Frozen billions. How the crypto market survives the crypto winter

This year, fear of a global recession and the worst inflation in more than 40 years damaged the still-nascent digital asset market, triggering a violent crypto winter that drove some of the biggest companies into bankruptcy and investors into panic selling. The consequence of the market crash has been the loss of trillions of dollars in market value, billions of dollars in frozen funds and thousands of jobs.

Low interest rates and government stimulus measures contributed to the surge in cryptocurrency prices during the COVID-19 pandemic, but the U.S. Federal Reserve System's (Fed) decision to curb rising inflation by raising interest rates has since undermined investor sentiment, leading to significant losses in the cryptocurrency market.

After accumulating a record market capitalization in excess of $3 trillion in November 2021, the market had its worst first half of the year ever and fell to about $920 billion. As of July 21, the total capitalization of the crypto market stands at $1,03 trillion, according to Coinmarketcap.

Wave of layoffs

Faced with a sharp market decline, cryptocurrency companies laid off more than 2,000 employees in less than five weeks. Coinbase laid off 1 180 employees, or about 18% of its workforce, weeks after its CEO Brian Armstrong warned investors that a potential recession could lead to a prolonged bear market.

Gemini, founded by the Winklevoss twins, suspended about 10% of its 1 000 employees and later cut staff by another 7%. Trading platforms Crypto.com and BlockFi said they would lay off 5% and 20% of staff, respectively. Austria-based Bitpanda cut 270 jobs, calling the move necessary “to navigate the storm and get out of it financially healthy.”

The layoffs continue. On July 14, OpenSea, the largest NFT marketplace, laid off about 20% of its employees. The startup was valued at $13,3 billion amid a surge in NFT sales. Over the past three months, the market capitalization of the non-fungible token market has fallen by nearly 40% and trading volume by nearly 66%.

On July 21, the Blockchain.com platform announced that it was cutting 25% of its staff (150 employees), closing its Argentine offices and plans to expand in several states. The company attributed this decision to cost optimization to cover the losses, which were caused by the bankruptcy of the hedge fund Three Arrows Capital (3AC) and its failure to repay a $270 million loan.

“Extreme conditions”

Investors withdrew crypto assets from funds at a record pace. According to a report from analysts at CryptoCompare, assets under management of crypto investment funds hit a record low of $21,6 billion in June, down 37% from May, as “looming liquidation threats” caused panic among investors after the Terra collapse, due to market turbulence.

Citing “extreme market conditions,” cryptocurrency lender Celsius became the first major platform to suspend customer deposit withdrawals on June 13. A few days later, others followed suit, with the lending companies Babel Finance and Voyager also freezing withdrawals. Neither of them restored access to billions of dollars in investor assets.

On June 27, Voyager issued a notice of default to Three Arrows Capital for failing to make payments on $675 million in bitcoin and stablecoin loans. The long-suffering 3AC, which was lent by most major players in the crypto market, managed $3 billion in assets. On June 29, a British Virgin Islands court ordered 3AC to liquidate its assets, deeming the firm insolvent; on the same day, the fund filed for bankruptcy.

Who Three Arrows Capital owes money to. Full list of creditors and loan amounts.

The fate of 3AC was sealed, and Voyager itself declared bankruptcy on July 5 — just four days after it suspended trading. In the lawsuit, the company said it had more than 100 000 creditors and up to $10 billion in assets.

Celsius was the next victim, filing for bankruptcy on July 13. The documents list assets between $1 billion and $10 billion, liabilities in the same range and dozens of loans worth millions of dollars each, including from companies like Alameda Research belonging to FTX exchange CEO Sam Bankman-Fried.

The market didn't spare other players either. On June 24, the CoinFLEX exchange suspended withdrawals, citing the same “extreme conditions” in a statement. On July 15, the exchange resumed withdrawals in limited mode, but customers can only withdraw 10% of the assets on their balances.

On July 4, Singapore-based crypto platform Vauld suspended withdrawals. Later, the company also filed for bankruptcy. The lawsuit found that it was unable to repay $402 million, of which 90% ($363 million) was from deposits from individual retail investors.

On July 10, Spanish crypto exchange 2gether shut down access to trading and withdrawal of funds, citing the inability to cover operating expenses due to crypto winter. Moreover, users were charged 20 euros each as a maintenance fee.

On July 19, Legion Strategies, one of the funds of the investment company SkyBridge Capital, suspended payments amid a sharp drop in stocks and cryptocurrencies. SkyBridge's unit managed digital assets, including bitcoin, Ethereum and Algorand.

On July 20, the Zipmex exchange announced it was suspending withdrawals and trading, linking the decision to “volatile market conditions” and “financial difficulties of key business partners.” According to insiders, Zipmex suffered because of the bankruptcy of Babel Finance, a lending platform to which the exchange provided a $100 million loan.

When the crypto winter will end

The market has recovered a bit from the fall since June, but according to a report by Grayscale Investments, we can expect another 250 days of crypto winter.

According to analysts' calculations, we are in a market cycle that began in 2020, and its “winter” part began in earnest only on June 13. Grayscale calculated the date by finding the point at which most crypto assets are held below the price at which they were bought.

How the current collapse of the crypto market differs from previous ones

Based on historical analysis, Grayscale experts note that crypto market cycles last about four years, and the current cycle is already about three years and two months. This means that it could be a long time before the ice begins to melt. The researchers estimate that a bullish period for cryptocurrencies can be expected no sooner than March 2023.