It is incredibly tempting to look at the ongoing plunge of every crypto asset under the sun and declare this the death rattle of the industry. This crash has been a persistent one, characterized by crisis after crisis as big-name crypto projects buckle under pressure, eat shit as their underlying assets are rapidly devalued, or simply make bad decisions about how to handle market conditions.
Since November, crypto’s global market capitalization has dropped from $3 trillion to around $900 billion—that’s over $2 trillion in value that has simply vanished. There have been slow bleeds, as in the case of the largest play-to-earn game, Axie Infinity, which suffered a massive $600 million hack just as its token economy entered the last stage of a longstanding death spiral. Derivative business models, such as move-to-earn, are already in decline.
There have also been more spectacular disasters: The third-largest stablecoin (UST) and its ecosystem imploded, losing investors tens of billions of dollars. And major crypto lending platform Celsius Network—which claims to have 1.7 million users—indefinitely paused withdrawals and transfers of assets on its platform this week, citing “macroeconomic conditions.” Other platforms are also beginning to limit or freeze their withdrawals anticipating a liquidity crunch as rumors swirl that major crypto investors like Three Arrows Capital, a crypto-centric hedge fund that manages $10 billion, are facing insolvency after engaging in complex and risky investing strategies.
"These strategies introduce a lot of risk into the overall ecosystem, and this week has been monumental in showcasing the implications with Celsius’ problems and Three Arrows Capital’s collapse,” Vetle Lunde, analyst at Arcane Research, told Motherboard
These are just some of the events that have touched off wave after wave of panic. Early in the crash, it seemed like investors were retreating to relatively more stable options like Bitcoin, but even the oldest cryptocurrency has not been spared—it's currently lost more than half its value from its most recent peak.
Looking at the crypto crash in isolation doesn't give the full picture, however. Though the stock market isn’t totally representative of the economy, it gives a good sense of what financiers and capitalists value and what they’re willing to finance, which definitively structures what the rest of us are offered or forced to suffer.
What we are seeing is a poor market that is entering or already in recession territory—crypto is crashing because everything is crashing.
The clearest example of the wider collapse is in the tech sector. Writ large, the technology sector has seen gains from the pandemic’s bull market run evaporate: Microsoft, Facebook, Apple, Amazon, Netflix, and Alphabet have lost a combined $3.3 trillion this year. Thanks to underwhelming earnings reports, supply chain shocks, and concerns that the Federal Reserve would hike interest rates and engineer a recession to contain inflation—which turned out to be true—the tech-heavy Nasdaq 100 Index shed nearly $2 trillion in the month of April alone.
Special purpose acquisition companies (SPACs)—deals where a shell company goes public then finds a firm to merge with and take public without an initial public offering (IPO)—are also down. 2021 saw 613 SPAC listings raise a total of $145 billion—that's a 91 percent increase from 2020 and about close to half of what SPACs have raised since 2008’s financial crisis. Today, SPACs are in poor shape: 600 SPACs are still trying to complete deals, according to a recent New York Times report, half likely won't find targets before their two-year deadline arrives, at least seven have folded since January, another 73 have abandoned their plans, and on average they are significantly down.
Over the past decade, initial public offerings (IPOs) have proved one of the more resilient tech bubbles. 2021 was a big year for IPOs with over 1,000 companies filing to go public—59 percent of them were SPACs. Funnily enough, IPOs have joined SPACs in disappointing and burning investors: tech companies going public have consistently performed poorly and IPOs in general are seeing some of the worst returns in a decade.
Valuations are also down. Perhaps the best example here is SoftBank, which wielded its $100 billion Vision Fund as a weapon to crush competitors, facilitate mergers, and consolidate markets into juggernaut monopolies that SoftBank’s founder and chief executive Masayoshi Son believed would usher in the next stage of human civilization. It’s been a rough journey since the fund launched in 2017 and Son has little to show beyond massive losses: a $13.2 billion loss last fiscal year at SoftBank caused by a $27 billion loss for its Vision Funds and another $13 billion loss since the new fiscal year started as market capitalizations of public portfolio firms have plummeted.
App-based labor platforms, some of Son's favorite investments, have watched their shares drop as much as 80 percent. Among companies itching to go public we’re actually seeing down rounds, financing rounds that yield a lower valuation than previous rounds, as the hangover
Volatility and spillover effects in global markets because of Russia’s invasion of Ukraine, persistent and growing inflation, supply chain crises, the beginning of the zero interest rate policies effectively adopted across the world that meant free money to gamble on this or that investment—these all matter. It is impossible to overstate that for nearly a decade, the tech sector in particular has operated in a world unmoored from reality, fueled by easy money. Trillions of dollars have flowed into a sector rife with bubbles, perverse incentives, and seemingly little interest or capacity among regulators worldwide to hold it to account.
Or, as Brad Stone and Lizette Chapman put it in Bloomberg: “VC high priests often argue that these downturns are macroeconomic acts of God, like some 100-year storm, or, OK, fine, maybe a 15-year storm—anyway, no need for anyone to moderate their selfishness or learn other pesky lessons.” Not an act of God, rather, but a very predictable outcome of how capitalism creates its own crises within a framework that has let it run wild.
Crypto is crashing for a host of reasons, not all of which can be pegged to macroeconomic factors. Many projects were overvalued (is that picture of an ape really worth $3 million?), fantastical projections about how much money it could suck from the rest of the world abounded, free money from speculation buoyed the market, and many projects experiencing the most spectacular implosions were houses of cards built on the unstable foundation of ever-increasing crypto prices.
The most important reason why crypto is crashing, however—in particular, Bitcoin, which the rest of the market tends to follow—is because everything is crashing. Crypto markets are increasingly correlated with equity markets and even crypto industry insiders are worried that a swan dive seems locked in. Indeed, it's worth noting that many Web3 projects were propped up by billions in funding from the same investors who propped up Facebook, for example.
Part of that correlation has been accelerated by Bitcoin's bull run and creeping integration into traditional markets. Now that times are uncertain, there is flight away from risky assets, which cryptocurrency definitely is.
“The uncorrelated properties of BTC vs. equities were one of the key sources of the institutional take-off in late 2020 and early 2021. Ironically, the institutional entrance to the market has also led correlations to grow, driven by a global desire to seek cash amid uncertainty,” said Arcane's Lunde. "In pressuring times with a global flight to cash, Bitcoin is pressured by general U.S. de-risking, as BTC is getting more intertwined in the global financial market."
Tech is crashing because the sector was overvalued. It was buoyed by free money and debt; it was flush with capital from global elites who needed somewhere safe to park fortunes; it was littered with unsustainable or illegal business models; it was dominated by figures who drank their own Kool-Aid about saving the world with unsustainable business models.
These similarities to the frenzy that buoyed crypto are instructive ones. For well over a decade, it’s been the case that historic losses, massive devaluations, and a general inability to present sustainable or concrete use cases haven’t been enough to kill tech companies and their offerings. The current moment might usher in a sea change and finally wipe out some of the zombies that moved as if they were still alive, but it’s not clear what happens next.
Many tech companies, products, and services flourished for reasons beyond the glut of global capital—though that certainly helped. Many proliferated because there were political or social problems that needed to be solved, but few if any solutions willing to be pursued outside of markets. In the shadow of governments rendered ineffective by political sabotage, decaying and inflexible institutions, capture by self-interested blocs of corporations or oligarchs, and a general lack of interest in governing, other central planners have blossomed and hope to offer solutions that disproportionately benefit themselves: start-ups, apps, fundraising rounds, and venture funds. These have all come to sharply define and limit what is defined as a problem, who should solve it, and how it will be solved. This arrangement also limits the sorts of technologies that can and will flourish, as well as the shape they can and will take.
It's in this context that Bitcoin, and crypto in general, has flourished on a promise of giving "the little person" a shot against financial elites. Our infrastructure is crumbling, our public transit systems are neglected, and our ecological niche is unraveling. Hordes of people are struggling to find dignity, purpose, food, healthcare, and housing. Investors are drooling at the prospect of exploiting our decaying prospects for greater and greater returns.
This is the backdrop which allows app-based labor platforms to present desperate workers as servants to drive, deliver, or perform tasks for users. It’s the background for every graphic showing a massive increase in sports and financial gambling, as well as their increased lobbying to legalize themselves or expand their app-based offerings. It’s also the context for why a lot of these choices have dovetailed with the interests of venture capitalists who are financing crypto assets and tech startups.
According to Arcane, there's a few ways forward for crypto here, all of which are tied to factors outside of it. A "proper market meltdown in crypto" could occur amid the current economic climate, Lunde said, eventually getting so bad that the biggest-risk takers are wiped out, which "would lift off a lot of risk from the market." On the other hand, the economy could get so bad that Bitcoin starts to look good again, or U.S. equities could stabilize, which would have a less potent but still positive effect on crypto as overall risk is reduced.
Almost everyone agrees that there is more pain ahead for the wider economy, and for the cryptocurrency markets—the ship is sinking, and whether you're filling up at the buffet or puking into the pool, we're all in the same boat now.