Crypto Winter

Crypto Winter

December 02, 2022

The crypto currency world continues to amaze me. Despite a year of high-profile crashes, bankruptcies and hacks costing crypto “investors” billions of dollars, there is still a hardcore group of folks out there who are “true believers.” Despite loss after loss, they will not be dissuaded.

The damage in the crypto markets this year has been so extreme and pervasive that 2022 has been dubbed “crypto winter.” To illustrate the extent of the damage, Bitcoin is down more than 75 percent from its high on 9 November 2021. Here are a few of the blow ups that led to the big freeze.

TerraUSD breaks the buck. TerraUSD was a stable coin, meaning its value was supposed to hold constant at one dollar. Luna, a sister currency, was supposed to help underpin TerraUSD’s stability by providing a release valve for volatility. Unfortunately, it did not work. In early May, TerraUSD came under pressure its value dropped to $0.98. Investors, spooked by the decline, ran for the exits and Luna was unable to absorb the associated volatility. Within days, the value of TerraUSD dropped from one dollar to 10 cents and Luna, which had been worth $116 in April, fell to a fraction of a penny. The collapse resulted in investor losses estimated at $40 billion.

The Celsius Network freezes. Celsius Network was a crypto company that operated much like a bank. Customers would deposit crypto into Celsius accounts and earn interest rates as high as 17 percent on their deposits. Celsius would in turn make loans with those funds. At their peak, Celsius deposits totaled $20 billion. However, in June, the company froze customer accounts, barring them from withdrawing or transferring funds. In July, Celsius filed for bankruptcy. It now faces investigation from prosecutors in at least 40 states.

Three Arrows Capital misses the mark. Three Arrows Capital was a crypto hedge fund which at one time managed more than $10 billion. In June, the decline in crypto prices left them unable to make their margin calls. Facing regulatory and perhaps criminal investigation, the founders shuttered the fund and went into hiding. Their whereabouts are still unknown.

FTX and Alameda Research implode. Before its collapse last month, FTX was one of the world’s largest crypto exchanges. However, in November, the entire enterprise collapsed in scandal. In the days following the collapse, FTX admitted that it had transferred $10 billion of customer deposits without customer authorization to Alameda Research, a crypto trading firm also founded by Samuel Bankman-Fried, the founder of FTX. Alameda Research used the customer money to help meet its liabilities. At this point, it is unclear how much of the customer money, if any, will be recovered. To add insult to injury, in the days following the FTX closure, hackers succeeded in siphoning over $473 million from FTX accounts.

Even if you are a die-hard crypto fan, this year’s crypto winter should be a wakeup call. Crypto may be new, but its problems are as old as human commerce: corruption, fraud, lack of transparency, and greed. Fortunately, you can follow some simple principles to keep yourself out of trouble: 1) Never invest in what you do not understand. 2) Limit your bets to limit your losses. 3) Ignore the hype and think for yourself.

My parting shot is a quick update on El Salvador’s big crypto bet. Last year, I wrote about Nayib Bukele, the president of El Salvador, who decided in September 2021 to make Bitcoin legal tender in his country. Since then, Bukele has spent more than $105 million of the country’s limited hard currency reserves to buy 2,381 Bitcoin at an average cost of $44,292 per coin. Today, those holdings are worth less than $39 million, leaving cash-strapped and debt-laden El Salvador with a loss of more than $66 million. The crypto winter has not dampened Bukele’s ardor. On November 16 Bukele tweeted, “We are buying one #Bitcoin every day starting tomorrow.” And on November 22, he sent a bill to El Salvador’s congress that would enable him to borrow $1 billion to buy even more Bitcoin. Bukele apparently has no problem making big crypto bets with the public’s money. It would be instructive to see if his bravado extends to his personal accounts.

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them