June 20, 2022


Crypto is melting down. Here's who's hurt (Michael Hiltzik, June 16, 2022, LA Times)

Meanwhile, crypto's financial infrastructure has been coming apart at the seams. The most recent development to rattle the field was a June 12 announcement by Celsius, a crypto lender that operated like an unregulated bank, that it was "pausing all withdrawals, Swap, and transfers between accounts" of its 1.7 million customers.

The decision appeared to be the product of rapid withdrawals of deposits at the company along with the crypto price crashes.

But it underscored persistent questions about the firm's business model, in which it offered annualized interest yields as high as 20% on crypto deposits -- traditional banks were paying around 0.5% on deposits and even junk bonds were paying around 7.5%.

Other crypto assets that depicted themselves as havens of reliability have turned out to have figurative feet of clay. Consider "stablecoins," which are purportedly tied to hard assets such as the U.S. dollar or short-term commercial paper.

The claim behind tether, a key stablecoin that has been lubricating crypto trading generally, is that each tether, priced at $1, is backed by $1 in cold cash. But since the sponsoring firm is unregulated and has never released an audit based on generally accepted accounting principles, no one really knows.

A bigger problem with stablecoins is that some aren't actually backed by hard assets but are "algorithmic," meaning that their values are supposedly kept stable by computer-driven buying and selling.

The crash of one such coin, terra, helped provoke a selloff in bitcoin in May. As the British systems engineer David Gerard observed, terra's ostensibly stable assets were "chained boxes of worthless trash," so its value plummeted from $1 to a current quote (though no one is buying) of six thousandths of a cent.

Fraud and other varieties of criminality are so rampant in the crypto space -- including its even less savory offspring, such as NFTs (nonfungible tokens) -- that a whole lexicon of scams has sprung up. These include "rug pulls," in which a promotion team suddenly abandons a project and escapes with the already-invested money.

More traditional investor abuses are also common. Crypto deposits have been stolen by hackers by the millions. The network supporting the online NFT-related game "Axie Infinity" reported that hackers had stolen crypto assets worth as much as $625 million.

State and federal regulators are also investigating crypto promoters for allegedly selling illegal securities, and the Securities and Exchange Commission is reportedly investigating evidence of insider trading at crypto exchanges.

Manifestations of the crypto meltdown are rife. They include layoffs at leading trading firms, and the withdrawal of job offers made by Coinbase, a big crypto exchange, to recruits from Goldman Sachs, Morgan Stanley and other Wall Street firms that were made during headier days.

The fortunes of seven top crypto billionaires, including Bankman-Fried and the Winklevoss twins of "The Social Network" fame, shrank from $145 billion at bitcoin's peak in November to $31.4 billion as of June 13, according to Bloomberg's billionaires index.

What may be making the meltdown worse than the bear market afflicting stockholders is that crypto doesn't have any value in the real world.

With the possible exception of stablecoins, it's not backed by gold, corporate profits or any other realizable asset. It doesn't throw off earnings, nor is its value protected by governments; indeed, the virtue of crypto assets, according to their promoters, is that they're independent of government activity.

Many of the assets' claimed virtues aren't virtues at all: It's said that transactions are irreversible and don't require an intermediary such as a bank, but that's become a problem for owners who think they've been scammed or robbed and are left with no recourse.

Promoters have been trying to articulate a use for crypto since bitcoin began trading in 2009, but have never made a case.

Instead, it's dependent on what is known as the "greater fool" theory: Crypto assets are worth whatever you can persuade another fool to pay you for them. When the supply of fools washes out -- or confidence wanes that they're out there at all -- the market is vulnerable to a crash.

Posted by at June 20, 2022 12:00 AM