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For a generation of alienated techies, crypto’s all-for-one ethos was its biggest draw. Now panic is spreading across this universe — and that same ethos is posing what may be the biggest threat yet to its survival.
What started this year in crypto markets as a “risk-off” bout of selling fueled by a Federal Reserve suddenly determined to rein in excesses has exposed a web of interconnectedness that looks a little like the tangle of derivatives that brought down the global financial system in 2008. As Bitcoin slipped almost 70% from its record high, a panoply of altcoins also plummeted. The collapse of the Terra ecosystem — a much-hyped experiment in decentralized finance — began with its algorithmic stablecoin losing its peg to the US dollar, and ended with a bank run that made $40 billion of tokens virtually worthless. Crypto collateral that seemed valuable enough to support loans one day became deeply discounted or illiquid, putting the fates of a previously invincible hedge fund and several high-profile lenders in doubt.
The seeds that spawned the meltdown — greed, overuse of leverage, a dogmatic belief in “number go up” — aren’t anything new. They’ve been present when virtually every other asset bubble popped. In crypto, though, and particularly at this exact moment, they are landing in a new and still largely unregulated industry all at once, with boundaries blurred and failsafes weakened by a conviction that everyone involved could get rich together.
Crypto has gone through several major drops in its history — known by its cognoscenti as “crypto winters” and to the rest of finance as a bear market — but the market’s expansion and increasing adoption from Main Street to Wall Street means more is at stake now. Kim Kardashian hawking a cryptocurrency that tanked shortly afterward is one thing, but Fidelity’s plans to offer Bitcoin in 401(k)s could impact an entire generation. Its growth has also made this year’s turbulence reverberate that much more: After crypto’s last two-year hibernation ended in 2020, the sector spiked to around $3 trillion in total assets last November, before plunging to less than $1 trillion. “It’s got a different flavor this time,” Jason Urban, co-head of trading at Galaxy Digital Holdings Ltd., said in an interview. Galaxy, the $2 billion digital-asset brokerage founded by billionaire Mike Novogratz, benefited immensely from crypto’s rise — but was also one of the industry’s most prominent investors in the Terra experiment. “Truthfully, it’s being a victim of your own success.” Read more: Novogratz Breaks Silence, Calls Luna ‘Big Idea That Failed’
If Terra was this crypto winter’s Bear Stearns, many fear that the Lehman Brothers moment is just around the corner. Just as the inability of lenders to meet margin calls was an early warning sign in the 2008 financial crisis, crypto this month has had its equivalent: Celsius Network, Babel Finance and Three Arrows Capital all revealed major troubles as digital-asset prices plunged, triggering a liquidity crunch that ultimately stems from the…
Read More News: A $2 Trillion Free-Fall Rattles Crypto to the Core