesting schedule that allows them to retrieve more of their funds as more of the newly issued Pods are also paid back.

The goal is to keep the platform stable by providing an incentive for users not to take the bailout money and run.

“The real question is about new audience and whether Beanstalk is going to be able to attract new lenders here,” Mr. Weintraub said, adding that several venture-capital firms have expressed interest in participating. He declined to name them.

The Securities and Exchange Commission, which declined to comment, has previously said many crypto offerings could eventually be subject to federal oversight. In a speech in Washington this month, SEC Chairman Gary Gensler said many crypto-based financial platforms “likely are trading securities.”

Mr. Weintraub acknowledged the possibility of SEC scrutiny but said he doesn’t “see it being something that the regulators have the real time for,” adding, “In the grand scheme of things, this isn’t a billion-dollar thing yet.”

Mr. Weintraub, 24 years old, lost more than $1 million of his own money in the heist and faces a potential haircut alongside other lenders if the coming fundraising round doesn’t recoup the full amount stolen.

“This is not a safe space,” he said of the crypto sector. “You’re not investing in the S&P 500.”

Some small investors agree. Albert Millis, a marketing professional in the U.K., said he has mentally written off about $4,000 that he lost in the Beanstalk incident. Still, he is considering investing a small amount in the platform’s coming debt offering.

Part of Mr. Millis’s motivation is that he supports the Beanstalk team and community, he said, while “the other part is definitely the sunk-cost fallacy kicking in.”

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