It’s summer outside, in the crypto world a bitter wind howls at temperatures well below freezing. Bitcoin, the largest cryptocurrency, plunged in value from nearly $70,000 in November last year to about $20,000 in recent weeks. Number two, ethereum, experienced a similar fall. And so there are nearly 10,000 more crypto coins that collapsed, ripe and green.
All in all, of the record value of all those cryptos together, at the beginning of November 2.627 billion euros, only a third is left. What does that mean? Will the structure continue to collapse, or will the sector bounce back – as happened before? This crypto winter seems different from the previous one. It is not only investors who feel the pain. The burgeoning economy around this digital currency is also suffering. Who are the victims of the crypto winter?
The investors
Late loafers, from the beginning of 2021, are on the brink. The largest group of crypto trading app users has traditionally been men under the age of 35 who are not shy about taking risks. But last year also a lot of new fortune seekers stepped in, who were afraid of missing out on a fortune.
People who have been in bitcoin or ether for some time have at most less super profit: anyone who, roughly speaking, entered mode before December 2020 with a price of 15,000 euros, is still in good shape. But it also applies to them: what do they actually have in their hands?
Suppose you are walking down the street with a bag of fifty M&Ms, and you meet someone who is so excited that he or she offers you 1 euro for one M&M. Is your whole bag worth 50 euros? That depends on whether you continue to encounter people who are also willing to do it.
This also applies to cryptos (and shares for that matter): the price is based on the last transaction. But under a share of a company is still the real company, with ‘intrinsic’ value: buildings, machines, patents, the knowledge of the staff or market share. The company is making a profit and hopefully will in the future. Unless it goes bankrupt, there is always a minimum value per share. With crypto, that is less, or perhaps nothing. This mainly consists of a share in a future role as a currency. In that sense, crypto is, ironically, just as “ficudi” as ordinary money.
Last year, many stocks rose far above their net asset value on the basis of a wave of speculation fueled by cheap money. Crypto was pulled up with that. It behaved like a young tech company that is far from making a profit, but a golden future was predicted.
The traders
The lower the bitcoin price, the less new people are interested in investing in crypto. That affects the trading platforms, who earn a small percentage of each trade. Publicly traded Coinbase, one of the largest trading platforms with 98 million users, has lost 80 percent of its value since the beginning of this year. The company also laid off 1,100 people, 18 percent of its workforce.
The Dutch trading platform Bitvavo (1 million investors) does not need to intervene so drastically, says Bitvavo founder Mark Nuvelstijn. “We now have 170 employees and expect to grow to 250 employees this year.”
The number of new customers is growing less quickly than before. “The market has cooled down. It was also very hard last year. We would rather see the price go up step by step – that creates more confidence.”
The trading platform can see how long people have been investing and when they acquired their crypto holdings. “People who joined earlier, for example in 2018, will continue to buy for the time being. They are not afraid of some volatility,” says Nuvelstijn. It’s the newcomers who freeze out of fear, or take their money out of it altogether. Many of the transactions are automated (more than 25 percent). In addition, a program executes the trades when, for example, the price reaches a fixed point.
Now that the crypto hunger seems to have subsided – especially with regard to smaller coins – Bitvavo has adjusted its marketing strategy. Less focused on the masses, Nuvelstijn says, and more focused on men between the ages of 25 and 40 who are interested in technology. “Like myself.”
the miners
Bitcoin is notorious for the enormous amount of power it takes to keep the cryptocurrency in the air: it costs the same amount of energy per year as the whole of Argentina uses.
The power is needed for a network of computers that solve complex sums on the assembly line. In doing so, they each time add a new block of transactions to the chain of a digital ledger. The reward: a cryptocurrency. That is mine (mining coins) in a nutshell.
Until 2021, the bitcoin mines were mainly in China, but were banned there, partly because they used too much energy. Since then, the companies have sought refuge in the US and Kazakhstan. The disadvantage: less sustainable energy is available there, which increases the impact on the environment. Many bitcoin miners settled in Texas.
On June 11, something remarkable happened. The power needed worldwide to keep the bitcoin mines running plummeted from 23 gigawatts to 15 gigawatts in a week. That drop was due to the fact that miners were shutting down their old computers en masse, says Alex de Vries, a data scientist who tracks energy consumption on the website. Digiconomist† That old equipment is no longer profitable at a price of 30,000 dollars, because those computers have less computing power and consume relatively more energy. The very latest equipment yields money as long as a bitcoin costs more than 5,000 to 10,000 dollars – the margin also depends on the energy price.
Bitcoin mining works with specialized chips, for mining ethereum fast video cards are used that you can put in a regular PC. These kinds of video cards were not available during the peak and are now being dumped en masse. Mining ethereum is – certainly due to rising energy prices – barely profitable.
The start-ups
60 million dollars, that much was work of art Everydays: The First 5,000 Days by artist Beeple when it went up for auction in March 2021. Not the work itself – because that’s just on the internet – but for the digital proof of ownership. In technical terms: an NFT, non-fungable token, recorded in the blockchain. It is an attempt to create scarcity in the digital world, where everything can be copied.
Everything became an NFT – from pictures of bored monkeys to Twitter messages. But the crypto winter is also cooling interest in NFTs. That is a setback for a company like Meta (formerly Facebook). That builds on a game-like world in which such title deeds would be the basis of a digital economy.
In addition, countless start-ups are taking advantage of the so-called ‘creator economy’ of NFTs – an online system in which the big tech companies do not call the shots, but users are in charge, and where creators themselves can trade their digital creations on the blockchain. . The hyped name for it: Web3. In other words, the decentralized online economy.
American risk investors have become more cautious. According to website The Information, they invested 700 million dollars in Web3 startups, such as auction site OpenSea, in the second quarter. That’s a 60 percent drop from last year — a fourth straight quarter.
Investor skepticism is understandable after a relentless series of NFT scandals and thefts, unstable coins and loan schemes that have turned out to be based on crypto-fried air. For that reason, the European Union and the United Kingdom want stricter rules for crypto products.
The crypto believers
Money is a medium of exchange, a store of value and a determiner of value. Cryptocurrencies should replace the old currencies such as the euro, dollar, pound or yen in all these three functions. But the good old dollar, the current most important currency in the world, still plays a significant role in the background of crypto coins.
For example, savvy crypto owners will have long since converted some of their capital gains into dollars, or euros to secure it. Many recent investors in crypto were only concerned with the appreciation – in dollars or euros. Because the price of crypto coins is invariably expressed in dollars or euros.
And moreover: ‘stablecoins’ such as tether have started to play a greater role in the mutual traffic between crypto users. Such coins invariably promise to be worth as much as 1 dollar, thus providing the whole system with confidence. But actually, the dollar is still basically the foundation that way.
Now you could say that the old coins are just the chair behind which crypto learns to skate. But the Bank for International Settlements (BIS), the umbrella body of central banks, concluded last week that crypto may not be able to take over the economy on a large scale. The economists of the BIS also warn against opacity and concentrations of power.
By the way, central banks themselves are already working on their own forms of digital money, based on their dollars, euros and other currencies.
But if crypto is pushed out of the wings and has no future, what is it actually worth? That remains to be seen. On the other hand: it will not be the last time that bitcoin has been depreciated, only to revive afterwards. At the very least, crypto seems to be heading the way of the Japanese Knotweed: once it enters the vegetable garden of the economy, it may never completely go away.
A version of this article also appeared in the newspaper of 9 July 2022