Economic Recession And A Crypto Winter

Cryptocurrency markets have been battered repeatedly since the start of 2022, making many investors and traders wonder if it’s officially a “Crypto Winter.” The fallout of crypto markets falling has included lawsuits against the likes of Elon Musk, regulators investigating Celsius, Coinbase layoffs, and more.

What’s behind it all, and what does it mean for crypto and its future? Listen in as Scott breaks down the latest.

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Episode Highlights

Fed Raises Rates by 75 Basis Points at June FOMC Meeting: “On Wednesday, the Federal Open Market Committee (FOMC) voted to raise its benchmark Federal Funds rate by 75 basis points (bps) to a range of 1.5% to 1.75%, its largest rate hike for a single meeting dating back to 1994.” (Investopedia)

Coinbase To Cut 18% of Workforce, CEO Wary of Potential Recession: “Today I am making the difficult decision to reduce the size of our team by about 18%, to ensure we stay healthy during this economic downturn,” Armstrong wrote in a blog. Armstrong warned changing economic conditions are signaling the onset of a recession, which could lead to another extended downturn — otherwise known across the industry as “crypto winter.” (Blockworks)

Celsius Is Crashing, and Crypto Investors Are Spooked: “It is one of dozens of unregulated lenders that have emerged in recent years promising high returns to investors willing to lend their digital assets. Celsius, which claims about 1.7 million customers, paid customers annual percentage yields of up to 18.6% on cryptocurrency deposits.” (Wall Street Journal)

State securities regulators investigate Celsius over withdrawal suspension: “According to a Thursday report from Reuters, Texas State Securities Board director of enforcement division Joseph Rotunda said regulators in Alabama, Kentucky, New Jersey, Texas and Washington began investigating Celsius after the platform announced it would be “pausing all withdrawals, swaps and transfers between accounts.” (Cointelegraph)

Musk, Tesla, SpaceX Are Sued for Alleged Dogecoin Pyramid Scheme: “Johnson is seeking to represent a class of people who have lost money trading in Dogecoin since April 2019. He is asking for $86 billion in damages, plus triple damages of $172 billion, as well as an order blocking Musk and the companies from promoting Dogecoin, and declaring that Dogecoin trading constitutes gambling under US and New York law.” (Bloomberg)

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Cryptogic is the show for crypto investors who are focused on long term results. Follow host Scott Hawksworth as he explores the investable world of blockchain technologies, Bitcoin, Ethereum, and other cryptocurrencies.

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Transcript

Scott: Hello, welcome to Cryptopic. I’m your host, Scott Hawksworth. And today, we’re going to be covering, well, what has been a week, really multiple weeks, of bad news in the world of crypto. We are officially, I think, undoubtedly in a bear market. There’s a lot of uncertainty, a lot of upheaval, a lot of drama both behind the scenes and front-facing.

And there’s a lot of capital that is flowing out of cryptocurrencies right now. A lot of folks looking at the landscape, at the larger macro-level, expecting economic recession, if we’re not already in one, and this is impacting so many folks out there.

So really, I wanted to cover today, the larger picture, the macro side a bit, cover what’s happening with crypto, how it’s responding currently, some of the big stories there, some of that bad news that we’ve been getting and exploring a bit of that. And then where do we go from here?

And what does that mean for folks who are investing in crypto and trading crypto and have that as a part of their portfolios? So with that said, I’ll go ahead and share my screen and let’s talk macro. So the first thing to look at is what happened just yesterday. And that is the Fed raised interest rates by 75 basis points. And this was the largest single hike, for a single meeting, dating back to 1994.

And, of course, the Fed has done this and they’re signaling that they could do it again and raise them even more, perhaps by another 75 basis points. That’s been signaled here. And why are they doing this?

Of course, because we have runaway inflation. There’s no way to sugarcoat it. You look at what the CPI PRN recently, was announced at 8.6%, more than 4 times the Fed’s long-run inflation target of 2%. This has been a long time coming. I would say that our decision-makers have been pretty cavalier with printing money and the political will to raise these rates has not been there.

And now, the bills have come, the chickens have come home to roost. And that is exactly what is happening. And this, of course, has created upheaval in traditional stock markets, a lot of uncertainty, a lot of concern that this is going to trigger a recession, which the Fed is clearly trying to avoid by only raising it…

and I say only liberally… but by only raising it 75 basis points when perhaps they could have raised it even more and perhaps they should have. But when you look at this, this really is a response to the runaway inflation that we’ve been seeing. We’ve seen supply chain disruptions. We’ve seen all kinds of upheaval.

You have the ongoing crisis in the Ukraine, in that war, and that’s impacting, of course, gas prices and all of that. So really, you’re feeling the pain at the pump. You’re feeling it in your stock market portfolios. You’re feeling it everywhere, even just going and getting groceries. And then again, you see an inflation like that.

So when you look at it, take a step back, that is the macro environment we are in right now. So looking at cryptocurrency and how that is impacting the crypto world, it’s no shock that crypto has been getting beat up, I would say. It’s been taking it on the chin.

And you look here, I’m at CoinMarketCap, and you look and, by market cap, the top cryptocurrencies, there are lots of red over the last seven days. Bitcoin down 30%, Ethereum down 38%. You look at some of these other tokens, Solana down 22%. We’ve talked about Solana on the show previously.

Dogecoin down 29%. We’ll talk a little bit about Doge in a minute here. And really, it’s just across the board. So you look at the macro impact, this is clearly impacting cryptocurrency as well. And within that, within this sort of bear market territory, there have been, well, just a lot of other drama.

I think this week started off really with Coinbase announcing that they’re going to be cutting 18% of their workforce and their CEO is wary of recession. Again, we are hurtling towards an economic recession, if we are not already there. And I think it’s undoubtable. So Coinbase really said that they maybe expanded too quickly. Their CEO, Brian Armstrong, said that they’re making a difficult decision to reduce their team by 18% to ensure that we stay healthy during this economic downturn.

So full disclosure, as someone who owns stock in Coinbase, you know, that’s something that I guess I’m encouraged by, that they’re trying to take steps to maintain and make sure that they can navigate the economic downturn. But at the same time, it’s brutal any time someone…

you know, you have job losses and this clearly is a signal in the larger crypto market when a company like this is having to reduce their workforce size. That impacts the confidence that so many investors have in crypto itself. And again, this is an outcropping of larger macroeconomic factors that we’re seeing here. Moving along, the next story to discuss is what happened with Celsius.

And for those who are unfamiliar, Celsius was really a lender and they had the gold. It’s one of the dozens of unregulated lenders, I’m reading this from “The Wall Street Journal,” that have emerged in recent years, promising high returns to investors willing to lend their digital assets.

And the title of this Wall Street Journal article is “Celsius Is Crashing, and Crypto Investors Are Spooked.” And really, what Celsius did that created so much upheaval is they paused withdrawals. And they said that in order to protect their business and make sure that they can remain healthy, that they were pausing withdrawals.

And when you have this unregulated lender doing that, a lot of folks are impacted. And Celsius, which claims about 1.7 million customers, paid customers annual percentage yields of up to 18.6% on cryptocurrency deposits. Higher interest rates were available to those willing to accept payments in Celsius-owned CEL token.

And again, this was launched in 2017 as a safe alternative to banks and really going after the puny interest rates. And I think that’s a fair characterization of them, that banks traditionally offer clients. But this is not without risk.

Again, unregulated, and clearly, they have had trouble with falling markets and they’re concerned about their liquidity, their ability to maintain. And so taking such a drastic step has had some consequences. Now, as of today, and I’m going over to Cointelegraph, “State securities regulators investigate Celsius over withdrawal suspension.”

And according to Thursday report from Reuters, Texas State Securities Board director of enforcement division Joseph Rotunda said regulators in Alabama, Kentucky, New Jersey, Texas, and Washington have begun investigating Celsius after this announcement that it was pausing all of the withdrawal, swaps, and transfers between accounts. And this goes on, “I’m very concerned that clients, including many retail investors, may need to immediately access their assets yet are unable to withdraw from their accounts.”

And the enforcement director reportedly said, “The inability to access their investment may result in significant financial consequences.” I think that’s may be understating it a little bit there. But then you look, now, we have regulators, once again, turning their attention to a significant company in the crypto world.

You’re looking at, once again, retail investors being put in greater risk because of no protections, again, adding to all of this uncertainty. Going back to these prices, you look at the macro, you look at what’s happening there. Then, I said I was going to talk about Dogecoin and I won’t leave you hanging.

Now, Dogecoin, well, Elon Musk, Tesla, and SpaceX are being sued for alleged Dogecoin pyramid scheme. And you look at this. They’ve been sued for $258 billion. I’m looking at bloomberg.com here, $258 billion over claims that they are part of a racketeering scheme to back the cryptocurrency Dogecoin.

Keith Johnson, “an American citizen who was defrauded out of money by defendants’ Dogecoin Crypto Pyramid Scheme,” sued Musk and his companies, claiming that they constitute an illegal racketeering enterprise to inflate Dogecoin’s price. And he’s seeking to represent a class of people who have lost money trading in Dogecoins since April 2019.

He’s asking for the small amount of $86 billion in damages, plus triple damages of $172 billion, as well as an order blocking Musk and the companies from promoting Dogecoin and declaring that Dogecoin trading constitutes gambling under U.S. and New York law. Wow.

Oh, and just a note here, on Thursday, Dogecoin was trading at about 5 cents and is down 67% this year. It spiked as high as 74 cents last year before giving up those gains. Personally, I could have told you that, personally, I don’t feel Dogecoin was ever worth much. But, you know, if you had invested in that, clearly, that was… if you’ve been holding, that’s been a tough ride there.

So what does this all mean? We’re talking about the larger macro landscape we find ourselves in. We are covering how crypto prices are continuing to fall, and then you have these really not great events happening at a micro level within the crypto world in terms of companies, lawsuits, and all of that.

And this is combined to really take the crypto world for a spin. And as an investor, I think that really you have to lean back on what the landscape really means, and if your investment thesis is still solid and how your portfolio is really segmented.

Are you prepared for these types of downturns? How much risk have you been building into your portfolio? How much research have you done before requiring these assets? Are you doing that research?

This is why it is so important to do that research. It is so important to question your investment thesis, challenge it. And if you don’t feel that you have the same passion for that investment, then it’s time to get out, whatever that investment may be, if you are concerned about it. And as for me, with my holdings and my belief in crypto, I believe in the underlying technologies.

I think that they’re here to stay. I think that there is a need for crypto. I think it’s unfortunate when you have something like what happened with Celsius, because clearly, in traditional banks, the interest rates are, are laughable. They’re insulting on their face.

Then you look at this inflationary landscape, CPI PRN of 8.6%. Oh, great. Thanks for that high-interest savings account, Mr. Bank. I’ll take that half of a percentage point or whatever it may be. So clearly, there is a desire for this. But at the same time, you have companies that are really breaking new ground, they’re operating in Wild West scenarios.

And when the market is being shocked repeatedly, as it has been, and again, this is not just the crypto market, this is the stock market itself. This is even in real estate, we’re seeing a lot of upheaval starting to happen. We’re seeing all of this impact our economy. And so when you look at that, you have to consider the risk that these assets do bring to the table.

And I think that it’s no question that there’s going to be regulatory action of some kind eventually on these crypto companies, on the space itself. What form that will take, honestly, I couldn’t tell you. I believe that certainly our decision-makers, lawmakers, and folks in the government have so many huge fish to fry right now, so to speak, that crypto is only one piece of just a larger, larger situation that we are facing economically.

And so, again, circling back to what’s your investment thesis, do you believe in your holdings? And if you do, then operate accordingly. And if you don’t, if you have to make decisions in order to protect your capital, in order to get out, if you are not comfortable, then clearly, those are the decisions to consider and possibly take action on.

And, of course, always consult your financial advisor before doing anything. And again, make sure you do that research. This is the time when it is tough to be in crypto. We’ve seen things like this happen before. Everyone remembers what happened in 2018, and then, we reach these high highs with Bitcoin and the party’s great.

I just saw Andy, of course, my co-founder of “Cryptogic.” He was posting a meme in our Discord the other day. And it was the Doge meme. And it was this muscle Doge, when crypto is up and talking how confident, and then it was another image of the dog, cowering in the corner when crypto’s down, and saying, you know, “Don’t make fun of me.”

All of this. It takes an attitude and it takes commitment and belief in your decisions to weather this storm. And it’s a storm. Do I think that all of the technologies built on the blockchain, all of these various benefits we’ve seen from crypto and these very, very real problems that crypto can solve?

Again, going back to what is this inflationary landscape we’re in? What are some of the challenges with folks around the world that are unbanked or underbanked? What are the challenges with payments and inefficient out-of-touch systems that are clunky? What are these kinds of challenges?

They aren’t necessarily going away and crypto still works to solve these, but some of the projects aren’t going to work out. Some of the companies aren’t going to be here. And we are in, I would say, very clearly a bit of a winter of crypto. And I know that’s not popular to say.

There was recently the consensus convention and that was one of those terms that just really wasn’t said, but I think it is appropriate to say that and act accordingly. So we’ll see where things go. I think that there will be greater days ahead, but as of right now, we have to navigate some challenges. Till next time.

Scott Hawksworth
Scott Hawksworth

Hailing from Evanston, Illinois, Scott is co-founder of Cryptogic as well as host of the several popular crypto podcasts.