Front Burner - Crypto is crashing. Why?

Episode Date: June 21, 2022

After many months of hype, the cryptocurrency market is crashing. Last week, the trading and lending platform Celsius Network paused all withdrawals, citing extreme market conditions. Another trading platform, Coinbase, laid off nearly 20 per cent of its workforce warning of a potential extended "crypto winter." Some $2 trillion in value has been wiped out. Today, how that wipeout has been felt by one cryptocurrency investor. Plus, an explanation of why this crash is happening now, and what could be next, from New York Magazine business and economics reporter Kevin Dugan.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hello, I'm Jamie Poisson. Rolling, Albert. So if you watched the Oscars back in March, maybe you saw this ad for Wealthsimple's cryptocurrency exchange with a bunch of, like, cavemen,

incredulous as their cave friends invent the wheel. They go way too fast. Way too fast. There's no beginning and no end. They're just circles. I call it the wheel. Should we burn them? Let's just undermine them.

Make them feel weird. At the Super Bowl in February, there was an ad for the crypto exchange FTX, with literally the exact same premise. Plus, Larry David. I call it the wheel. I don't think so. What does it do? It rules.

Yeah, so does a bagel, okay? A bagel you can eat. One of the worst ideas I've ever heard. The message being sold here is really clear. Doubting crypto is like doubting a technology as foundational as the wheel. It's foolish. It's short-sighted. Matt Damon added some gravitas to the pitch in his commercial for Crypto.com. The four simple words that have been whispered by the intrepid since the time of the Romans. Fortune favors the brave. But here's the thing. If you are feeling brave and put down a thousand bucks into crypto, let's say Bitcoin, around when that ad first aired last year, your fortune on Monday morning would have been around $350.

And other less established cryptocurrencies, they're doing even worse. Like looking back, it sounds almost like negative, I think. And it was honestly just the crazy hype and like monetary gains from the Dogecoin stuff. This is William Scarcia. He got into crypto last year through Dogecoin, the meme-y coin boosted by the likes of Elon Musk. Yeah, like it was, you know, being memed all over the place and just like you could hear about it everywhere.

And, you know, people are talking about how they made like 100x gains and all that kind of stuff. And I was like, that's pretty cool. Might as well try that out a little bit. And honestly, it went really well too at first. It hit its peak with the Saturday Night Live thing with Elon Musk.

Now, what is Dogecoin? Well, it actually started as a joke based on an internet meme. But now it's taken off in a very real way. Okay, but what is Dogecoin? And then there, I think it peaked around like 70 something cents. And I was up like $8,000 or something. That was amazing. And I was like, ah, yes, I think I'm actually going to sell like right now just in case. And then my dad called like right when I was in the

middle of doing that on my phone. And I was like, oh, I'll talk to him first and then I'll do that. And we talked for like 15 minutes. And then when I got back to the chart, it was like down to like 50 cents. And I was like, OK, I'll wait a little bit for it to go back up. And and it never got anywhere near that again. And now it's at like four cents or something. And it never got anywhere near that again. And now it's at like four cents or something. Just last week, an American man sued Elon Musk for $258 billion, accusing him of running a pyramid scheme and arguing that Musk, Tesla and SpaceX, quote, falsely and deceptively claim that Dogecoin is a legitimate investment

when it has no value at all. But back to William. He didn't have too much in Doge. His losses were under a grand. And he says he tried to be more careful with crypto after that. But then he starts hearing about TerraUSD. It's a so-called stablecoin designed in theory to hold a relatively steady value. Investors, including major venture capital firms, were buying it. It didn't seem so bad, just all of the positive feedback and its relatively lasting presence and their plans going forward and their white papers and announcements and social media presence all seemed legit. white papers and and announcements and social media presence all seemed legit and it seems like everybody out here is talking about it like like this normal thing that everyone uses so i might

as well invest in that and then like months go by and i make some good earnings and i end up investing my entire savings account into that and it was awesome because I was making so much money for nothing. And then it was all gone. Last month, TerraUSD and its sister token, Luna, collapsed completely. It happened really fast. William was home alone at the time. His wife and baby son were off visiting the grandparents. And as he stared at his phone watching the price crash,

William says he felt his chest tightening, like he was having a heart attack. Honestly, it was just complete disbelief. I think I was just silent for minutes and just looking at everything and, you know, reloading and reloading the charts, just in shock. And, uh, I think the whole rest of the day I was really in shock and, you know, the thoughts passed, like, like, what am I going to do? What am I going to tell my wife? Like, should I tell her? When do I tell her? Um, I ended up calling her, I think, the next day. I couldn't do it that afternoon. I was just too, I don't know, scared. I didn't think that she would, you know, she wasn't going

to leave me or anything, but I just felt so like, I don't know, like I didn't want her to be so like disappointed, you know? So she was disappointed and William is still stressed and frustrated, but not totally financially ruined. While his whole savings account went into Tara and Luna, he's a registered nurse and his wife is a teacher. He still has some other investments in stocks and in crypto. But I just feel like I need something. I need to try something to kind of set myself up to retire a little bit earlier. I don't want to be a nurse at 60 years old. No. Oh, my gosh. It's so surprising, like physical. I work out.

I play basketball. I always have. And I'm pretty athletic. And even I'm having back pain and shoulder pain and stuff at work. And our salary is so low here for nursing. So the salary plus the difficulty of work is not worth it. It makes it difficult to want to stay there, you know? So William is hoping that someday down the line,

his crypto investments will pay off and he can retire early. But for now, the market is crashing. Last week, the crypto trading and lending platform Celsius Network paused all withdrawals, citing extreme market conditions. Another trading platform, Coinbase, laid off nearly 20% of its workforce, warning of a potential extended crypto winter. Two trillion dollars in value has vanished in a matter of months. So today I've got Kevin Dugan with me. He's a business and economics reporter at New York Magazine. And we're going to talk about crypto's hyped up highs, today's lows, and whether or not they could be here to stay. Hey, Kevin, thanks very much for being here. Thank you so much for having me on today. I'm really excited to talk about this.

Me too, me too. So look, this crash didn't begin last week. It's been creeping up for some time now. And tell me about when you think this really started. Sure. Well, you could really trace this back to the all-time high in November when it reached almost $69,000. That's Bitcoin. When Bitcoin reached almost $69,000, at the time, crypto was actually seen as a way for people to fight against inflation while the prices for everything around us from food to gas were going up. And it turned out that that thesis didn't really hold any water. Essentially, crypto acts kind of like a tech

stock. It can be very volatile. People can lose money very, very quickly. And you have all of these Wall Street traders. They know that it's risky. They know that risky things can make them a lot of money. But as soon as that risk becomes more of a liability, then they dump it. Right. And when do you think it started to become a liability for a lot of these investors? You mentioned that it was initially seen as this way to hedge against inflation, but at some point that turned, right? Right. Well, around November, that was when you really started to see a lot of the hype around cryptocurrencies reach an absolute peak uh i remember around that time i went to a crypto uh nft conference in miami and it was yachts and

fancy dinners and big parties and it was all wound up with art basil it was a lot of high society our world has been turned upside down again, like a fun house of mirrors. This is the year of so-called crypto art, creations that live in a digital world. So I don't see anything here, but when I stand here, it's there? Exactly. So it's an augmented reality. And that for me, even though that was a little bit past the peak, that really felt like the kind of end point. There was just so much money and it was so ostentatious, which a lot of this stuff really is in a flagrant way on purpose.

So I think there's a lot of feeling that what had been driving it over the past year, 18 months, I guess really since the start of the pandemic, was just starting to fizzle out. And at the end of the day, most people really aren't using crypto in their day-to-day lives. They use cash, they use credit cards, and they don't really have a reason to use any kind of cryptocurrency or use NFTs or things like that. Related to that, is it fair to say that as the broader economy started to take more of a hit here, as inflation started to really hurt people, as interest rates starting to go up, you know, you have a war in Ukraine. You mentioned risk earlier, maybe people were thinking, like, I don't want to take such a risk anymore. Sure. That's really, I think, a big part of it. And that is what I hear from, you know, investors on Wall Street. You know, essentially, think about it this way. If you know that the economy is going to start slowing down, then where you want to keep

your money invested would be in assets that wouldn't lose so much money or would be less risky, right? And you would take money out of assets that are more risky. And really nothing is quite as risky as cryptocurrencies, at least as a general investment asset class. at least as a general investment asset class. So it makes sense that people would kind of turn tail and run. In January, the price of cryptocurrency fell almost by 50%. Let's go to those one week losses right now. And they are brutal. More than $600 billion in market value wiped out from Bitcoin's peak alone.

It could take some time. And it recently did that again. So, you know, when you start to see these really, really large drawdowns, then people, you know, they don't have the same kind of confidence in that. Yeah. Yeah. And I suppose that effect compounds, right? Like as you start to see these drawdowns, as one person pulls their money out, others start to wonder if they should too. And it like creates this sort of panic. Sure. And you know, I mean, there's also just the crypto community for better or for worse, has really internalized that this risk is just a part of everything.

Just like the way that it has to operate because it's so new, because it's kind of like the Wild West and people are, you know, they really feel that they're building something that is alternative to the financial system that we have right now. But there are also a lot of scams. There are a lot of projects that are just bad. They don't make a lot of sense and they fail. And so that level of failure and in some cases, you know, scams, it doesn't make people feel

that they can put their money here and trust that it's going to be there tomorrow. here and trust that it's going to be there tomorrow. And when the economy is starting to really slow down, now that we have wars, huge geopolitical problems, people want that kind of security with their money. In fact, these blockchain technologies, these blockchain currencies, they're supposed to be more secure in a way, at least this is thinking, than your kind of fiat currencies, your dollars, your euros. Governments can lose power. They can take away your ability to own money, but nothing could take away your ability to own Bitcoin. That's the pitch. It hasn't really been proven, at least on a wide scale. So I think people are seeing that it's not everything that has been sold to me. Yeah. And I guess, tell me more about that,

right? Like, I'm, I'm curious about what lies underneath that, like the commercials that we heard in the introduction present crypto as a technology that's as transformative as the wheel, but at the end of the day, you have a wheel, right? Like at the end of that, and I guess what value, what use do you see in crypto? Well, the blockchain technology is essentially a large ledger that replicates over and over. And it can be good for, you know, verifying transactions.

And I'm sure that since there are central banks who are looking into ways to use it for digital currencies that there's some future to it um however you know i think for most people people really would be better off in putting their money in a bank unless you are edward Snowden or another kind of figure like that, you don't really need it. Most people are not going to have their money taken away from them. I don't really see how Bitcoin and blockchain would be for most people. If you're looking at crypto as a way to make money, then that's another story. But there are also lots of different little companies that are sprouting up that are trying to essentially issue their own currencies.

This is why you see hundreds, thousands of different cryptocurrencies pop up and then make a lot of money for a very small number of people and then crash. So for some people, it may make a lot of sense because it can make them a lot of money, but it is a hugely risky asset. And people who tell you otherwise, I don't think that they're really looking at the, you know, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empower empowering Canada's

entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income. That's not a typo. 50%. That's because money is confusing.

In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. Would you agree that what's really propelled the value of crypto for most people so far is like vibes, basically enthusiasm, excitement, belief that it'll make money? Crypto definitely is derived on vibes, right? So, you know, there are many cryptocurrencies that have almost really no use. They're maybe jokes or they have, you know, not very good technology. Bitcoin is, people use Bitcoin and it is, you know, the most popular cryptocurrency.

But it's a form of money that doesn't have a government. It doesn't have a strong infrastructure and it is fairly slow and energy intensive. And most businesses don't take it. So it's definitely something where it's like, So, it's definitely something where it's like, yeah, I kind of think that maybe this will be the future that is what is propelling it. Now, maybe it will be, right? I mean, crypto has survived crashes before. But when you invest in a company, say a company that makes cars, it's because you think that those cars are going to be driven and popular and people are going to buy them and that money is going to go into a company. Or if you invest in one country's currency against another's, it's because you are betting on their economy.

How do you make that same investment with cryptocurrencies when there is nothing underlying it except enthusiasm? Well, in extreme cases, that is the basis for Ponzi schemes. And so that can be a problem. Not everything is a Ponzi scheme. Not everything in crypto is a scam, but if there's nothing underlying it except a technology that, let me remind you, is getting more and more obsolete every single day, it's difficult to see where the future thesis is coming from. Why is it getting more and more obsolete every day? Well, the essential idea behind cryptocurrency goes back to blockchain technology, right? And this idea originated about 13 years ago with a white paper by a pseudonymous person named Satoshi Nakamoto. And there have been updates to the broader technology overall. Recently, Ethereum, which is a different kind of cryptocurrency,

they're now in the middle of a broader update. But in general, the idea is basically the same. And these small updates haven't really made it all that much more useful for the common person. If you think about the broader technological shifts that we've seen over the past 15 years, you know, the iPhone came out just two years before Bitcoin did, right? And we are calling it iPhone. Today, Apple is going to reinvent the phone. Now, almost nobody had an iPhone in 2007. And now millions and millions and millions of people do.

It's technology that's improved with time. And it's become more and more useful to more and more people. Can you say the same thing about Bitcoin? Can you say the same thing about cryptocurrencies? Certainly, it's more popular than it was before, but nowhere near the same scale as smartphones. And so part of the issues I think people are seeing with cryptocurrencies is just that the promises of its wide adoption over time, the promises around it, the potential for its use,

they keep on getting thrown out further and further into the future. And now that it's so many years past since the origins of Bitcoin, I think there's also a little bit of fatigue that we haven't quite figured out how this is going to work and why has it taken so long? Crypto has faced challenges before. The price has dipped before. It's rebounded. You know, on top of that, we talked about the economy in general is hurting right now and the economy probably won't be in the pits forever you know knock on wood um these things are cyclical so couldn't crypto bounce back despite the challenges that that

you've been talking about today 100 it could definitely bounce back. You know, there's no reason why crypto could not go to brand new highs that have never been seen before. But I do think that whatever happens after this down period that we're in, things will probably be different. You know, there are regulators who are taking much closer scrutiny of this market than ever before. There are more countries out there that have banned the cryptocurrency markets in their country, like China. China has banned large parts of crypto trading and crypto investing. So you are starting to see that the worldwide feelings around crypto have started to turn.

And that will, I'm sure, have some kind of impact on a next bull run period for crypto. You know, whether that is smaller, whether it is higher, whether it's because crypto is being used for a whole new reason that nobody ever thought of, you know around it, it got to be a little ridiculous at times, right? You would see all kinds of new millionaires and billionaires out of nowhere. There's a lot of crazy colors and it seemed to be this whole new world. Yeah, I think everyone will remember the Bored Apes, right? Yeah, that's right, right, the Bored Apes. And then I bought an ape. I got an ape too,

because I saw you on the show with Beeple and you said you got on Moonpay. So I went and I copied you and did the same thing. You did? Mm-hmm. This is your ape when we debuted? It's really cool. People are really trying to wrap their head around

why do I want, why would anybody want a picture of a monkey that is generated by a computer and then anybody can download on their phone? Why would I want it in this crypto package? For a while, it seemed like maybe this really was something that was going to take off. And this was just one facet of it,

but we're already starting to see the value of even the board apes are, it's much lower than it has been from the peak. You know, people are selling them off and it's because people need the money, right? It's the same reason they sell everything else off because they need the money faster. They need the money to pay their bills because they need the money faster. They need the money to pay their bills. They need the money to put into something that won't lose as much money. So yeah, I do think that there's going to be a reset of some kind now, but it could certainly come back again. All right. Kevin, thank you for this. Thank you so much for having me on. I really appreciate it.

All right. That's all for today. Thanks so much. And we'll talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.