Off to the south
The all-time high of November 2021 was a while ago; since then, the price of most cryptocurrencies has been heading south like many vacationers. Slumps of around 70 percent compared to the peak are driving investors to sweat without any summer heat. While an impending crypto winter sends cold shivers down the spines of many, a market slowdown could send prices plummeting for years to come.
The current geopolitical situation is hardly likely to provide relief in the foreseeable future. On the contrary, the Ukraine war and Corona are weighing on commodity and energy prices, making life difficult for miners and creating an economic environment that must be described as “challenging” at best. Inflation is reaching dangerous levels, forcing central banks to counter inflationary pressures and initiate a turnaround in interest rates. The ECB raised its key interest rate to 0.5 percent for the first time in years – a drop in the bucket, sure – but enough to drive some investors back into the fold of fixed-income securities.
Market shakeout
It became apparent just a few weeks after the slumps who had done well in the fat years and who had not. Numerous companies reacted promptly with waves of layoffs because they had grown too quickly in the past or had built up too few reserves. What is little consolation to the affected employees, but an important consideration, is the shakeout that is now underway, as CK Zheng, co-founder of hedge fund ZX Squared, and James Butterfill, Head of Research at CoinShares, find, “We don’t know if the deleveraging is now complete. I think we are still in the process of flushing out weak players,” “CNBC” quotes Zheng as saying. In his opinion, it would help the market find a bottom if there were no more threats of surprise corporate collapses.
It is this point – a halt to the collapses – that presents itself as the incalculable variable in this equation: Because many crypto companies derive their revenue through transaction fees, their success depends heavily on how large their trading volume is. And that has declined significantly of late. After the insolvency of crypto-lending companies, Bitcoin mining companies are now also threatened with bankruptcy. They, unlike bitcoin lenders, are threatened from different sides.
The current situation awaits with four components from which it is hard to build a sustainable framework: Bitcoin’s plummeting price, increased energy requirements for mining, rising energy prices, and higher capital costs due to rising interest rates are causing mining companies, in some cases, to dump reserves onto the market in large quantities to ensure their continued existence. The collapsing share prices of listed miners are doing their part to make the struggle for survival more difficult. In some cases, share price losses of over 50 percent have to be absorbed – a Herculean task that only a few companies will be able to cope with.