Crypto winter has become nuclear winter

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The question that is preoccupying much of the financial world this week – will fallen crypto idol Samuel Bankman-Fried testify before the House Financial Services Committee or not? – is of little more than academic importance to the industry he helped build and then quickly dismantle. The crypto market is now deep into a year of general price declines, and nothing Bankman-Fried tells Congress will restore investor confidence. The collapse of FTX exposed how little capital and control underpins the crypto system, and even some of the strongest crypto players are walking wounded. Consider:

  • Bitcoin investors are pulling record amounts of the cryptocurrency from public markets Financial Times published on December 11. Citing data from Cryptocompare, the FT said that in November, “investors withdrew 91,363 bitcoins, worth a total of close to $1.5 billion based on an average November price of around $16,400, from centralized exchanges including Binance, Kraken and Coinbase.” December hardly looks healthier; in the first week “4,545 bitcoins were withdrawn from centralized exchanges, compared to inflows of 3,846 bitcoins in the same period last year.” Yes, it is possible that some of these investors are moving their currencies to private wallets, but even that movement is causing pain to the system (more below). Last month we noticed the departure of “Bitcoin tourists” from the market; now it seems as if some permanent residents are also fleeing.
  • For years, Silvergate was presented as a less risky way to enter the crypto revolution. It offered banking services to crypto exchanges (including FTX), which allowed it to grow and go public in November 2019, once again offering a seemingly safe proxy for crypto. But the FTX bankruptcy has been brutal for Silvergate shares, which are now trading at about one-tenth the price of a year ago. On Dec. 1, several Silvergate shareholders filed a class action lawsuit, alleging that Silvergate “knowingly or negligently permitted” Bankman-Fried to transfer FTX client funds to its other company, Alameda Research. (The company will, of course, defend its actions, but expects more such lawsuits soon.) This week, Elizabeth Warren and two other senators sent a lengthy letter to Silvergate CEO Alan Lane, pointing out that as a state-chartered bank, Silvergate has access to federal funds, but it is also subject to strict rules (such as the Bank Secrecy Act) that do not necessarily cover all fintech companies. Allowing FTX and Alameda to commingle the funds, they argued, “seems an outrageous violation of your bank’s responsibility to monitor and report suspicious financial activity conducted by its customers.”
  • Coinbase’s year of misery continues. The company has taken several measures to convince existing and potential customers that it is a safer option than FTX, but this cannot save the business, which remains almost exclusively dependent on large volumes of crypto trading. This week, CEO Brian Armstrong admitted in an interview with Bloomberg that the company’s revenues in 2022 will likely be less than half of what they were in 2021. Moreover, Coinbase’s relationship with Circle, which issues the popular USDC stablecoin, has been called into question. On Friday, analysts at Mizuho Securities downgraded Coinbase shares to underperform, noting that Circle’s plans to go public were recently delayed, which could lead Circle to reconsider its current practice of paying Coinbase to hold some of its USDC assets. This week, WealthJeff John Roberts wrote in his newsletter that the market value of Coinbase is now low enough that a big Wall Street player like JPMorgan or Citi or a private equity firm can easily buy Coinbase.
  • No, not everyone plays the crypto space as recklessly as FTX, but the line between crypto innovation and outright fraud is too blurred and gets even companies that should know better into trouble. Jason Mikula this week documents the wild story of ZELF, which bills itself as the “bank of the metaverse.” ZELF announced its latest offering on Product Hunt Thursday: an anonymous debit card that the company says is available within 30 seconds and doesn’t require a Social Security number, identification or even an address. It can be loaded with cryptocurrency, but then used as a payment card via Apple Pay. Mikula tried it under a fake name and sure enough, he got the card in 30 seconds. The problems here should be obvious, but they apparently weren’t for Evolve and Solid, two of ZELF’s financial partners, one of which (Evolve) is a federally regulated bank. Incredibly, by Friday morning ZELF had removed the offer.

All that entropy within a few days. Crypto winter has gone nuclear and there are no signs of it warming up anytime soon.

Crypto winter has become nuclear winter

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