The massive crypto meltdown is part of a larger market downturn brought on by elevated inflation, rising interest rates, war in Ukraine, Covid lockdowns and supply chain chaos.
This week, the Federal Reserve increased interest rates by 75 basis points, the largest hike since 1994. The change led to a retreat from all assets. The S&P 500 is also in a bear market and posted its worst week on record since 2020.
The crypto world is reeling from the $60 billion collapse last month of two other major tokens, Terra-Luna and Celsius. Those losses have increased doubts about the general stability of digital currency.
The pandemic brought a period of hypergrowth to the crypto sector as young investors suddenly flush with stimulus cash sought to invest in digital currency and meme stocks. Between March 2020 and November 2021 bitcoin’s price rose twelve-fold to $64,000.
Now, crypto-adjacent companies are struggling to survive. Coinbase laid off 18 percent of its employees in June. Gemini, BlockFi and Crypto.com also are cutting jobs.
It’s not unusual for crypto bear markets to draw down between 85% and 90%. In the last decade, two prolonged crypto downturns saw bitcoin lose more than 80% of its value. The coin bounced back — and then some.
During the 2017 to 2018 crypto bear market, bitcoin plummeted 83%, from $19,423 to $3,217. But by November of 2021, the coin was valued at $68,000.
Over the same period etherium fell from $1,448 to $85, a drop of about 95%. In November of 2021 the coin was valued at $4,850. The bear market between 2013 and 2015 also saw bitcoin fall about 82%, from $1,127 to $200.
If the current drawdown reaches those levels, with bitcoin hitting $10,000 and ether at $750, “things will start breaking,” said Jason Yanowitz, co-founder of Blockworks, a research platform for crypto investors, executives and builders. “A lot of companies today aren’t meant to operate at those prices.” But while he believes ether could hit a low of $750, he’s very doubtful that bitcoin will sink to $10,000.
Investing in cryptocurrencies is “not something that I would recommend to most people who are saving for their retirement,” Yellen said this week at a New York Times event. “To me it’s a very risky investment.”