When times are good in a particular market, investor enthusiasm has a way of keeping worrisome problems and threats at bay.
But when the cash machine slows down, issues that were always lurking in the distance start to crowd the horizon. Negative headlines pile up. Regulators and enforcement agencies, as well as vulture-like opportunistic investors, watch public sentiment shift against potential targets and then strike.
So is the current state of affairs for crypto. Rising from scrappy fringe asset class to economic powerhouse over the past couple of years, crypto has been pummeled by the same forces dragging down the stock market — only it’s fallen even harder.
The downward trend is inflicting nasty wounds on the market. Now there is blood in the water, drawing sharks. Here are the problem areas that are emerging, and what “predators” might be looking to take a bite.
Celsius and other crypto lenders
Crypto lending was a hot area for the past couple of years as the value of digital assets surged, promising new sources of capital for growing businesses and offering investors healthy returns. But that picture seems to have dramatically shifted in recent weeks. As the value of major cryptocurrencies such as Bitcoin and Ether have tumbled, the value of assets deposited with crypto lenders has also plunged to the point where the business model is in doubt.
Florida-based Celsius Network, one of the largest crypto lenders, which claimed to service 1.7 million customers, was among the first to feel the heat. Last month, the company announced that it was “pausing all withdrawals, Swap and transfers between accounts.” It added in a statement that it was “taking this action…to put Celsius in a better position to honor, over time, its withdrawal obligations.”
And the carnage is spreading. Elsewhere in decentralized finance, or DeFi, lenders including Hong Kong-based Babel Finance and Singapore Vauld have faced liquidity crunches. Vauld froze withdrawals on Monday. Crypto hedge fund Three Arrows Capital, also based in Singapore, filed for bankruptcy last week and is currently in liquidation.
Crypto’s richest human, Sam Bankman-Fried, has been offering to rescue some faltering crypto lenders, including BlockFi and Voyager Digital, earning him comparisons to financial tycoon John Pierpont Morgan. (J.P. Morgan, for whom the bank is named, stepped in and bailed out the U.S. government to avert an economic crisis in 1907, before the Federal Reserve was established.) But it’s safe to assume a lot of tumultuous DeFi stories won’t have happy endings.
Troubles for Tether and stablecoins
Amid the crazy volatility in the crypto markets, stablecoins were supposed to offer an alternative that was, well, stable. But in reality, many have been quite the opposite as of late. Appearing as a canary in the coal mine of sorts, Neutrino USD, also called USDN, dropped 20% from its target value of $1 (becoming depegged, so to speak) in April after allegations of price manipulation rocked the blockchain protocol, Waves. USDN relies on Waves.
Since then, more stablecoins have become “depegged,” including TerraUSD, which created damaging ripples that spread throughout much of the crypto markets, and increased regulatory scrutiny.
All eyes are now on Tether, the world’s largest stablecoin, which had a market capitalization of $84.2 billion in May. Tether, however, has slipped below its $1 peg, raising fears that it could be the next domino to fall. Considering how much of a dent Terra made in the crypto markets, a Tether failure could be catastrophic. Hopefully that won’t happen, though. Tether claims it has ample reserves.
The jpeg (NFT) bubble bursts
We have seen that public opinion surrounding NFTs, or non-fungible tokens, is more like an entrenched battleground. While these crypto-cousins were billed as a means for artists to obtain new revenue streams for their work (Beeple, for instance, sold an NFT for $69 million in March 2021), it became apparent that not all artists were benefiting from the trend.
Some felt that NFTs were just a means for tech-savvy grifters to steal their work and profit off of it. Others claimed that the entire NFT market, worth billions of dollars earlier this year, was just one big Ponzi scheme waiting to crash.
Well, those in the Ponzi scheme camp are seeing their views validated to some extent. Transaction activity dropped from $3.9 billion in mid-February to $964 million in mid-March, according to Chainalysis. Another data firm called CryptoSlam found that the average NFT price is now down 94% from its year-to-date daily high.
While some observers claim that rumors of the NFT market’s demise are widely exaggerated, it’s clear the market has hit a rough patch. Not helping matters, the world’s biggest NFT marketplace OpenSea has been having some messy issues. Its co-founder Alex Atallah recently announced he is stepping down from the company.
Last month, a former employee of the marketplace also became the first ever criminal insider trading defendant in the NFT market. Manhattan U.S. Attorney Damian Williams announced an indictment against former OpenSea product manager Nathaniel Chastain with securities law violations for allegedly using confidential information about NFTs that would be featured on the platform’s home page for his own personal gain. He pleaded not guilty at his arraignment. Still, not a good look.
Ponzi schemes and scams
That brings us to another area of concern for crypto which is revealing weaknesses in the market. There seems to be a never-ending parade of Ponzi schemers and other scam artists who have been found to be defrauding crypto investors, laundering money, or otherwise engaging in sketchy activities.
One recently revealed crypto scam in India, for instance, reportedly cost victims $12.8 billion. Meanwhile, the U.S. Federal Trade Commission found that more than 46,000 Americans lost a combined $1 billion in crypto scams just in 2021. Then you have hacks, and heists, and specialized crypto-based schemes, like a form of romance fraud charmingly called “pig butchering.”
This is all bad news both for investors and for crypto — because these schemes offer ammunition to crypto critics who claim the entire market is a giant fraud and needs a massive regulatory crackdown. While undoubtedly, the “Wild West” of crypto needs to be tamed, heavy-handed regulation could easily cripple the industry for years to come.