Column: Crypto is melting down. Here’s who’s hurt

Fans line up before the start of a game between the Los Angeles Lakers and Brooklyn Nets at Arena on Christmas Day 2021.
(Gary Coronado / Los Angeles Times)

These are gut-wrenching days if you’re an investor in stocks or bonds. But things could be worse:

You could have your money in crypto.

In its heyday, which sometimes feels like only a few days ago, crypto seemed to be on the verge of breaking into the mainstream.

It can be very hard for ordinary investors to separate fact from hype.

— U.S. Department of Labor, warning against investing in cryptocurrency in 401(k) plans


High-profile investment bankers were leaving traditional Wall Street firms such as Goldman Sachs and Morgan Stanley to join Coinbase Global and other crypto startups.

Entertainment stars Matt Damon and Larry David and sports legends LeBron James and Floyd Mayweather Jr. lent their reputations to companies in the field.

The giant Fidelity Investments announced in April that it would allow investors in 401(k) retirement plans to put some of their assets in crypto (corporate sponsors of those plans, but not government regulators, would have to agree).

Crypto companies made sponsorship deals, which gave us Arena (the former Staples Center in downtown Los Angeles), and those FTX badges on the uniforms of Major League Baseball umpires. Crypto billionaires like Sam Bankman-Fried, the chief executive of FTX, started dreaming about deploying their wealth as political kingmakers.

Since then, the field has lost its luster. Bitcoin, the leading crypto asset and the one most familiar to laypersons, has lost about 70% of its value since Nov. 9, when its price peaked at $69,000. The Standard & Poor’s 500, a key stock market index, is down about 24% from its peak of 4,818, reached on Jan. 4.


Other crypto assets have also crashed: Ethereum, the second-biggest name, has come down by about 78% in the same period. Dogecoin, which was launched as a parody crypto asset but later got taken up by Elon Musk (his company SpaceX dubbed one of its planned lunar missions DOGE-1), has fallen by about 92% from its peak in May 2021, to less than six cents today. (All prices are those cited by Coinbase.)

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Meanwhile, crypto’s financial infrastructure has been coming apart at the seams. The most recent development to rattle the field was a June 12 announcement by Celsius, a crypto lender that operated like an unregulated bank, that it was “pausing all withdrawals, Swap, and transfers between accounts” of its 1.7 million customers.

The decision appeared to be the product of rapid withdrawals of deposits at the company along with the crypto price crashes.

But it underscored persistent questions about the firm’s business model, in which it offered annualized interest yields as high as 20% on crypto deposits — traditional banks were paying around 0.5% on deposits and even junk bonds were paying around 7.5%.

Other crypto assets that depicted themselves as havens of reliability have turned out to have figurative feet of clay. Consider “stablecoins,” which are purportedly tied to hard assets such as the U.S. dollar or short-term commercial paper.

The claim behind tether, a key stablecoin that has been lubricating crypto trading generally, is that each tether, priced at $1, is backed by $1 in cold cash. But since the sponsoring firm is unregulated and has never released an audit based on generally accepted accounting principles, no one really knows.

A bigger problem with stablecoins is that some aren’t actually backed by hard assets but are “algorithmic,” meaning that their values are supposedly kept stable by computer-driven buying and selling.

The crash of one such coin, terra, helped provoke a selloff in bitcoin in May. As the British systems engineer David Gerard observed, terra’s ostensibly stable assets were “chained boxes of worthless trash,” so its value plummeted from $1 to a current quote (though no one is buying) of six thousandths of a cent.

Fraud and other varieties of criminality are so rampant in the crypto space — including its even less savory offspring, such as NFTs (nonfungible tokens) — that a whole lexicon of scams has sprung up. These include “rug pulls,” in which a promotion team suddenly abandons a project and escapes with the already-invested money.

More traditional investor abuses are also common. Crypto deposits have been stolen by hackers by the millions. The network supporting the online NFT-related game “Axie Infinity” reported that hackers had stolen crypto assets worth as much as $625 million.

State and federal regulators are also investigating crypto promoters for allegedly selling illegal securities, and the Securities and Exchange Commission is reportedly investigating evidence of insider trading at crypto exchanges.

Manifestations of the crypto meltdown are rife. They include layoffs at leading trading firms, and the withdrawal of job offers made by Coinbase, a big crypto exchange, to recruits from Goldman Sachs, Morgan Stanley and other Wall Street firms that were made during headier days.

The fortunes of seven top crypto billionaires, including Bankman-Fried and the Winklevoss twins of “The Social Network” fame, shrank from $145 billion at bitcoin’s peak in November to $31.4 billion as of June 13, according to Bloomberg’s billionaires index.

What may be making the meltdown worse than the bear market afflicting stockholders is that crypto doesn’t have any value in the real world.

With the possible exception of stablecoins, it’s not backed by gold, corporate profits or any other realizable asset. It doesn’t throw off earnings, nor is its value protected by governments; indeed, the virtue of crypto assets, according to their promoters, is that they’re independent of government activity.

Many of the assets’ claimed virtues aren’t virtues at all: It’s said that transactions are irreversible and don’t require an intermediary such as a bank, but that’s become a problem for owners who think they’ve been scammed or robbed and are left with no recourse.

Promoters have been trying to articulate a use for crypto since bitcoin began trading in 2009, but have never made a case.

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Instead, it’s dependent on what is known as the “greater fool” theory: Crypto assets are worth whatever you can persuade another fool to pay you for them. When the supply of fools washes out — or confidence wanes that they’re out there at all — the market is vulnerable to a crash.

One poorly understood aspect of the crypto meltdown is who is getting hurt the most: In short, it’s the small investors who have been sucked in over the last few months. With bitcoin trading at around $21,000, it’s still profitable for anyone who invested prior to early December 2020, and held on since then (or sold out after, say the beginning of January 2021).

But as is often the case with conventional markets, a wave of investors piled in as prices soared, spurred in part by a torrent of advertising by crypto firms starting last year and peaking during the Super Bowl in February.

An investor survey published in December by Grayscale, a pro-crypto research firm, found that 55% of surveyed bitcoin investors had launched their investments during the prior year.

That implies that a large share of new investors are underwater today; some may have lost their life savings. Still, most of the holdings are in the hands of a small number of big investors, according to research from MIT and the London School of Economics.

Grayscale said it detected a surge in investor interest in bitcoin, with 59% of its December survey respondents considering bitcoin, up from 36% in 2019.

That apparent receptiveness to the investment category is presumably what spurred Fidelity’s initiative, through which it is offering companies with 401(k) plans the option to allow workers to place some of their contributions in crypto.

The idea, however, unnerves the Department of Labor, which oversees retirement plans. As it should.

As if bitcoin fans didn’t have enough to worry about these days, a widely respected international bank has just published a scathing analysis of the cryptocurrency questioning whether it ever will be more than a fad — and a costly fad for its adherents.

June 18, 2018

The agency says it has “serious concerns about plans’ decisions to expose participants to direct investments in cryptocurrencies or related products, such as NFTs, coins, and crypto assets. ... These investments can easily attract investments from inexperienced plan participants with expectations of high returns and little appreciation of the risks the investments pose. It can be very hard for ordinary investors to separate fact from hype.”

The agency implied that it might question whether companies allowing workers to invest in crypto are meeting their legal duty to “act solely in the financial interests of plan participants,” and warned that they could be held liable for any losses the participants suffer if the companies have breached that duty.

Crypto still seems to grip the imaginations of some congressional policymakers. Two of the leading crypto shills on Capitol Hill, Sens. Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.), appeared on CNBC this month to promote a bill they introduced to give the industry exactly the regulation it craves, which is to say almost none at all. According to regulatory expert Hilary Allen of American University, crypto “is not innovation that merits a light-touch bespoke [that is, tailor-made] regulatory regime” such as that proposed by the bill.

Asked on the air if she thought crypto belonged in workers’ 401(k) and other retirement plans, Lummis replied, “It’s a wonderful idea . ... You want assets that are a store of value, and I think that’s where bitcoin really shines. ... It’s some of the hardest money that’s ever been created in the world.”

Leaving aside that bitcoin doesn’t meet the definition of “money” in any way, the glow is off its “shine,” since it lost 30% of its value in the eight days since Lummis’ appearance.

Promoters might argue that one week does not a long-term asset make, but crypto hasn’t shown its utility for anything other than criminality and fraud in the 13 years since bitcoin began trading. Many experts in finance and digital security have been watching with dismay as consumers and policymakers bought in to promoters’ balderdash.

In an open letter earlier this month, a group of 26 experts urged congressional leaders to take steps to protect the public from these “risky, flawed, and unproven digital instruments.” Their letter ultimately attracted signatures from 1,700 scientists and technologists, according to Stephen Diehl, a British engineer who is one of the organizers.

The writers said, “We strongly disagree with the narrative — peddled by those with a financial stake in the crypto-asset industry — that these technologies represent a positive financial innovation.” Rather, the technologies are “poorly suited for just about every purpose currently touted as a present or potential source of public benefit,” they said.

They’re right, as investors who took the plunge into crypto when it looked to be going to the moon have learned.

But the promotional verve in the crypto industry is fierce — possibly more now than before, in the drive to find more investors to cover their losses. It’s up to regulators and political leaders to take a hard look at how to protect ordinary families from the unwarranted claims and promises still coming from crypto, and stop talking about how “wonderful” it is.