Those who suffer most in the crypto crash won’t be the loud billionaires, it’ll be those who listened to them

There are a million and one things happening across cryptocurrency and Web3 right now but the bottom line is that things aren’t going great.

Since I last wrote CryptoCam earlier this year, the price of bitcoin has halved. Ethereum is worth a touch over a third of what it was then. Coinbase and other top cryptocurrency businesses are laying off huge numbers of staff not long after hiring them. The best known venture capital firm said we’re going into a “crypto winter”. All in all, bad vibes.

The cause for all this pessimism about cryptocurrencies comes down to two main things: factors outside of the crypto market and, if you’re being very generous, what can be called “growing pains” in the industry.

The former is much bigger than even the massive cryptocurrency industry. Inflation has skyrocketed. Central banks are cranking up interest rates. The stimulus being handed out by governments around the world to counteract the COVID-19 economic shock is long gone. All this means that there’s less money sloshing around the economy that can be tipped into the crypto industry (or other things, as you might gather from looking at the ASX recently). Plus in these cold, cold conditions, people are selling off their cryptocurrencies too.

The latter cause is linked to the former. With fewer people and institutions looking for options to make use of cheap loans or earn with their existing cash earlier than expected, crypto businesses are feeling the crunch. This pressure has contributed to some high profile collapses and hiccups with cryptocurrencies and businesses that were thought to be fairly safe that have scared off investors.

A few weeks ago, a “stablecoin” project called Luna and its associated cryptocurrencies crashed and burned. A stablecoin is a type of cryptocurrency that is “pegged” through various means (which frankly go beyond the scope of this column to explain) to the price of another asset like the US dollar so, ideally, they never change. The point of this is to provide a cryptocurrency asset that is not volatile so that people can buy or hold money without having to deal with the headaches involved with actually transferring it back to cash (i.e. regulation). When Luna’s stablecoin’s peg collapsed (explained here), the result was people who invested in a financial product associated with Luna which promised a 20% annualised yield had almost nothing. Yikes.

Since then, there have been other big wobbles. Cryptocurrency “bank” Celsius froze transactions this week over extreme market conditions. Major exchange Binance also did the same but blamed it on a “stuck” transaction. These are major players in the industry; even the suggestion that they are teetering is enough to send major shockwaves.

The cryptocurrency investors I spoke to are spooked — but they’re not acting on this fear. One, who has the equivalent of a couple of thousand Australian dollars invested, told me that he was a bit disappointed but also found the drop cathartic because: “I no longer have FOMO [fear of missing out] eating at me.”

Another investor who bought bitcoin in 2014 and works at a cryptocurrency company told me that, while he’d been through the ups-and-downs, “it stings not being able to sell at a higher prices”. His bigger concern was how the crunch would affect the company, saying there’s a real tense atmosphere at the moment. Ultimately, he intends to keep HODLing, which is industry parlance for refusing to sell and holding on to crypto.

As someone who bought a couple of hundred dollars of bitcoin and Ethereum purely to see what it’s like, I’m happy to tell you that I feel fine because I am fine. I don’t look at my crypto app ever. It’s certainly less fun than when the line was going up. The bear market also reveals something that doesn’t portend well for the future of crypto: without the speculative part of the cryptocurrencies, there’s really no other use in my life for it at all at this point. Maybe that will change soon but for now I don’t know why I’d need the blockchain.

You don’t need to worry about me as someone who is gainfully employed and doesn’t have anything rising on it. Nor should you worry about the crypto billionaires who are seeing huge loses. They’ll be fine. Think about the people who came to the game late, who were promised stable investments (by people who cashed out in the meantime) that could have been their ticket out of otherwise grim situations, who in some cases have lost a lot or even everything.

It’s unwise to make predictions but the volatile history of cryptocurrency and the amount of institutional skin in the game suggests that this is not going to be the end of cryptocurrencies. But after having the hype rubbed in our faces, it can feel good to see people with hubris suffer a reversal of fate. Just remember that it’s not just the loudest voices who are suffering, it’s also the people who trusted them.

This article was first published by Crikey.