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Crypto’s no good, very bad week just keeps getting worse

May 12, 2022, 9:00 AM UTC

For months, cryptocurrency bears, skeptics, and even some of the most optimistic prognosticators have been raising the alarm bell: A winter was coming to the crypto markets. And surely enough, if you were holding out hope for anything different, this week has likely taken that tint of lingering optimism, thrown it on the ground, squashed it, and then spit on it before walking away.

To put it more lightly: The last seven days have been dismal.

Prices across the board—no matter your preferred data source—are in the red, as I write this essay Wednesday evening. Of course, the broader market has tumbled as well. But nothing has been on par with that of crypto’s descent. Bitcoin and Ether? Both down more than 22% from last week. The total value of crypto markets? Now $1.32 trillion—oh wait, $1.3 trillion. It was $1.8 trillion a week ago. And it’s not getting any better.

On Tuesday, in the first slug of a one-two punch combo to crypto investors everywhere, Coinbase, the largest U.S. crypto exchange, reported earnings for the first three months of the year, and, well, it wasn’t great. With trading activity dying down from its pandemic-heights, Coinbase recorded a net loss of $430.7 million in the first quarter versus a profit of $771 million a year ago. The count of monthly transacting users on Coinbase, meanwhile, fell to 9.2 million in the quarter from 11.4 in the prior three months, though it was still up year-over-year from 6.1 million. And total trading volume dropped from $335 billion a year ago to $309 billion to start 2022.

Coinbase did warn in February that a slowdown was on the horizon. At the time, it issued guidance for the quarter ahead based on the “decline in crypto asset volatility and crypto asset prices compared to all-time high levels in Q4 2021.” But the end result was far from what Wall Street was expecting, leading Coinbase’s stock to plunge in trading Wednesday by as much as 31% before slightly recovering and closing the day at $53.72. For comparison, Coinbase shares opened for a week ago at $125.

Brian Armstrong, the cofounder and CEO of Coinbase, doesn’t seem too concerned, for what it’s worth. On Wednesday, he tweeted a quote purportedly from venture capitalist (and Coinbase board member) Fred Wilson, saying “Markets are irrational in the short term but not over the long term. They sometimes offer fire sale prices on the greatest companies in the world.”

It’s not just Coinbase, though. The second blow to the crypto markets—the decline of TerraUSD—had already been bubbling up by the time Coinbase’s earnings had dropped. But the brunt of hit came in the earliest hours of Wednesday, when the algorithmic stablecoin dropped below 30 cents—well lower than its $1 theoretical peg. (UST, as TerraUSD is known, has since recovered slightly, trading at around 70 cents, as of late Wednesday afternoon.)

Created by Terraform Labs and its leader Do Kwon, the so-called “King of the ‘Lunatics,'” UST is distinct from the likes of Tether’s USDT and Circle’s USDC in that, instead of using a mix of assets like cash and bonds to maintain its peg, UST relies on what’s been described as “financial engineering.” If you’re looking for a more detailed explainer on how it works, check out this piece from Fortune‘s Marco Quiroz-Gutierrez and Taylor Locke. But, to oversimplify, the gist of what’s happened of late is that, as University of Calgary professor Ryan Clements explains to my colleagues, algorithmic stablecoins ultimately rely on perception and demand. And, as you can guess, the perception around UST has shifted as of late.

A recovery plan for UST is in the works, with the hope being that the stablecoin can become, well, stable again. Its success is far from guaranteed, though. But, between UST, Coinbase’s recent woes, and an already shaky market, one thing is clear: Winter is here.

Just a quick note here: Be kind to yourselves and others. Yes, crypto can be fun and goofy. It’s a place where an entire empire is being built around some cartoon apes, after all. But this is also an asset class, and one where sudden declines can hit with very tangible implications. The last two-plus years of the pandemic have already been filled with mental anguish, burnout, and exhaustion. So, if you need help or if you’re struggling at all, let someone know, reach out, or just talk. There’s always someone who wants to listen. 

Declan Harty
@declanharty
Declan.harty@fortune.com

DECENTRALIZED NEWS

Credits 🚀 

Chainalysis, the crypto data and fraud tracking company, is now valued at $8.6 billion with a new Series F deal. 

FTX.US appears to be inching closer to entering New York, having now filed for a trust charter with the state's Department of Financial Services. 

Brazilian fintech Nubank is launching crypto trading on its platform through a partnership with Paxos.

Crypto exchange KuCoin raised a $150 million pre-Series B financing round at a $10 billion valuation. 

Talos, a crypto trading platform, has notched a $1.25 billion valuation after raising a $105 million Series B. 

Some customers of Robinhood can now earn 1% interest on uninvested cash. 

Debits 🐻 

TerraUSD is not the first algorithmic stablecoin that Terraform Labs CEO Do Kwon has been involved with. That honor goes to the failed Basis Cash.

Even Treasury Secretary Janet Yellen is talking about TerraUSD.

Securities and Exchange Commission Chair Gary Gensler is taking aim at crypto exchanges for the sprawl of their businesses, many parts of which can conflict with the others. 

A DeFi offering from Compound Prime received a junk rating from S&P. 

FOMO NO MO

So you want to be a crypto cop? In the past few weeks, the U.S. government has been setting the stage to go on a bit of a hiring spree. We've already talked about the SEC's plans, but plenty of other parts are staffing up too, according to a report from Recode. And that's not to say anything about the swell of private companies focused on crypto crime as well. But what does it mean to be a crypto crime fighter?

From the article:

“In traditional investigations, we know who committed the crimes and follow the money to prove it,” explains Dana Windsor, a spokesperson for the IRS’s criminal investigations unit, which had 80 crypto-related cases on its docket at the end of last year. “In crypto investigations, we know what the crime is and follow the money to prove who committed the crime.”

That might sound simple enough, but finding these connections is extremely difficult, and generally requires technical expertise that veteran detectives just don’t have. Federal agencies like the IRS, the FBI, and the State Department have spent millions of dollars on contracts with private crypto intelligence firms. These companies often have access to powerful machine learning software that can sift through huge numbers of transactions and look for leads. Even with this software, these investigations are getting harder, since criminals are constantly developing new ways of concealing their methods.

One of the biggest hurdles ahead for crypto crime-fighting is the fact that there’s not necessarily an established pipeline of people who can help. Right now, there’s no specific pathway to becoming a crypto investigator, so it’s mostly been a career people have stumbled upon. Janczewski, for instance, studied accounting before he became a crypto cop for the IRS. And CipherBlade crypto researcher Paul Sibenik told Recode he got into crypto detective work after he ran a side gig as a consultant for people in divorce cases who thought their spouses were stashing away bitcoin.

BUBBLE-O-METER

$152.63

That's how much FTX.US president Brett Harrison supposedly paid for a single share of Apple stock on May 9. His brokerage of choice? Well, FTX.US, of course. The American offshoot of Sam Bankman-Fried's FTX has been teasing an entry into stock trading for some time now, and, if Harrison's tweet is any indication, it appears that the plans are coming along quite well. 

THE LEDGER’S LATEST

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The rise of the crypto-curious Democrat by Declan Harty

El Salvador's president says it's time to buy the dip, as Bitcoin crashes below $30,000. But the country's citizens are less bullish by Nicholas Gordon

Bitcoin whale Michael Saylor tries to defuse fears over MicroStrategy margin call by Christiaan Hetzner

Mark Cuban is reliving the internet boom when he looks at crypto. The 'consolidation phase' is coming, he says by Taylor Locke

Instagram's push into NFTs is a big win for several smaller blockchains by Marco Quiroz-Gutierrez

(Some of these stories require a subscription to access. Thank you for supporting our journalism.)

IF YOU DON'T KNOW, CRYPTO

Decentralized Autonomous Organization. The name's intimidating, I know. But DAOs, if crypto evangelists are to be believed, are the future, so they're worth getting to know.

The idea is simple: A group of people band together online to achieve some sort of goal. Perhaps the DAO is trying to buy one of the last surviving copies of the U.S. Constitution. Or maybe it's to set up a lending and borrowing system on top of Ethereum. But what a DAO is not is an organization where anything goes, nor is it a corporation. Ruled by the code of the blockchain, DAOs are designed to be run by the members of the community, not some central being, and that has plenty of potential

This is the web version of The Ledger, Fortune’s weekly newsletter covering financial technology and cryptocurrency. Sign up here to receive future editions.