Crypto

There Have Been Crypto Winters in the Past, but the Situation We Are in Feels Different

Although Bitcoin (BTC -2.34%) has rallied as of late, the price of the world’s largest cryptocurrency is still down more than 40% from a year ago.

A crypto winter essentially means that prices have dropped significantly and stayed around that level for weeks or months. There’s been a handful of crypto winters since 2017, so they are more common than one might think.

But the situation we are in now feels different from past crypto winters because many crypto-related firms have filed for bankruptcy and the scandalous collapse of crypto exchange FTX has really put confidence in the industry at an all-time low. Could the current crypto struggles turn into a more sustained winter? Let’s take a look.

Why it feels different

Well, for one there is much less activity across the ecosystem. Daily crypto exchange volume has recently fallen to levels not seen since before 2021.

The FTX meltdown and eventual bankruptcy, which included widespread allegations of fraud by the company’s founder and former Chief Executive Officer Sam Bankman-Fried, has really put crypto investors on edge.

Many crypto firms had exposure to FTX, and the large crypto exchange’s bankruptcy set off a domino effect, triggering the bankruptcies of many other crypto firms. Many in the crypto community are wondering if there are other cases of fraud about to pop up, which has sent them to the sidelines until there are more answers.

The crypto bank Silvergate Capital (SI -8.40%) serves most of the large crypto exchanges and many other crypto institutional trades by offering them access to its real-time payments platform, the Silvergate Exchange Network. Earlier this month, Silvergate reported a close to 70% drop in deposits, as investors fled the industry. CEO Alan Lane reported seeing a “crisis of confidence” in the fourth quarter of the year that was very different from what he has seen in his nine years working in the industry:

And so we had clients that were proprietary traders, market makers that had been doing business with each other for sometimes six, eight years, that just stopped doing business with each other and pulled their — essentially pulled all their deposits. We had some clients that moved — these are crypto-native firms that moved almost completely into U.S. Treasuries.

The large U.S. crypto exchange Coinbase (COIN -7.26%) also recently said that it would cut 20% of its workforce, after having already laid off 18% of the company earlier this year.

Coinbase CEO Brian Armstrong said on the company’s third-quarter earnings call that the goal this year was to be able to operate within a loss of $500 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), given the difficult environment. With Coinbase feeling like one of the last big lines of defense in the struggling crypto industry, it will be important for the company to maintain the faith of its customers and investors.

There’s still hope

I still expect the industry to be here for the long haul, and there has been a good rally for Bitcoin so far this year. So perhaps conditions will change on a dime.

But the challenges feel more pronounced than they have in the past and it seems like key crypto players are hunkering down for a sustained winter.

Softening inflation and the end of the Federal Reserve’s aggressive rate-hiking campaign might help but ultimately, investors need to be able to come out on the other side of the FTX bankruptcy feeling like they once again can trust the industry. At this time I just don’t know how long this will take.

Bram Berkowitz has positions in Bitcoin and Silvergate Capital. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global. The Motley Fool recommends Silvergate Capital. The Motley Fool has a disclosure policy.

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