Crypto winter risks turning into ice age

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After a spectacular crash earlier this year, the crypto industry's most popular tokens have gone to sleep, suggesting amateur investors have fallen out of love with the once thrilling asset class and big funds have decided to keep their distance.

The price of the biggest token, bitcoin, has hovered mostly at about $20,000 now since August, having peaked a year ago close to $70,000. Ether, the second largest, has failed to rally since its environmental overhaul in September. Average annualised volatility for bitcoin is now the lowest since October 2020, according to analytics platform CryptoCompare.

At first, the drop in token prices was labelled a "crypto winter" — one of the market's periodic dips. But the length of this now-drab phase, combined with the thousands of job losses in the sector in recent months, suggests this is more of an ice age, with no grand theories emerging as the next source of fuel for rallies.

"The narrative silence is deafening," said Edmond Goh, head of trading at crypto broker B2C2. "Eventually a narrative will come along that will [break the impasse] — perhaps inflation or a big regulatory announcement. Perhaps something completely unexpected."

Digital asset investment and trading group CoinShares describes this as an "apathetic period".

In part, crypto has suffered the same malaise as other highly speculative asset classes since it became clear almost a year ago that US interest rates would need to rise fast to tackle sticky inflation.

The tech-heavy Nasdaq stock index in the US has fallen 30 per cent over the past year — one of the worst performances across developed markets. But bitcoin's near-70 per cent drop over the same period is steeper, and May's collapse of token luna, and the related so-called stablecoin terraUSD, lost about $40bn for investors and shook confidence in crypto more deeply. The industry's market cap has shrunk from $3.2tn to under $1tn.

Thousands lost their jobs after exchanges including Coinbase and Gemini cut large sections of their workforces, while crypto hedge fund Three Arrows Capital and lending platform Celsius Network have collapsed into bankruptcy. High-profile senior executives across the industry have also surrendered their posts, including former industry chief executives Jesse Powell of Kraken, Michael Saylor of MicroStrategy and Alex Mashinsky of Celsius.

The flat price has deterred speculators, leaving the market to long-term bulls. Known in industry as "Hodl-ers" — short for Holding On for Dear Life — they appear to be doing just that. Morgan Stanley estimated this week that 78 per cent of all bitcoin units had not been used for any transaction in the past six months, a record amount.

Aside from the tougher interest rate environment, some of the key arguments underpinning crypto have proven faulty. El Salvador's experiment with bitcoin as an official currency has fallen flat, while crypto has failed as a hedge against inflation — prices have dropped even as inflation in developed economies has approached 10 per cent.

"[Bitcoin] has not acted, over the last couple of years, as an inflation hedge or as a store of value," said Alkesh Shah, digital assets strategist at the Bank of America.

Even a successful shift away from energy-intensive crypto mining practices to a carbon-light alternative has not helped lift spirits. In September, the Ethereum network, performed the so-called Merge, hopping over to a greener blockchain. The move has cut the network's energy usage by about 99 per cent but it has yet to spark a rise in the value of ether, the token tied to the blockchain.

The pain for others may not yet be over. Crypto miners, which generally use computers to solve puzzles in return for tokens, are also feeling the squeeze. While they need to keep spending ever-rising sums of money on energy, the token they are rewarded with is depressed.

US-listed mining firm Core Scientific this week warned it may run out of cash by the end of the year and need to file for bankruptcy, sending it shares down more than 70 per cent. In a regulatory filing, the company blamed the low price of bitcoin, increased electricity costs and litigation with now-bankrupt lending platform Celsius.

Despite collapsing value, some remain optimistic. Dan Ives, managing director of Wedbush Securities, said "this has been a brutal period for risk assets including crypto  ... but the asset class is here to stay". However, he also said "blockchain and more use cases are key for crypto looking ahead".

In August, Coinbase announced a deal with BlackRock to give the asset manager's clients access to digital assets in a move viewed as a potential watershed moment for crypto's mainstream hopes. The asset management giant said it was "still seeing substantial interest" from institutional clients despite the market's downturn.

Nasdaq, Mastercard and BNY Mellon have also announced crypto services in recent weeks, bolstering the argument that institutional interest in digital assets remains despite this year's crash. But it may be some time before interest turns into something firmer.

"There are no fundamentals that underlie crypto, or to the extent that they exist they haven't been identified yet," said Charley Cooper, managing director at blockchain firm R3. "The idea that we are suddenly going to see a spectacular bull run before the broader economy gains its footing, I think is fanciful."

Copyright The Financial Times Limited 2022