by Greg Barker
Saturday, 18
June 2022
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07:00

The crypto world is imploding

Its reputation will likely never recover from this crash
by Greg Barker
An engineer inspects crypto mining rigs in Romania. Credit: Getty

After an epic drawdown in crypto markets, which resulted in Bitcoin losing more than half its value, it looked like the worst of the so-called “Crypto Winter” was over. Terra, the largest algorithmic stablecoin on the market, had collapsed and, for a brief moment, it looked as though the situation might have stabilised.

Then on Monday, disaster struck. Celsius Network, the largest crypto bank, froze customer withdrawals, citing “extreme” market conditions. The company suffered a series of severe setbacks, which included a $22 million loss in one of its exchanges. Now, the company is on the brink of insolvency.

Contagion from plunging crypto prices has caused injury elsewhere too. Just as Hong Kong-based Finblox — a firm enabling its customers to earn up to 90% per year on crypto assets — announced that it had limited rewards and withdrawals, another prominent crypto “hedge fund,” Three Arrows, took a fatal hit, having to liquidate a $400 million position. 

The fate of the crypto industry looks bleak. Its fate now lies in the hands of the Federal Reserve, which, due to soaring inflation and a dire geopolitical situation, hiked interest rates while winding down its gargantuan $9 trillion balance sheet to restore credibility.

The effects of this decision are being felt in traditional markets too. Tech stocks have plunged, with some losing more than their value in less than six months. Tesla, for instance, has seen half its market capitalisation evaporate, causing CEO Elon Musk to believe America is “probably” already “in a recession”. Other asset classes, meanwhile, such as high-yield corporate bonds and MBS (mortgage-backed securities) have also experienced violent sell-offs.

As inflation continues to grow, the Fed has entered full-on “Draghi mode,” doing “whatever it takes” to try and tame it. This means that risk assets will continue to plunge in the near future, spelling disaster for crypto. That’s because the “smart money” class always liquidates its most risky holdings first, and crypto will likely be the premier asset class to liquidate when raising emergency cash.

What was once dubbed ‘the future of finance’ will now be the fall guy in this crash. But it will only be the start of it. For the assets that most people really care about — real estate, stocks, and even bonds this time — will also take a significant hit. Unfortunately, this is a necessary sacrifice taken by central banks to rescue the western world from an inflationary doom loop. And by the time they have regained control, the demise of crypto will be the last thing on our minds.

Greg Barker is an independent journalist and quant, who also writes under the name Concoda. You can find him on Substack and Twitter at @concodanomics.

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polidori redux
polidori redux
8 days ago

I’m sitting pretty: I am the guy who holds no bitcoin. When it reaches sub £10 a shot, I might buy some on the off chance that I might become fabulously wealthy.

John O'Byrne
John O'Byrne
8 days ago
Reply to  polidori redux

What do you hold to ‘sit pretty’ – just curious, as it would be nice to know if I’m sitting pretty too!

polidori redux
polidori redux
8 days ago
Reply to  John O'Byrne

Bug*gerall, John.
I am a pensioner and have some thousands in cash which I will probably put into gold. Or perhaps I will buy another Triumph, a pair of sunglasses, the best blonde that I can afford and go to hell in a handcart.

polidori redux
polidori redux
6 days ago
Reply to  polidori redux

I see that my choice of investments has gained some support. Remember, dying rich is failure.

Ian Stewart
Ian Stewart
3 days ago
Reply to  polidori redux

Agreed, spend the pension and the house until I’m about 75 on the basis I won’t be able to do much thereafter, then throw myself into the state welfare system, and finally get some return on my taxes when I’m too daft to know it’s poor quality care.

Liam O'Mahony
Liam O'Mahony
2 days ago
Reply to  polidori redux

No it’s not! Ask the offsping!

Liam O'Mahony
Liam O'Mahony
2 days ago
Reply to  polidori redux

Polidori Redux You sound like my kinda guy! In fact you sound like me! But my ‘Triumph” is a campervan: not as goid at pulling the blonds though!

a g
a g
8 days ago
Reply to  polidori redux

Great idea in theory but proved to have no utility in real life.
7 transactions per second speed limit forever would always prove it’s lack of utility. If only they could have factored in future transaction speeds today. Visa is approaching 180000 i believe

Peter Johnson
Peter Johnson
8 days ago

I do sometimes wonder whether between my government seizing bank accounts for political transgressions (Canada) and the general insanity of society and the markets that buying physical blocks of gold might be the best place for my investments. If you want to seize my investments you will need a map and a shovel!

Steve Elliott
Steve Elliott
8 days ago

It was only a week or so ago that there was an article on Unherd to the effect that the current crash would be good for Crypto.

James Billot
James Billot
8 days ago
Reply to  Steve Elliott

Hi Steve,
Thanks for your message. We would prefer to present our readers with a number of different perspectives rather than force-feed them an editorial line. UnHerd is, after all, a heterodox publication. Readers can make up their own minds about who — or what — they agree with!
Thanks,
James

Steve Elliott
Steve Elliott
8 days ago
Reply to  James Billot

Thanks James, I completely agree with you. My comment wasn’t meant to be a criticism of unherd. I’m sorry if it came out like that. I was just pointing out that we’ve recently had an almost completely opposite viewpoint regarding crypto. I have absolutely no idea if either or neither are correct.

a g
a g
8 days ago

Loved bc in the early years, then learned the limitations:
Limited to 7 transactions per sec….for ever!(so no good for fast payments vs Visa 1400ps etc)
51% blockchain ledger control by China or other.
When all 21m are mined, who will verify transactions?
How much will they charge?
If you can’t use it like money, ie, bye a can of Coke without waiting 2 hours for the BC to clarify the transaction then it has no utility and that’s that.

Eliot Hollier
Eliot Hollier
8 days ago
Reply to  a g

Good questions.

The 7 tx/sec is an artificial limit placed on bitcoin. On the BSV fork of bitcoin the cap on transactions was removed, which has seen millions of transactions per day carried out for fees of 1/100 of a penny.

Who will verify transactions after all coins mined? For BTC no one. Unless the price rises to a high enough level to justify huge tx fees, which won’t happen. For BSV, millions of transactions a day at tiny fees adds up to large enough revenues for miners to continue verifying transactions.

You can’t use BTC for small transactions like buying a can of coke because of a change to the protocol called ‘replace by fee’ allowing a transaction to be redirected elsewhere on the payment of a larger miner fee. BSV (and bch) doesn’t suffer this problem: small payments can be accepted with confidence.

As it happens, BSV is the only coin not to have fallen in value in the last month. A retreat to utility.

a g
a g
8 days ago
Reply to  Eliot Hollier

Thanks Eliot
Not sure what BSF is, guesing BC Cash which it seems to me is just BC with weak verification,
Guessing you know lots more than me but still.
If i can’t buy a coke with it it’s not money.

Simon S
Simon S
6 days ago
Reply to  a g

The 21m notional limit will not be reached until 2140, by which time the Btc ecoverse will be highly developed – and miners will likely earn income from transaction processing fees, rather than a combination of block rewards and transaction fees. Remember how cruddy the internet was back in 1993 when everybody’s hero Bill Gates naysayed it.

Hardee Hodges
Hardee Hodges
6 days ago
Reply to  Simon S

I suspect the limit arrives as the marginal cost of creation exceeds the energy required to create it. That will happen well before the theoretical numeric limit.

Michael Richardson
Michael Richardson
8 days ago

Another Bitcoin obituary.

Michael Richardson
Michael Richardson
8 days ago
David Lindsay
David Lindsay
8 days ago

Where cryptocurrencies were concerned, I always thought that the clue was in the name. It gives me no pleasure to have been right, but I was. Has there been some operation to take them down after the adoption of Bitcoin as legal tender in the Central African Republic posed a threat to the CFA franc, itself pegged to the euro and so on? Yes, of course. But that is where the power lies. I told you that this gave me no pleasure.

What matters is to get our hands on the power. Then there would be no cost of living crisis. Recession and inflation are both political choices. A sovereign state with its own free floating, fiat currency has as much of that currency as it chooses to issue to itself. All wars are fought on this understanding, but the principle applies universally. The State also has the fiscal and monetary means to control inflation, means that therefore need to be under democratic political control in both cases.

A currency can buy only the available resources. Most immediately, that calls for a resolution of the situation in Ukraine, which even the BBC now describes as a “stalemate”. Once again, we told you so.

Nicky Samengo-Turner
Nicky Samengo-Turner
6 days ago

a truly frightening example of how the internet pied piper+ kings new clothes plays to mass ignorance

Alex Colchester
Alex Colchester
6 days ago

This article has marked the bottom almost to the day. Good work!

Simon S
Simon S
6 days ago

For anyone interested in the bigger picture as to why Btc will survive and prosper as govt currencies tank (inflation = devaluation) as they always have done historically, I recommend a short synthesis here: https://medium.com/zen-and-the-art-of-crypto/7-reasons-why-bitcoin-success-is-inevitable-d44a2d9b703b

Hilary Easton
Hilary Easton
6 days ago

Really glad to hear that this might be the end of bitcoin for the simple reason that ‘mining’ bitcoin takes an incredible amount of power and so contributes disproportionately to climate change.

Jason Highley
Jason Highley
6 days ago

And where the hell have the regulators been for all of this, allowing it to morph into an issue with enough density and momentum to affect even non-crypto markets? Where are the audits? Where are the exchanges’ reserves? What actually backs USDT? Nobody knows. It’s all a casino with the ceiling on fire. When the building collapses, the aftermath will be ugly, not just for the crypto makers, but for trust in any regulatory institution that was out to pasture.

Last edited 6 days ago by Jason Highley
LCarey Rowland
LCarey Rowland
6 days ago

This is very helpful report. Thank you.