This hasn’t confounded the long-term upward trend in prices for Bitcoin, Ethereum, and other flagship digital assets. But it has made a significant dent in many portfolios.
The tumbling prices of digital assets
In December 2021, BTC was around the $50,000 mark, already on what now looks like a downward trend from its November high of $67,582. By January 2022, $15,000 had been wiped off that December valuation. Now, BTC is around $20,000 — less than a third of its price nine months ago.
Where BTC leads, the rest of the digital assets space tends to follow, so it’s unsurprising to see an industry-wide decline in valuation. Ethereum hasn’t tracked it, as you would expect — it’s fallen faster, hitting a low of $1,748 on May 28 this year — from $2,400 just the previous day. It’s now trading at $1,540. In November of 2021, one ETH was worth $4,500.
Most recently, since the beginning of May this year, we can see a clear structure showing two drops, first as the coin drops below $38,000 for the first time since July of last year, and another a few weeks later.
Ethereum’s line is less clear but the trend is similar:
These assets haven’t been worth so little since 2020. But the drop has also affected newer coins.
The suffering “Ethereum-killers”
Newer assets, often the native tokens of major projects built to exploit the potential of decentralized finance and on-chain computation, are also falling. In many cases, they’re falling harder and faster. Cardano is trading at 51¢; nine months ago it was worth $2.
Here’s its last year’s price history:
On May 11, Solana lost a third of its value in 24 hours, falling to a low of $41 from $66, itself a low price compared to its November 2021 high of $258 . Unlike the older digital assets that were launched as networks and accrued value slowly, many of these coins began life with ICOs; Solana launched at $163 in October of last year. It’s never been worth this little before.
Even stablecoins were affected. Tether is supposedly linked (tethered, in fact) to the price of USD. But its price fell to 95¢ over just a few days, in a dive that was already underway by May 8 last year but deepened sharply on the 10th and 11th.
Here’s the price chart for Tether for the last year:
That plunge around May 11 looks catastrophic, but it’s actually a fall in Tether’s price from $1 to 99.59¢. The narrowness of Tether’s historical price volatility makes the drop look larger than it really is.
Algorithmic stablecoins like Luna were affected even more strongly. For example Terra LUNA, an algorithmic stablecoin pair, which works to obtain a stable price without backing by real assets (which is the way other stablecoins seek to do it). Values of UST and LUNA are interdependent, meaning that one’s value will affect the other’s. Terra USD (UST) lost its peg to the U.S. Dollar. Under the influence of falling investor confidence Terra LUNA’s lost 99% of its market cap.
Why did the prices fall?
What has happened to cause these drops? What do they mean for investors? And what’s coming next?
To answer those questions, we need to dig a little deeper into why the drops we’ve seen are so different. After all, BTC is volatile; it’s risen and fallen by this kind of amount before, and so has ETH. Looking at the last three months of BTC price changes gives you this picture:
That looks like a scary drop? This isn’t normal in that it happens every day but it’s not egregious either. Let’s look at a wider timeframe.
Over there on the right, we are right now. BTC seems to respect the previous all time high support of $20,000 from 2017.
We need to look at the degree to which these drops were related to withdrawal from DeFi, versus withdrawals from legacy coins. (Prices are from CoinMarketCap.) In November 2022, BTC’s price was around $66,000 and its 24-hour volume was $24 billion. Now it’s $22,400 and the 24-hour volume has been averaging around $30 billion since May. That’s a sharp disparity. Prices are down by about 66%, and trading volume is up by about 20%. But compare it with Ethereum: in November last year, its price peaked at $4,800 with a 24-hour trading volume of $19 billion. Now it’s trading at $1,550, with an average 24-hour trading volume of… $17 billion. Price down by over 68%, trading volume more or less identical. Put a pin in these figures and look at what happened to Cardano. Cardano’s price peaked at $2.96 in November last year, and it had $5 billion in trading volume; now it’s trading at 51¢ with a average daily trading volume of 1 billion.
What has happened here? Bitcoin the blockchain doesn’t support any activity but Bitcoin the coin. Trading volume is likely up as hopeful traders buy the dip and others sell out. Price down a lot, volume down a little. Ethereum supports both investment in ETH and investment in a wide range of stablecoins, secondary tokens, and DeFi projects. Price is down sharply, but trading volume is still the same because those projects are still moving money on and off the chain.
If there was still similar demand on Ethereum’s computational resources to run all those tokens, smart contracts and DeFi projects, we should see that reflected in gas prices. And…
The smaller of the two spikes on the right may be investors moving money out of ETH; it’s the right day, May 11. But gas prices are within historical norms; depressed compared to October and November last year, but by no means as seriously affected as ETH prices.
Cardano’s precipitous decline in price probably tells a similar story, with new investors pulling back and a dump of the native coin but many people still running projects and making money on the chain.
Where has the money gone? The case of Solana
DeFi network coins are suffering more serious price crashes than legacy coins. Solana lost more than Ethereum, which supports significant DeFi activity. And Ethereum was hit worse than Bitcoin which is purely an asset. Solana makes an instructive case study.
Solana’s 68% price plummet was precipitated by several factors. One was increasing competition. The quest to be the next Ethereum now has numerous participants, such as Bitgert, whose price actually rose as Solana’s fell up until May 7th. However, its trading volume was just a few million dollars and its coin price a fraction of a penny; that remains the case after it participated in the general fall, losing half its value. Wherever the money has gone, it hasn’t gone into Bigert.
The real reason for Solana’s descent is likely the Fed taper and rising interest rates. As interest rates rise, interest in digital assets fell. That effect was observable in April, as the Federal Reserve began acting to reduce the danger of rising inflation. This change altered the push-pull calculus for investors.
When interest rates were low, there was little opportunity cost for investors choosing to buy and hold non-yielding assets like BTC. As BTC prices rose, investors could realize a profit on their purchases, or borrow against their BTC assets to invest in yielding assets — either on DeFi platforms or in the conventional financial system. Investors who bought these coins with leveraged cash were particularly vulnerable since they would now pay actual as well as opportunity costs.
It’s increasingly clear, too, that the most liquid markets were hit hardest. Over 76% of BTC is held in “illiquid” wallets, which haven’t been transacted in years. This is HNWI, corporate treasury, corporate and fund investment. It won’t move unless it has to, and even though BTC is sharply down on last year’s highs, it’s still up on five years ago. For long-term investors this may be regarded as a blip. It’s certainly no reason to panic-sell assets that were purchased strategically after lengthy meetings, not on a whim in the hopes of striking lucky.
“You have had, obviously, moves of 50% during this correction, but that’s really after you had a 350% move up since January of last year”, observed Bank of America global crypto and digital asset strategist Alkesh Shah.
Digital assets stock prices are falling too, but the picture is complicated
The effect of digital asset price falls is now being felt in digital asset stocks too, where a perfect storm of falling digital asset and tech stock prices have conspired to drive down stock prices faster than asset prices.
Coinbase bumps along at about $70, more or less where it’s been since it followed the rest of the digital assets market off the May 11 cliff from a May 4 price of $123. Yet that price was itself a sharp drop from over $200 in April. With some turbulence, the numbers are still heading down. More tellingly even than these figures, Coinbase’s price chart is in the red for the whole year.
Coinbase is a relatively recent IPO. The company went public in April 2021, coming off 136% revenue growth in 2020, and was initially listed at $342. With actual profitability to point to back its valuation, Coinbase should have been a great bet.
There are some problems with the pricing system for IPOs. Initial valuations and share prices are often inflated because companies hope to be able to generate hype and declare the sale a success, which hopefully leads to a feedback loop of positive events and positive coverage that reinforce each other. This probably didn’t happen with Coinbase though.
Coinbase: Why are digital assets stock prices falling?
When Coinbase was preparing for its IPO, shares were trading at $343 on the private market. That’s not out of line with its initial asking price, which is perhaps explained by the fact that Coinbase’s IPO wasn’t technically an IPO at all. Instead, a slightly different mechanism called direct listing was used instead, in which the shares’ current price is used as the basis of the listing price. That would explain why the pricing was so close. Initial shares were sold at market prices, and there was no artificial peak to roll down from.
Instead, the answer might be found in Coinbase’s business model. Coinbase is a digital asset exchange, making money from trades between holders of digital assets such as Bitcoin and Ethereum. When Coinbase ran their technically-not-an-IPO, in April last year, Bitcoin prices were peaking; could the fall in digital assets prices explain the tumble digital asset stocks have taken?
Not really. Here are Bitcoin prices from March last year to March this year:
And here’s Coinbase’s share price:
What’s happening here? The general shape is similar, but the trough in BTC prices around August of 2021 doesn’t show up in the stock pricing. The new one, starting around the beginning of this year, does show up. What explains the difference?
Coinbase’s earnings history may provide some answers. The company saw the kind of growth that attracts epithets like “unicorn” in 2020-2021, with 652% year-on-year growth. That should have driven confidence in the company and increased stock prices. If you were considering investing in a company and they posted earnings like that, you’d want in — on whatever floor you could get in on. That impulse likely drove Coinbase through the momentary lapse in BTC prices.
However, there’s still something missing. If Coinbase stock purchasers weren’t solely driven by BTC price, it makes sense that they’d put money into the company even as BTC prices fell, as they did during the slump in BTC prices in the summer of last year. But if they were solely driven by Coinbase earnings reports, all they had to go on this year would be last year’s earnings report — which shows massive gains. Even quarterly reports wouldn’t have been available until well after the end of Q1. Q4 2021 earnings were published only on February 24 this year. That can’t be the reason.
We also can’t blame the currently ongoing conflict between Russia and Ukraine: Coinbase doesn’t operate in Russia and the downward trend in stock prices began in late 2021 before the conflict began.
Coinbase’s core business is as an exchange, but just as the rest of the digital assets economy is diversifying, so is Coinbase. The company is building out a suite of digital assets services including interfacing with Cardano and Solana, and a suite of infrastructure services for the Avalanche ecosystem.
Yet, the real reason could be wider and more serious than Coinbase’s business model or the digital assets space’s issues.
The wider market — and the Fed
The stock market is down, tech stocks are down, and interest and inflation are both sharply up. Looking to the wider market, the NASDAQ COMP is down 25.26% year-to-date, and it’s far from the only stock to suffer. What may be driving these changes is a new attitude in the US Federal Reserve.
We’ve recently lived through a period of very low-interest rates, with rates near zero in many countries and the Federal Reserve pursuing a policy of keeping rates low and buying from the bond market to reduce inflation during a period of stimulatory spending. However, those things are now at an end. As interest rates rise, they tend to devalue stocks against other forms of investment, particularly commodities. And the Fed reduced bond-market buying, tapering from November last year — around the time that Coinbase prices started falling. The dip and persistent low price in Coinbase stock can thus be explained by investor concerns about rising interest rates. The same concerns could plausibly be driving digital asset prices down.
As the Fed moves to drive inflation down by tipping up interest rates, it’s also tapering off the supply of quantitative easing faster than previously expected. When the post-2008 round of QE tapered off in 2014, investors started selling bonds, driving up yields and dropping prices — a tempting investment target for long-term investors hoping to generate returns that beat next year’s interest rates, not this year’s. BTC, then worth $327, was unaffected by that taper. But the Fed taper has definitely affected the digital assets market this time around.
The Fed learned from 2013-14 and plans to supply clear communication this time around, meaning there’s less likely to be a knee-jerk reaction to changing rates and reduced QE support. But one of the most severe effects of the 2014 taper was felt in emerging markets that were overly reliant on QE; while the Fed thinks their balance sheets are in better shape this time around, no-one knows for sure how much of their national wealth is in BTC.
As for LUNA, it was an experimental technology, and despite the protestations of some in the community, it seems that the experiment has failed, at least for now. It’s being rebuilt as a collateralized stablecoin.
Where next for digital assets?
The impact of the wider market on digital assets is a two-way street. Digital assets are conventionally used as a hedge against inflation, but that’s less interesting when retail investors’ incomes are being consumed by inflation. Pension funds can feel similar pressure. Falling prices make digital assets seem like a less promising investment. And crumbling tech stock prices indicate what the Fed itself has signposted: less money looking for a home, even as the limitless earnings of the early tech unicorns begin to dry up. None of this means the digital assets market is facing collapse: we’ve been here before and BTC prices haven’t even fallen to their then-record 2018 levels yet. As a five-year investment, it’s still trending positively. Meanwhile, as new chains, new coins and new projects are winnowed under the impact of financial contraction, we’ll see new and innovative solutions emerge, ready to ride the next peak.