If you’ve detected some digital tears amid the sea of ape and punk avatars on Twitter, it’s because—not for the first time this year—cryptocurrencies are experiencing a major nosedive. Bitcoin briefly dropped below $20,000 Wednesday morning for the first time since December 2020, and other popular currencies like Ethereum have also plunged to their lowest levels in years. Binance, the world’s biggest crypto exchange, had to halt Bitcoin withdrawals on its platform for a few hours on Tuesday. Yahoo Finance reports that on Monday, $1 billion worth of currency was liquidated from the market over a 24-hour period; overall, crypto has lost two-thirds of its market share since its November peak.
Why is this happening now? Well, the cryptoverse is in part reacting to the same factors that have walloped it, along with the normie stock market, all year: rising interest rates, loss of investor confidence, inflation. But right now, some individual crypto companies, exchanges, and currencies appear to be coming undone—and the interconnected nature of the crypto market means that an issue in one part of the ecosystem will ripple through the entire space. Is a bubble, inflated first by faith and then by VC dollars, finally bursting? Or has crypto grown to such a robust size that this turbulence will all pass? Let’s take a look at the key factors behind this month’s crypto chaos—and why the sector might get through it.
The week’s crypto palpitations began on Sunday when Celsius Network, the most popular lender in the crypto space, announced it was “pausing all withdrawals, swap[s], and transfers between accounts,” citing “extreme market conditions.” Celsius is a kind of experimental bank that had attracted nearly 2 million users because of the jaw-dropping returns it offered. Basically: You stash your Bitcoin, Ethereum, or CEL—the in-house currency—with Celsius, it loans out those coins, and it pays you handsomely in turn, with yields as high as 18.6 percent for stablecoins like Tether.
While Celsius’ operations had attracted scrutiny from New Jersey and federal regulators, its business wasn’t hurt too badly until this year’s crypto tumbles, which fueled a 50 percent drop in the worth of its total assets throughout 2022, thanks to massive user withdrawals. By this month, Celsius couldn’t pay its interest to users, and it halted all withdrawals. On Sunday, CEL’s value fell from 48 cents to 16 cents; the coin has wildly zigzagged in price since then.
Celsius is not the first crypto exchange to have offered insanely high yields to customers, only to buckle when it couldn’t meet those obligations. There’s a reason traditional banks don’t offer such lofty yield percentages.
The Celsius debacle has something to do with stablecoins, a major factor in last month’s crypto bellyflop. The network has plenty of financial ties to Tether, a core asset that helps prop up the crypto economy. Tether is a “stablecoin,” meaning each of its coins is pegged to the U.S. dollar, in a mechanism intended to provide some stability to a volatile market. It’s also the most widely used stablecoin. (Here’s a good explainer from Ben McKenzie and Jacob Silverman on Tether’s centrality to the crypto space, the opaqueness of some of its holdings, and why, if it were to collapse, it could take a big chunk of the crypto market with it.)
Stablecoins, it turns out, are a bit of a misnomer. Last month’s crypto fall kickstarted when a different stablecoin, known as Terra, plummeted from its peg to the U.S. dollar, spooking the rest of the market. Tether, which unlike Terra is supposed to be backed with actual assets, hasn’t depegged so dramatically, but it does fluctuate. It dipped during May’s crypto crash, staying just under $1 for weeks. The price had recovered by this weekend—before Celsius’ struggles came to light, tipping it down to 99 cents once again. One point of stablecoins is that people use them to trade other currencies, because that’s more efficient than converting digital money in and out fiat. So you really do want Tether’s value to be stable, otherwise the value of currencies backed by Tether coins could also drop severely, and crypto players could more generally lose trust in the system.
The thing is, Tether (which is purportedly stable) was very tied up in Celsius (which apparently is not). Last year, Celsius’ co-founder told Bloomberg he’d taken loans from Tether Limited, the entity behind the coin, equating to 1 billion Tether coins to back his platform. In 2020, Celsius had held a crowdfunding drive for which half the money raised came from Tether. But on Wednesday, Tether announced it had liquidated its share in Celsius, with no effect on its own value, and insisted that its “reserves hold strong.” OK!
In the meantime, yet another stablecoin, USDD—which was launched just last month, in the midst of the May crash—also lost its dollar peg on Monday, and hasn’t yet recovered its price.
It’s worth noting that the other stablecoins that had collapsed this year are different from Tether in significant ways: They’re nowhere near as widely used as Tether, and they’re also “algorithmic,” meaning they use automated trades to ensure their supply holds steady with the dollar’s value. Maybe they shouldn’t be called “stablecoins,” then?
Digital assets are suffering right now, but so are real people. Coinbase, the U.S.’s biggest crypto exchange, saw a 10 percent drop in share value and announced on Tuesday that it was laying off 18 percent of its workforce—about 1,100 employees. The trade exchange Crypto.com and lending platform BlockFi also planned for layoffs. All this, just weeks after Gemini, the crypto platform founded by the Winklevoss twins, cut 10 percent of its staff, and the Latin American exchange Bitso laid off 80 employees. Observers attribute these job losses to a general slowdown in crypto trades over this year, alongside the fact that many crypto companies, like Coinbase, are now also traded on the suffering stock market. And that company had already been hard hit by last month’s crypto crash, around when it reported a quarterly loss of $430 million, announced it had lost a fifth of its users, and warned it was facing possible bankruptcy.
Crypto startups have been rapidly growing in number and value over the past few years, with many tech workers and executives flocking to the space. We can probably say that boom is over.
But Should You Buy the Dip?
Despite the bedlam, some crypto executives, experts, and observers predict a long-term improvement for the market, and are even, yes, encouraging users to buy Bitcoin and other currencies now.
One researcher noted to CNN that crypto bear markets in the past have seemed drastic, and yet the currencies have often rebounded: For example, from 2017–18, Bitcoin plummeted to $3,217, a low it’s well recovered from. The financial research firm FSInsight likewise stated in a report that Celsius’ struggles could provide lessons for future investors, like to be wary of exchanges with too-good-to-be-true yields. Another investor told CoinDesk that the market will only really be in trouble when a major currency bottoms out to zero, which hasn’t happened yet. Where they have fallen is somewhere closer to Earth. We’ll see if they ever reach the moon.
Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.