There’s something about the latest crypto crash that makes it different from previous downturns.
Artur Widak | Nurphoto | Getty Images
The two words on every crypto investor’s lips right now are undoubtedly “crypto winter.”
Cryptocurrencies have suffered a brutal comedown this year, losing $2 trillion in value since the height of a massive rally in 2021.
Bitcoin, the world’s biggest digital coin, is off 70% from a November all-time high of nearly $69,000.
That’s resulted in many experts warning of a prolonged bear market known as “crypto winter.” The last such event occurred between 2017 and 2018.
But there’s something about the latest crash that makes it different from previous downturns in crypto — the latest cycle has been marked by a series of events that have caused contagion across the industry because of their interconnected nature and business strategies.
Back in 2018, bitcoin and other tokens slumped sharply after a steep climb in 2017.
The market then was awash with so-called initial coin offerings, where people poured money into crypto ventures that had popped up left, right and center — but the vast majority of those projects ended up failing.
“The 2017 crash was largely due to the burst of a hype bubble,” Clara Medalie, research director at crypto data firm Kaiko, told CNBC.
But the current crash began earlier this year as a result of macroeconomic factors including rampant inflation that has caused the U.S. Federal Reserve and other central banks to hike interest rates. These factors weren’t present in the last cycle.
Bitcoin and the cryptocurrency market more broadly has been trading in a closely correlated fashion to other risk assets, in particular stocks. Bitcoin posted its worst quarter in more than a decade in the second quarter of the year. In the same period, the tech-heavy Nasdaq fell more than 22%.
That sharp reversal of the market caught many in the industry from hedge funds to lenders off guard.
Another difference is there weren’t big Wall Street players using “highly leveraged positions” back in 2017 and 2018, according to Carol Alexander, professor of finance at Sussex University.
For sure, there are parallels between today’s meltdown and crashes past — the most significant being seismic losses suffered by novice traders who got lured into crypto by promises of lofty returns.
But a lot has changed since the last major bear market.
So how did we get here?
TerraUSD, or UST, was an algorithmic stablecoin, a type of cryptocurrency that was supposed to be pegged one-to-one with the U.S. dollar. It worked via a complex mechanism governed by an algorithm. But UST lost its dollar peg which led to the collapse of its sister token luna too.
This sent shockwaves through the crypto industry but also had knock-on effects to companies exposed to UST, in particular hedge fund Three Arrows Capital or 3AC (more on them later).
“The collapse of the Terra blockchain and UST stablecoin was widely unexpected following a period of immense growth,” Medalie said.
Crypto investors built up huge amounts of leverage thanks to the emergence of centralized lending schemes and so-called “decentralized finance,” or DeFi, an umbrella term for financial products developed on the blockchain.
But the nature of leverage has been different in this cycle versus the last. In 2017, leverage was largely provided to retail investors via derivatives on cryptocurrency exchanges, according to Martin Green, CEO of quant trading firm Cambrian Asset Management.
When the crypto markets declined in 2018, those positions opened by retail investors were automatically liquidated on exchanges as they couldn’t meet margin calls, which exacerbated the selling.
“In contrast, the leverage that caused the forced selling in Q2 2022 had been provided to crypto funds and lending institutions by retail depositors of crypto who were investing for yield,” said Green. “2020 onwards saw a huge build out of yield-based DeFi and crypto ‘shadow banks.'”
“There was a lot of unsecured or undercollateralized lending as credit risks and counterparty risks were not assessed with vigilance. When market prices declined in Q2 of this year, funds, lenders and others became forced sellers because of margins calls.”
A margin call is a situation in which an investor has to commit more funds to avoid losses on a trade made with borrowed cash.
The inability to meet margin calls has led to further contagion.
At the heart of the recent turmoil in crypto assets is the exposure of numerous crypto firms to risky bets that were vulnerable to “attack,” including terra, Sussex University’s Alexander said.
It’s worth looking at how some of this contagion has played out via some high-profile examples.
Celsius, a company that offered users yields of more than 18% for depositing their crypto with the firm, paused withdrawals for customers last month. Celsius acted sort of like a bank. It would take the deposited crypto and lend it out to other players at a high yield. Those other players would use it for trading. And the profit Celsius made from the yield would be used to pay back investors who deposited crypto.
But when the downturn hit, this business model was put to the test. Celsius continues to face liquidity issues and has had to pause withdrawals to effectively stop the crypto version of a bank run.
“Players seeking high yields exchanged fiat for crypto used the lending platforms as custodians, and then those platforms used the funds they raised to make highly risky investments – how else could they pay such high interest rates?,” said Alexander.
One problem that has become apparent lately is how much crypto companies relied on loans to one another.
Three Arrows Capital, or 3AC, is a Singapore crypto-focused hedge fund that has been one of the biggest victims of the market downturn. 3AC had exposure to luna and suffered losses after the collapse of UST (as mentioned above). The Financial Times reported last month that 3AC failed to meet a margin call from crypto lender BlockFi and had its positions liquidated.
Then the hedge fund defaulted on a more than $660 million loan from Voyager Digital.
Three Arrows Capital is known for its highly-leveraged and bullish bets on crypto which came undone during the market crash, highlighting how such business models came under the pump.
Contagion continued further.
When Voyager Digital filed for bankruptcy, the firm disclosed that, not only did it owe crypto billionaire Sam Bankman-Fried’s Alameda Research $75 million — Alameda also owed Voyager $377 million.
To further complicate matters, Alameda owns a 9% stake in Voyager.
“Overall, June and Q2 as a whole were very difficult for crypto markets, where we saw the meltdown of some of the largest companies in large part due to extremely poor risk management and contagion from the collapse of 3AC, the largest crypto hedge fund,” Kaiko’s Medalie said.
“It is now apparent that nearly every large centralized lender failed to properly manage risk, which subjected them to a contagion-style event with the collapse of a single entity. 3AC had taken out loans from nearly every lender that they were unable to repay following the wider market collapse, causing a liquidity crisis amid high redemptions from clients.”
It’s not clear when the market turbulence will finally settle. However, analysts expect there to be some more pain ahead as crypto firms struggle to pay down their debts and process client withdrawals.
The next dominoes to fall could be crypto exchanges and miners, according to James Butterfill, head of research at CoinShares.
“We feel that this pain will spill over to the crowded exchange industry,” said Butterfill. “Given it is such a crowded market, and that exchanges rely to some extent on economies of scale the current environment is likely to highlight further casualties.”
Even established players like Coinbase have been impacted by declining markets. Last month, Coinbase laid off 18% of its employees to cut down on costs. The U.S. crypto exchange has seen trading volumes collapse lately in tandem with falling digital currency prices.
Meanwhile, crypto miners that rely on specialized computing equipment to settle transactions on the blockchain could also be in trouble, Butterfill said.
“We have also seen examples of potential stress where miners have allegedly not paid their electricity bills, potentially alluding to cash flow issues,” he said in a research note last week.
“This is likely why we are seeing some miners sell their holdings.”
The role played by miners comes at a heavy price — not just for the gear itself, but for a continuous flow of electricity needed to keep their machines running around the clock.
George Clooney, Gladys Knight among Kennedy Center honorees
Secretary of State Antony Blinken, second from left, and his wife, Evan Ryan, left, join 2022 Kennedy Center Honorees, front row from left, Amy Grant, Gladys Knight, George Clooney, Tania León, and Kennedy Center President Deborah Rutter, back row from left, Kennedy Center Chairman David Rubenstein, along with fellow 2022 Honorees Adam Clayton, Larry Mullen Jr., The Edge, and Bono for a group photo at the State Department following the Kennedy Center Honors gala dinner, Saturday, Dec. 3, 2022, in Washington.
Kevin Wolf | AP Photo
Performers such as Gladys Knight or the Irish band U2 usually would be headlining a concert for thousands but at Sunday’s Kennedy Center Honors the tables will be turned as they and other artists will be the ones feted for their lifetime of artistic contributions.
Actor, director, producer and human rights activist George Clooney, groundbreaking composer and conductor Tania León, and contemporary Christian singer Amy Grant will join Knight and the entire crew of U2 in being honored by the John F. Kennedy Center for the Performing Arts.
The organization honors a select group of people every year for their artistic influences on American culture. President Joe Biden, Vice President Kamala Harris and their respective spouses are slated to attend.
The 61-year-old Clooney — the actor among this year’s musically leaning group of honorees — has television credits going back into the late 1970s but became a household name with the role of Doug Ross on the television show “ER.” conductor Tania León, and
From there he starred in movies such as “Three Kings,” “Ocean’s Eleven” (and “Twelve” and “Thirteen”), “O Brother, Where Art Thou?” and his most recent film, “Ticket to Paradise.” He also has extensive directing and producing credits including “Good Night, and Good Luck.” He and his wife, humanitarian rights lawyer Amal Clooney, created the Clooney Foundation for Justice, and he’s produced telethons to raise money for various causes.
“To be mentioned in the same breath with the rest of these incredible artists is an honor. This is a genuinely exciting surprise for the whole Clooney family,” said Clooney in a statement on the Center’s website.
Knight, 78, said in a statement that she was “humbled beyond words” at receiving the Kennedy honor. The Georgia-born Knight began singing gospel music at the age of 4 and went on to a career that has spanned decades.
Knight and family members started a band that would later be known as Gladys Knight & The Pips and produced their first album in 1960 when Knight was just 16. Since then she’s recorded dozens of albums with such classic hits as “I Heard It Through the Grapevine” and “Midnight Train to Georgia.” Along the way she’s acted in television shows and movies. When Knight and the band were inducted into the Rock & Roll Hall of Fame, Mariah Carey described Knight as “a textbook you learn from.”
Sometimes the Kennedy Center honors not just individuals but groups; “Sesame Street” once got the nod.
This year it’s the band U2. The group’s strong connection to America goes back decades. They performed in Washington during their first trip to America in 1980. In a statement the band — made up of Bono, The Edge, Adam Clayton and Larry Mullen Jr. — said they originally came to America with big dreams “fueled in part by the commonly held belief at home that America smiles on Ireland.”
“And it turned out to be true, yet again,” read the statement. “It has been a four-decade love affair with the country and its people, its artists, and culture.”
U2 has sold 170 million albums and been honored with 22 Grammys. The band’s epic singles include “I Still Haven’t Found What I’m Looking For,” “Pride (In the Name of Love)” and “Sunday Bloody Sunday.” Lead singer Bono has also become known for his philanthropic work to eradicate poverty and to raise awareness about AIDS.
Christian music performed Amy Grant said in an interview with The Associated Press that she’d never even been to the Kennedy Center Honors even though her husband, country musician Vince Gill, has performed during previous ceremonies. Grammy winner Grant is well known for crossover pop hits like “Baby, Baby,” “Every Heartbeat” and “That’s What Love is For.” She’s sold more than 30 million albums, including her 1991 record “Heart in Motion,” which introduced her to a larger pop audience.
Composer and conductor León said during an interview when the honorees were announced that she wasn’t expecting “anything spectacular” when the Kennedy Center initially reached out to her. After all, she’s worked with the Kennedy Center numerous times over the years going back to 1980, when she was commissioned to compose music for a play.
But the 79-year-old Pulitzer Prize winner said she was stunned to learn that this time the ceremony was going to be for her.
León left Cuba as a refugee in 1967 and eventually settled in New York City. She’s a founding member of the Dance Theatre of Harlem and instituted the Brooklyn Philharmonic Community Concert Series.
Michigan couple teaches people how to start lucrative side hustles
In 2020, Jamie and Sarah McCauley filmed themselves ripping, repainting and restoring thrifted furniture. They resold the items, made more than $1,000 in profit and posted the results on YouTube.
Within a week, the video received 20,000 views. The McCauleys, who live off a variety of concurrently running side hustles, sensed opportunity. They started posting more videos about their other streams of income, which include rental properties, house flipping projects and reselling return pallets from Amazon and Target.
Teaching people how to build those types of hustles has proved lucrative: In the last year, the McCauleys made $102,000 from their YouTube and other social media channels, according to documents reviewed by CNBC Make It.
That averages out to $8,500 per month. During their best month of the year, they brought in $9,000.
“We started to realize: This is a great way for people to make extra money if they have bills, or they just aren’t able to pay their rent, or they want to go on a nice vacation with their family,” Sarah says. “Anyone can do it.”
But of all their income streams, Jamie says their YouTube and social media presence is the most stressful to manage.
Here’s how they built it, and what goes into maintaining it.
Jamie and Sarah knew the ins and outs of social media from years of running a successful wedding photography business, which at its height made $150,000 per year, Jamie says.
But after having two children, the couple realized they didn’t want to spend weekends away from their family. So they started buying, renovating and renting out properties around west Michigan, hoping for a more passive income stream that would encourage schedule flexibility.
It worked, and the extra time allowed them to embrace a variety of side hustles. They got the idea to post their furniture and property-flipping adventures on YouTube in 2019, and immediately found it challenging.
Initially, Jamie worked 30 hours per week on the YouTube project alone, with Sarah working an additional 10 — on top of their efforts to sell two flipped houses and manage their photography business.
It took them a full year to hit 1,000 subscribers and 4,000 hours of watch time, making them eligible for Google AdSense, a feature that allows creators to monetize their YouTube videos with advertisements.
“We weren’t really sure where home design or flipping or photography or YouTube would lead us,” Sarah says. “But we knew if we put ourselves out there, it would open more opportunities.”
There are a couple of clear-cut benefits to flipping and reselling furniture and home décor online, especially during times of economic uncertainty, Sarah says.
For instance, more people are willing to hunt for deals on eBay and Facebook Marketplace when times are tough, instead of frequenting their usual retail stores.
“When a recession hits, people don’t want to pay full price for things,” she says. “Thrift stores thrive during recessions, and I think resellers do, too, because people are trying to save money in any way they can.”
Unlike real estate, the gambles of buying and reselling furniture are minimal in both price and risk, the McCauleys say. There’s less of a financial investment, and Sarah says she’s broken even on every flip.
The couple says one of their best flips was a mid-century dresser they bought for $50 on Facebook Marketplace. All they had to do was stage and take a nice photo of the dresser before reselling it for $300.
Sometimes, after buying furniture, the couple realizes the items have more flaws than they expected. Usually, this means investing more time and money into fixing up the piece, which can affect the item’s eventual sale value, they say.
In those cases, “we just get our money back instead of gaining a huge profit, but we’ve never really lost money from it,” Sarah says.
Going a full year without making any money from YouTube was difficult, the McCauleys say. And simply qualifying for AdSense didn’t guarantee the big bucks.
“The slower growth and the inconsistency of it, it’s been more of a mental struggle to keep pushing and believing the process,” Jamie says. “Now, we’re in a better spot, but throughout that two-year period, it was a question of, ‘Is this what we should be doing? Is this going to work out?'”
In 2020, the couple felt a shift, they say. Their videos started going viral more regularly, and brands like Skillshare, Beyond Paint and HelloFresh reached out to them with partnership opportunities.
The sudden attention was overwhelming, and they didn’t immediately know which brands to trust. These days, the McCauleys work with an agency that vets the brands and sets up contracts for them, claiming an 18% from a number of those partnerships, they say.
Monetizing their YouTube presence allowed them to shut down their photography business, which significantly cut down their weekly workload.
But there’s still a mental struggle that comes with inconsistent income, Jamie says. When you’re reliant on advertising and brand partnerships, your earnings depend on viewership, and the algorithm often feels beyond their control.
“There are times of discouragement where there’s not a whole lot coming in,” Jamie says. “But there are also good months where a lot of money is coming in. It’s about the long game and trying to continue to push through. It’s perseverance.”
The couple says they have no plans to abandon their social media business. Collectively, their income streams help them make a good living while spending more time with their families than they would in standard 9-to-5 jobs.
“We want it to fit within our life, and that’s the reason we wanted non-traditional jobs,” Sarah says. “So that we can choose what we do.”
Want to earn more and work less? Register for the free CNBC Make It: Your Money virtual event on Dec. 13 at 12 p.m. ET to learn from money masters how you can increase your earning power.
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