Crypto Quarterly is The Logic’s recurring series assessing the overall state of the crypto market, with a focus on Bitcoin, Ethereum, Flow and Cosmos’s Atom, four cryptocurrencies with strong ties to Canada.
After a long bull run, the cryptocurrency market unravelled in the second quarter, alongside a huge decline in other assets like stocks and bonds. While it wasn’t the industry’s first-ever crash, this is the first crypto winter to take place in such a perilous economic environment. That means the crypto sector could face new challenges this time around, even if investors and founders say its prospects are stronger than ever.
Talking Point
Cryptocurrencies plunged alongside traditional assets like stocks and bonds in the last quarter, prompting a wave of defaults that will challenge the sector even as proponents maintain its fundamentals are strong.
Bitcoin ended the quarter down 55.8 per cent, performing better than three other cryptocurrencies that The Logic tracks: Ether, Atom and Flow. Those tokens were down 66.5 per cent, 74.5 per cent and 77.2 per cent, respectively, as of June 30. Most of the drop took place in the first half of the quarter.
The plunge also occurred in tandem with global economic headwinds that the industry hasn’t seen in its 14-year existence. For the first time since the Bitcoin white paper was published in 2008, central banks around the world are aggressively tightening monetary policy. With rising inflation and supply-chain snags also disrupting commerce, many analysts are now predicting a recession within the next 12 months.
“There is an open-ended question with respect to what is going to happen to the whole asset class,” said George Bordianu, CEO and co-founder of Balance, a crypto custodian based in Toronto. “I don’t believe anyone has seen a recession of the likes of what we’re about to see.” That has placed additional pressure on startups like Balance to operate at a profit, he said.
Against that backdrop, founders and investors are mapping out a path forward. The crypto sector is no stranger to panics that wipe out nearly the entire market cap of many tokens: in the last bull run, which ended in a dramatic plunge at the start of 2018, the price of Bitcoin fell from a peak of more than US$19,000 in December 2017 to around US$3,000 by the end of 2018, despite fewer signs of trouble for other non-crypto assets. But the new economic climate will provide a different test for the industry, investors and analysts say.
Tom Dunleavy, an analyst for the crypto-research firm Messari, wrote in a June 30 research report that economic conditions mean digital-asset markets could fall even lower in the coming months, contradicting others who say it’s hit a bottom. Because of rising costs for food and housing, higher inflation expectations and the possibility of weaker corporate earnings, Bitcoin and Ether could fall even lower, Dunleavy wrote.
The market has rallied somewhat in July after a brutal quarter. And many veterans say the crypto market’s underlying fundamentals are stronger than in past years, putting it in a stronger position to weather the storm.
“This year is fundamentally different than previous years,” Jake Brukhman, managing partner of the U.S. crypto investment firm CoinFund, told The Logic, “in the sense of having more founders than ever, more capital than ever, more traditional attention than ever, more market fit then ever, more Web2 people taking up Web3 than ever, more infrastructure than ever, more corporate adoption than ever.”
CoinFund, which was founded during a crypto bear market in 2015, has made some of its most important investments during downturns, he added. The fund has since backed many prominent names in the industry, which according to PitchBook include Vancouver-based Dapper Labs and the DeFi platform Zapper, whose team has ties to Montreal.
One factor separating this downturn from past years is the amount of leverage in the sector. When prices fell sharply this spring, Celsius Network, backed by the Caisse de dépôt et placement du Québec, had been lending out customers’ funds to decentralized finance protocols in exchange for high yields, and found itself unable to meet withdrawal requests.
A failure to make loan payments by the crypto hedge fund Three Arrows Capital also brought down other lenders such as Voyager, whose shares were halted on the Toronto Stock Exchange last week after filing for bankruptcy.
Crypto miners, whose incomes are tied to the price of cryptocurrencies, have been under similar pressure. Facing a liquidity crunch, Toronto-headquartered Bitfarms sold about US$62 million worth of Bitcoin last month to pay down loans it had taken out for mining equipment. Shares in Bitfarms and Hut 8, another Canadian crypto-mining company, fell 69.7 per cent and 75 per cent during the quarter, respectively.
Hut 8 hasn’t sold any of its Bitcoin since January 2021, CEO Jaime Leverton said. “It’s always an option that we can use Bitcoin as collateral for debt,” Leverton said, “but as of right now, our entire stack of over 7,400 bitcoins is uncollateralized, and we have not sold.”
Sam Bankman-Fried, CEO of the crypto exchange FTX, whose company entered into a deal with an option to buy the remaining assets of the troubled lender BlockFi, said in an interview with Bloomberg that he was open to exploring acquisitions in the mining sector.
Leverton told The Logic that she expects consolidation among crypto miners, given the large number of publicly traded Bitcoin miners in North America.
“If these market dynamics continue for an extended period of time, I think you will see consolidation—it would be inevitable,” Leverton said.
