In this issue
- Crypto values: Inflation impact
- Celsius freeze: Chilling effect
- Inner Mongolia: Navigating a minefield
From the Editor’s Desk
Since Covid-19 turned the world as we knew it on its head, much soul-searching has been done as to how well markets and other fixtures of economic life are serving their assumed and typically unquestioned purpose.
Specifically, a long-simmering debate over the validity of the “growth at all costs” business model adopted by many in the digital asset industry is back on the boil.
In the perfect storm of the pandemic, war in Europe and galloping inflation, growth — or rather, its opposite — in the cryptocurrency space has provided evidence of the vulnerability of even the boldest, most bullish of businesses. The market capitalization of the whole crypto sector this week dropped below US$1 trillion, representing a loss of two-thirds of its value since last November.
Amid all this, talk of the quality of growth, as opposed to quantity, has gained renewed momentum. The means by which this might be measured is moot, but it is doubtless an important guiding principle — particularly in an industry wracked with debacles such as the implosion of Terra’s stablecoin and what looks like a slow-motion collapse of crypto lender Celsius.
The business models of both Terra and Celsius embody the growth-at-all-costs approach, the ability of each enterprise’s ability to deliver for its users being dependent upon a swelling pipeline of new money sloshing into its treasury. In other settings, this might be described as a Ponzi scheme. That’s debatable, and it’s not our place to pass judgment. But two things are certain.
First, as the clouds of the current economic storm continue to gather, growth in the crypto industry — as in all other parts of the economy, into which it is now more than ever integrated — will be more difficult to attain.
And, second, quantitative growth is a necessary but not the sole condition of the industry’s success.
Until the next time,
Founder and Editor-in-Chief
1. America sneezes
By the numbers: Inflation — over 5,000% increase in Google search volume.
The capitalization of the cryptocurrency market has dropped by more than 27% following the release of a long-anticipated U.S. inflation report last week, falling below US$1 trillion for the first time since 2021, with Bitcoin falling through the psychologically important US$21,000 threshold.
- In the report, the U.S. Department of Labor revealed a year-on-year Consumer Price Index increase of 8.6% in May, the biggest jump in more than four decades.
- The sharp uptick in inflation, and the likely response to it in the form of Federal Reserve interest rate increases, have triggered a sell-off across the crypto market. The price of Bitcoin has dropped more than 30% in the past seven days, from slightly above US$30,000 to US$21,218 at press time.
- Major altcoins are faring even worse. Ether’s price has plummeted by almost one-quarter, from more than US$1,780 last Friday to US$1,126 at press time. Cardano, Polkadot and Dogecoin have also seen double-digit declines. The overall crypto market cap has dropped from more than US$1.2 trillion on Friday to under US$1 trillion.
- Inflationary pressures are building across the globe. The Organisation for Economic Co-operation and Development reported year-on-year inflation of 9.2% across its member countries in April.
- There was also a sell-off on stock markets after the report’s release. The Dow Jones Industrial Average has dropped by around 2.7% in the past three days, and the Nasdaq Composite has shed more than 6%.
- Antoni Trenchev, co-founder and managing partner of crypto lender Nexo, told Bloomberg in an interview: “Cryptos remain at the mercy of the Fed and stuck in a merry dance with the Nasdaq and other risk assets.”
Forkast.Insights | What does it mean?
The crypto winter returns — but this time it’s different. In the last crash, in 2018, the global economy was strong. Despite then-U.S. President Donald Trump’s trade war with China, the year ended better than it started, financially speaking.
Crypto’s correlation with the broader asset market was still nascent, and crypto prices nosedived more than 80% from their 2017 highs, despite a year of sustained growth in other markets. Many are drawing comparisons between what happened in 2018 and what is happening now. But that’s a mistake.
The 2018 crypto winter was the result of hubris and growth fuelled by the initial coin offering craze of 2017. Lawsuits and arrests followed that as regulators caught up with crypto’s unquenchable thirst for innovation. The same hasn’t happened this time around.
This current collapse is part of a broader sell-off of riskier assets as the world economy braces for a post-Covid recession. Despite this, crypto, as a marketplace and an asset class, is widely considered to be in better shape than it was in 2018. Capital for crypto continues to flow: a16z, the crypto unit of venture capital firm Andreessen Horowitz and former Andreessen Horowitz employee-turned crypto investor Katie Haun alone have raised US$6 billion for cryptocurrency investments in recent weeks, with other prominent investors finding similar success.
Although some will dismiss this as yet another example of crypto’s whiplash volatility, a more astute analysis would suggest that things are tough, but that the industry will continue to grow.
2. Worse by degrees
By the numbers: Celsius Network — over 5,000% increase in Google search volume.
Celsius Network, one of the biggest players in the crypto lending space, this week froze all user withdrawals and transfers, triggering a 50% plunge in the company’s CEL token, which was trading at US$0.54 at press time.
- In a post on Medium, Celsius announced that it was pausing all withdrawals, swaps and transfers between accounts due to “extreme market conditions,” in order to honor its withdrawal obligations over time and that Celsius users could continue to accrue rewards during the pause period.
- CEL’s tumble began last Friday when the U.S. reported the sharpest Consumer Price Index increase in four decades.
- Celsius Network is a U.S.-headquartered crypto lending platform founded in 2017 through which users can lend out their tokens as collateral and earn annual yields of as much as 17%. Last month, the company had almost US$12 billion of crypto assets, down from more than US$20 billion in August 2021, and it had loaned over US$8 billion to clients.
- The business models operated by Celsius and some of its peers have drawn attention from regulators, including the U.S. Securities and Exchange Commission, which five months ago began looking into whether their services involve unregistered securities offerings.
- Nexo, one of Celsius’s competitors, shared a letter of intent on Monday in which it offered to buy the company’s remaining qualifying assets, with a focus on collateralized loans, soon after Celsius announced the halt to withdrawals.
Forkast.Insights | What does it mean?
Little over a month since Terra’s stablecoin collapsed, another digital asset debacle appears to be in the works, raising questions over the long-term viability of decentralized finance (DeFi), even though Celsius is a centralized business.
Celsius offers financial products and services with high interest rates and few safeguards. If that sounds familiar, it’s because that’s one of the models that have fueled DeFi’s lightning-fast growth. But that growth has sputtered lately.
At its peak in November 2021, DeFi in the Ethereum network had more than US$100 billion locked into various interest-earning schemes, according to DeFi Pulse. That number has fallen to US$41 billion.
What Terra and now Celsius’s apparent demise highlight is that the super high-yields promised by DeFi protocols are unsustainable. The supercharged growth of both these projects suffered from what Reid Hoffman, the founder of LinkedIn, calls “blitzscaling.”
This concept, popularized by Web 2.0 startups in Silicon Valley, is driven by a desire for projects to grow with sufficient speed to become the first mover at scale and capture the market — even if that growth comes at the expense of profits, and when they fail, consumers.
Celsius and Terra could deliver high yields only if they could sustain a steady flow of entrants into the market. During the latest downturn, which has seen the capitalization of the crypto market slashed by two-thirds in just seven months, the mechanics of these businesses have faltered. Expect others to do the same as the current market woes worsen.
3. A lode off miners’ shoulders?
Inner Mongolia, once a thriving cryptocurrency mining hub in northern China, has so far closed 49 cryptocurrency mining farms, only four of which have been shut down since September last year, indicating either that authorities’ attempts to crush the industry have been successful, or that the clampdown ordered by Beijing is slowing down.
- In September 2021, Inner Mongolia reported the closure of 45 crypto mines, according to state-backed newspaper Science & Technology Daily. A report by Inner Mongolia Daily on June 9 said the number of mine closures had increased only to 49.
- Before the mining clampdown, Inner Mongolia had been a favored base for many crypto mining operations in China, thanks to the fact that its abundant coal resources meant electricity was cheap.
- China started its offensive against the crypto mining industry in March 2021, triggering an exodus of crypto miners from the country. Nevertheless, China’s mining hashrate began to rise again late last year, and it became the second-largest Bitcoin mining hub in January, with 21% of the global hashrate, according to the Cambridge Centre for Alternative Finance — which suggests the presence of large-scale clandestine mining operations.
- Provincial governments in China have taken multiple measures to crack down on crypto mining, including tracking electricity consumption to locate illegal mining farms. But miners are still operating secretly in China, either scattered throughout rural areas or greasing the palms of local officialdom to help conceal their mining activities.
Forkast.Insights | What does it mean?
Inner Mongolia was one of the first regions of China to experience a Bitcoin mining clampdown in 2021, but the slowing rate of data center closures and a climbing Chinese Bitcoin hashrate suggest that Beijing’s war against crypto miners may be ebbing.
In March, the Cambridge center reported that cryptocurrency mining farms in Inner Mongolia, an autonomous region, accounted for 8% of the global Bitcoin mining hashrate. But the slump in Bitcoin prices to 18-month lows and rising energy prices around the world are also delivering a one-two punch to mining businesses.
The International Energy Agency reported in January that it had observed the steepest increase in energy demand in 2021 since it had started tracking relevant data and that half of the demand spike came from China.
Bitcoin miners have started to diversify their businesses as cryptocurrencies lose their value.
Although Beijing’s clampdown may be easing somewhat, Chinese miners will likely generate lower profits amid higher costs, thanks to rising electricity prices, for the next few years.
The reach that Chinese authorities enjoy in their country is longer than most, but the invisible hand of the market may pose a bigger threat to Bitcoin miners than official efforts to throttle their business.