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The Crypto Winter Cometh? 5 things CPAs should know about crypto-collapse and beyond

by Malik Datardina, CPA, CA, CISA, GRC Strategist, Auvenir

Is the crypto winter upon us? It certainly seems that way.

 

According to Google Trends, fear, uncertainty, and doubt (FUD) around cryptocurrency and crypto-assets is top of mind as we search out the term “crypto winter”:

 

Here are the top 5 things CPAs need to know about the crypto-collapse and beyond.

 

  1.  Crypto winter or crypto collapse: Is there a difference?

As most have guessed, it largely has to do with the mass selloff that has bitcoin, Ethereum, and the crypto-market broadly. Harvard summarizes it as follows:

 

“The past few months have been dark times for the crypto industry. Between April and June, Bitcoin’s value more than halved, from just over $45,000 to around $20,000; other coins have fallen even more. The Terra-UST ecosystem, which paired a crypto coin with one designed to be pegged to the dollar, collapsed in May, wiping out $60 billion worth of value and leading to cascading failures among crypto lenders. Established companies like Coinbase, a popular crypto exchange, have announced layoffs.”

 

What is the crypto winter and what does this have to do with crypto-collapse?

 

Crypto winter, according to the World Economic Forum, is the situation where “prices [of cryptocurrencies and cryptoassets] have dropped a long way and then stayed low for weeks or months”.

 

Of course, if it was about just the fluctuation in price, it would not be much of an issue. The larger issue is the overall instability as exemplified by the Terra Lab’s Terra-UST collapse and the Celsius Network bankruptcy filing. Each of which deserve their own takeaway.

 

  1. Terra-UST Ecosystem: How did $60 Billion just vanish?

How big was the Terra-UST Ecosystem collapse? It rivals the Bernie Madoff Ponzi-scheme, which also came in at $60 billion.

 

The cryptocurrency, UST, was an algorithmic stablecoin that was supposed to be pegged to the US dollar. Unlike the volatility experienced in bitcoin/ether’s wild price swings, UST was to enable regular transactions. It achieves this stability “by destroying a sister token, known as luna, using smart contracts, lines of code written into the blockchain… Terra’s protocols also feature an arbitrage mechanism, where investors can exploit deviating prices in each of the tokens. For example, too much demand for UST may result in its price topping $1. That means traders can convert $1 worth of luna into UST, and pocket the difference as profit.” (Source: CNBC).

 

So why the sudden collapse?

 

Do Kwon, the founder of Terra Labs, “retweeted a Twitter user claiming that UST collapsed due to a coordinated attack. By his account, a whale dumped 9 figure amounts of UST on both Curve and Binance, thus bringing its market value down.”

 

Other industry watchers blame his arrogance. He not only mocked people for being poor but also invited people to attack the currency as well. For more see here.

 

  1. Celsius Network: Didn’t they promise not to freeze withdrawals?

The other spectacular collapse was the bankruptcy of Celsius Network.

 

The CEO, Alex Mashinsky, capitalized on the anti-bank sentiment stating:

 

"I hate the banks…You can't retire when you make 1% on your savings - the Fed is screwing all Americans, so the banks can put more profit on their balance sheets."

 

However, the company’s business – giving depositors 18% interest on their funds and loaning funds  –  seems awfully like banking without the FDIC insurance of course.

 

On Twitter, Mahinsky dispelled rumours that the non-Bank-Bank was going to freeze funds. But 24 hours later that’s exactly what the company did.

 

And now they are no more. They have filed for Chapter 11 bankruptcy. In an added twist, they are claiming that the people who deposited funds with them are not account holders. Adam Levitin, a Georgetown law professor, explained to CNBC that:


“The treatment here seems to be that the customer’s crypto is actually the company’s property, and as an unsecured creditor, you don’t get your bitcoins back”

 

  1. Layoffs hit Coinbase and others

When the hype runs out and the trough of disillusionment sets in, such layoffs are inevitable.

 

Coinbase announced that they are laying off 18% of their staff (1,100 people) and have explicitly stated that it is due to the coming “crypto winter”. The CEO of the company, Brian Armstrong, stated in a blog post:

 

 "We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period…"

 

Additionally, Reuters reported that the “crypto market meltdown has forced companies like BlockFi and Crypto.com to slash hundreds of jobs”.

 

  1. Bitcoin: Why the Price Collapse?  

Bitcoin was not immune to the Celsius Network collapse. As reported in Reuters:

 

“Bitcoin, the world's largest cryptocurrency, tumbled as much as 14% on Monday after crypto lender Celsius Network froze withdrawals and transfers.”

 

The higher interest rate environment has also led to further declines in bitcoin and ether. As illustrated by this Bloomberg chart, the price of the cryptocurrency is moving in the opposite direction of interest rates.

 

The crypto collapse is certainly traumatic for those who had high hopes for the technology. However, this bloodletting is hardly a surprise. Bitcoin enthusiasts, like Andreas Antonopoulos, have clearly said that bitcoin is in a bubble for the last 5 years. In other words, the winter that has beset the industry was inevitable.

 

What does this mean for Web3?

Gartner in a recent blog post unveiling its Hype Cycle for Blockchain and Web3, 2002, made an important observation:

 

“In the meantime, other than cryptocurrency trading, we still have not seen killer use cases yet. They need to leapfrog over current applications in terms of making our lives better.”

 

Now the post was careful to delineate between the value of the technology and its price. However, the question remains, what is the utility behind crypto-assets, crypto-currencies, and Web3 more broadly?  Look out for our next blog, where we will explore this topic further in a future post.