Crypto Market in Free Fall
It's been a tough time in the Crypto markets, I wanted to share thoughts here.
Given the carnage in the Crypto markets, I thought a post talking about cool new web3 products was a stupid idea today. For anyone that has even dabbled buying Crypto, it’s been a tough month. $BTC has dropped from $38K to $28K from the start of May, a 28% hit. Bitcoin is down about 60% from its all-time high in November of last year. $ETH is down a similar amount. If you had ventured into any of the other programmable blockchains like $SOL, the losses this month are likely 50% or higher. It’s an ugly time to be a holder of Crypto.
Of course, the stock market has had similar losses. Some of my favorites from last year like Peloton and DraftKings are down 30% and 25% respectively just this month, and they have seen way bigger losses from their highs. The Nasdaq is off nearly 30% from its high point in December 2021, and it has lost another 7% this month.
In the startup world, companies are definitely adjusting to this new market environment. VC accounts on Twitter are advising companies to conserve capital and prepare for a lack of financing options. The consensus seems to be to extend runway by curtailing spending and to selectively consider layoffs. Tech leaders like Cameo, On Deck and Robinhood have all announced layoffs in the 10-20% of their workforce range recently. Sadly, more layoffs are certainly coming. Capital raises are still being announced, but many of these were closed and funded weeks ago. I have personally seen companies cut sizes of rounds and valuations since last month.
What has been weighing on the Crypto markets the most over the past week? It’s the crazy story of Terra/Luna. I briefly touched on the fragility of the stablecoin market in a prior post. When I wrote this back in January, Terra ($UST) was not a top stablecoin so I didn’t give it much ink. Since that time, it exploded in size to tens of billions of dollars. While I was critical of the lack of disclosure of $USDC and $USDT, Terra was pure insanity. Terra is a “decentralized and algorithmic” stablecoin. They bought a grab bag of risky Crypto to back their coin, instead of investing in short-term US dollar assets. Terra accumulated billions in Bitcoin to back a short-term coin. It makes no sense. Allegedly, a few big hedge funds went after the Terra $1 peg, shorting the “stablecoin” and simultaneously shorting $BTC. The peg broke violently, trading down to $0.38 in the last two days. Their companion risky coin $LUNA traded from $85 down to $0.04, wiping out billions of investors cash. You can see more on this on CNBC and a more pro guide from CoinDesk.
Another story weighing on the Crypto markets emerged yesterday, when Coinbase reported that customer assets could be considered part of the company if they were ever to go through a bankruptcy proceeding. This was a real shocker. If a retail stockbroker goes bankrupt, the holdings of its customers are kept in custody and not at risk. Coinbase said their institutional assets are kept securely off their balance sheet but not the retail ones. How they allowed this to be the case is unreal. Coinbase better fix this quickly or they could see clients pull assets. I’ve got a small Coinbase account, and it is certainly making me question why.
I’ve had a lot of conversations about the markets with people in venture capital and from my past life in fixed income trading over the past two weeks. I suppose there are three big picture scenarios from here. You’ll have to decide how you choose to probability weight each of these. The optimist case is that the selling was too harsh and that the bottom is near. The economy is still strong, unemployment is really low, and markets will bounce without any major hit to the real world. The pessimist case looks to the fragility of the current markets where any further bad news could trip us into a multi-year recession. We could see another surge of COVID, a worsening situation in Ukraine, or inflation finding an even higher level. Any of these could push the markets to far lower levels and move the time of recovery out years. The middle of the road case actually scares me more. We could sit in a crappy economy for a few years. Limited growth, stubbornly high inflation that drags rates into the 5-7% area, stock markets that leak lower for a few years. This would be a tough situation for many industries and most people.
I’m not going to give financial or markets advice here. Do your own research and make your own decisions on the markets. Decide what your risk appetite is and allocate your capital accordingly. If you have some dry powder, maybe consider adding risk assets slowly as markets fall like I am.
I’m going to wrap up this post here. Best wishes to everyone in this difficult market environment. If you want to chat more on this, hit me up and we’ll talk.
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