Cryptocurrency industry insiders predict bitcoin could hit a new all-time high in 2023 and possibly reach $100,000. It comes after a noted investor bet that the digital currency could go to $1 million in 90 days.
Chris Ratcliffe | Bloomberg | Getty Images
Bitcoin has rallied nearly 70% so far this year — and industry insiders who spoke to CNBC remain bullish, with one saying the world’s biggest cryptocurrency could reach new heights.
Bitcoin previously hit its all-time high of $68,990.90 in November 2021. Since then it has fallen about 60%.
Marshall Beard, chief strategy officer at U.S.-headquartered cryptocurrency exchange Gemini, said $100,000 could be a possibility for bitcoin.
“I think bitcoin probably breaks all-time highs this year,” Beard said, adding that the $100,000 price figure is an “interesting number.”
Beard said that if bitcoin gets to its previous record high of near $69,000, “it doesn’t take much more for it to lift up” to $100,000.
Bitcoin would need to rally around 270% to hit $100,000.
Paolo Ardoino, chief technology officer at stablecoin issuer Tether, said bitcoin could “retest” its all-time high near $69,000.
Bitcoin proponents say this is evidence that bitcoin is offering an alternative to the traditional banking system as a place for people to keep their money safe.
“I think the rally is explicable by saying, people have got freaked out by the banking system by the collapses,” Oliver Linch, CEO of Bittrex Global, told CNBC in an interview at Paris Blockchain Week on Thursday.
For many years, bitcoin advocates have argued bitcoin is a form of “digital gold” — a safe-haven asset that can provide investors a hedge against inflation and an investment in times of turmoil. But over the past few years, bitcoin has traded in correlation with stocks, in particular the tech-heavy Nasdaq.
There are now signs of decoupling with bitcoin massively outperforming the Nasdaq, many other risk-assets and gold this year.
But bitcoin also got a boost on hopes the banking crisis maybe reduce the U.S. Federal Reserve’s ability to be as aggressive on interest rate rises, which would be supportive for risk assets like cryptocurrencies.
Discussion of where the digital coin’s price could go this year has been rife since Balaji Srinivasan, an investor and the former technology chief at Coinbase, wagered on Mar. 17 that bitcoin would be worth $1 million or more in 90 days. He bet $2 million.
The wager was in response to a Twitter user who said that they would bet $1 million that the U.S. does not enter hyperinflation.
Srinivasan argued that the “world redenominates on Bitcoin as digital gold” as hyperinflation kicks in, erodes the value of the U.S. dollar, and nations, individuals and companies begin to buy large amounts of bitcoin. Hyperinflation is the massive rise in prices in an economy.
I think for bitcoin to be a million dollars in 90 days, some crazy things are happening in the world, which we don’t want.
Marshall Beard
Chief strategy officer, Gemini
A $1 million price on bitcoin would represent a roughly 3,600% increase from the digital currency’s current price.
Most people have poured cold water on this prediction.
Gemini’s Bear said “there’s probably a world where bitcoin hits a million dollars” but not in 90 days as Srinivasan wagered.
“I think for bitcoin to be a million dollars in 90 days, some crazy things are happening in the world, which we don’t want,” Beard said, adding that it could take 10 years to get anywhere near that figure.
Tether’s Ardoino echoed the sentiment that if bitcoin were to hit $1 million in 90 days, it would likely mean an unusual economic event.
“I’m kind of skeptical about that, because honestly, I wouldn’t even hope for that,” Ardoino told CNBC in an interview at Paris Blockchain Week, that aired Thursday.
“Because if bitcoin would reach such a high price level, [it] would mean that the entire economy will crumble. I’m not sure [that] is the world that we want to live in.”
Shares of Coinbase Global Inc. dropped 15.8% in the extended session Wednesday after the crypto exchange disclosed a warning from regulators that it may have broken securities laws.
Coinbase COIN, -8.16%
said it received a Wells notice from the Securities and Exchange Commission, which could lead to formal charges.
“We asked the SEC for reasonable crypto rules for Americans. We got legal threats instead,” Coinbase said in a blog post detailing the action. “Rest assured, Coinbase products and services continue to operate as usual — today’s news does not require any changes to our current products or services.”
Based on discussions with the SEC, Coinbase said that the potential charges relate to the company’s spot market, its staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.
The crypto exchange said it asked the regulators to detail which assets in its platforms the SEC believes may be securities, but the SEC declined to do so. Coinbase called it a “cursory investigation.”
SEC representatives declined to comment Wednesday.
The company said that the investigation is “still at a very early stage,” and that it has turned in documents and provided two witnesses for testimony, “one on the basic aspects of our staking services and one on the basic operation of our trading platform.”
Silvergate Capital, a central lender to the crypto industry, said on Wednesday that it’s winding down operations and liquidating its bank. The stock plunged more than 36% in after-hours trading.
Silvergate has served as one of the two main banks for crypto companies, along with New York-based Signature Bank. Silvergate has just over $11 billion in assets, compared with over $114 billion at Signature. Bankrupt crypto exchange FTX was a major Silvergate customer.
“In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path forward,” the company said in a statement.
All deposits will be fully repaid, according to a liquidation plan shared on Wednesday. The company didn’t say how it plans to resolve claims against its business.
Centerview Partners will act as Silvergate’s financial advisor and Cravath, Swaine & Moore will provide legal services.
The liquidation comes less than a week after Silvergate discontinued its payments platform known as the Silvergate Exchange Network, or SEN, which was considered to be one of its core offerings. As part of the liquidation announcement, Silvergate clarified that all other deposit-related services remain operational as the company winds down. Customers will be notified should there be any further changes.
Silvergate said last week it would delay the filing of its annual 10-K for 2022 while it sorted out the “viability” of its business. The company disclosed that the delayed filing was partly due to an imminent regulatory crackdown, including a probe already underway by the Department of Justice.
Silvergate also attributed the delay to Congressional inquiries, as well as investigations from its banking regulators, which include the Federal Reserve and the California Department of Financial Protection and Innovation.
Crypto companies like Coinbase and Galaxy Digital raced to cut ties with Silvergate last week after the bank warned that it was unsure whether it could stay in business.
The Federal Reserve’s latest meeting minutes will be a key focal point for investors in the week ahead, as they seek clarity on the central bank’s interest rate hiking path. Stocks ended the week on a mixed note. The Dow Jones Industrial Average is down 0.13% for the week. The 30-stock index notched its third negative week in a row, which is its first since September. Meanwhile, the Nasdaq Composite is up 0.59% for the week, and the S & P 500 is down 0.28%. Some Fed commentary this week suggesting higher rates for longer, following a series of surprisingly strong economic data, weighed on markets. On Friday, Federal Reserve Governor Michelle Bowman said the central bank still has a long way to go to reach its 2% inflation target. On Thursday, the producer price index gained 0.7% last month , greater than the 0.4% consensus estimate from Dow Jones. PPI tracks wholesale prices. On Tuesday, the consumer price index showed i nflation rose 0.5% in January, which was also higher than economists were expecting. January retail sales data also smashed expectations . Meanwhile, bond yields surged this week, with rates on the benchmark 10-year Treasury and the 2-year Treasury reaching their highest levels since November. “I think that the the narrative of the market has shifted a little bit over the past couple of weeks from the positives from disinflation, and better than expected economic data that led to maybe the idea of a soft landing becoming more likely, which is positive for risk assets, to the economy maybe being so strong that the Fed would need to perhaps raise rates a few more times than what’s expected,” said Ed Clissold, chief U.S. strategist for Ned Davis Research Group. “So, I think what the markets can be focused on over the next week is to see just how strong the economic data is,” he added. Fed meeting minutes For Wall Street, there will be greater emphasis next week on the minutes from the Fed’s latest meeting, which are set to be released Wednesday. Following some recent comments from central bank officials suggesting greater rate hikes ahead, investors will parse the meeting minutes for further signs of hawkishness. “We’ve recently started to hear from some members that there was some advocating for 50 basis points at the last meeting. So this will give us a rundown of how large that cohort is, and if any of them are voters,” said Art Hogan, chief market strategist at B. Riley Financial. In fact, the likelihood of a 50 basis point hike is now 18.1%, which is double what it was one week ago, according to data from CME Group . Hogan is also anticipating some additional insight into the Fed’s Summary of Economic Projections, or where the central bank believes the terminal rates will stand. Other forthcoming data will give investors further insight the strength of the consumer. January’s data for existing home sales will be released Tuesday, possibly showing investors a continued improvement in the housing industry. The Fed’s favorite inflation gauge — personal consumption expenditures — will be out Friday. Economists polled by Dow Jones predict core PCE gained 0.5% in January and rose 4.4% on an annual basis. February’s final reading of consumer sentiment data from the University of Michigan is also due Friday. Retail earnings Meanwhile, a slate of retail earnings will show Wall Street how household names such as Home Depot and Walmart are managing their inventories. The results will also give investors the latest read into the state of the U.S. consumer. Other notable earnings include Nvidia. The semiconductor stock has emerged as an investor favorite to play the recent hype around artificial intelligence , because of its software and hardware capabilities. The stock is up more than 50% this year. Week ahead calendar Monday The NYSE is closed for Presidents’ Day. Tuesday 9:45 a.m. ET: S & P Global Composite PMI (February) 10 a.m.: Existing home sales (January) Earnings: Home Depot , Walmart , Coinbase , Toll Brothers Wednesday 2 p.m. ET: Fed minutes 5:30 p.m. ET: New York Fed President John Williams speaks Earnings: Baidu , eBay , Nvidia Thursday 8:30 a.m. ET: Chicago Fed National Activity Index (January) 8:30 a.m. ET: Jobless claims (week ending Feb. 11) 8:30 a.m. ET: Q4 GDP (second reading) 11 a.m. ET: Kansas City Fed Manufacturing Index (February) Earnings: Alibaba , Beyond Meat , Block , Booking Holdings , Warner Bros Discovery Friday 8:30 a.m. ET: Personal consumption expenditures (January) 10 a.m.: Consumer sentiment (February) 10 a.m. ET: New home sales (January)
Not six months ago, ether led a recovery in cryptocurrency prices ahead of a big tech upgrade that would make something called “staking” available to crypto investors.
Most people have hardly wrapped their heads around the concept, but now, the price of ether is falling amid mounting fears that the Securities and Exchange Commission could crack down on it.
On Thursday, Kraken, one of the largest crypto exchanges in the world, closed its staking program in a $30 million settlement with the SEC, which said the company failed to register the offer and sale of its crypto staking-as-a-service program.
“This should put everyone on notice in this marketplace,” SEC Chair Gary Gensler told CNBC’s “Squawk Box” Friday morning. “Whether you call it lend, earn, yield, whether you offer an annual percentage yield – that doesn’t matter. If someone is taking [customer] tokens and transferring to their platform, the platform controls it.”
Staking has widely been seen as a catalyst for mainstream adoption of crypto and a big revenue opportunity for exchanges like Coinbase. A clampdown on staking, and staking services, could have damaging consequences not just for those exchanges, but also Ethereum and other proof-of-stake blockchain networks. To understand why, it helps to have a basic understanding of the activity in question.
Here’s what you need to know:
What is staking?
Staking is a way for investors to earn passive yield on their cryptocurrency holdings by locking tokens up on the network for a period of time. For example, if you decide you want to stake your ether holdings, you would do so on the Ethereum network. The bottom line is it allows investors to put their crypto to work if they’re not planning to sell it anytime soon.
How does staking work?
Staking is sometimes referred to as the crypto version of a high-interest savings account, but there’s a major flaw in that comparison: crypto networks are decentralized, and banking institutions are not.
Earning interest through staking is not the same thing as earning interest from a high annual percentage yield offered by a centralized platform like those that ran into trouble last year, like BlockFi and Celsius, or Gemini just last month. Those offerings really were more akin to a savings account: people would deposit their crypto with centralized entities that lent those funds out and promised rewards to the depositors in interest (of up to 20% in some cases). Rewards vary by network but generally, the more you stake, the more you earn.
By contrast, when you stake your crypto, you are contributing to the proof-of-stake system that keeps decentralized networks like Ethereum running and secure; you become a “validator” on the blockchain, meaning you verify and process the transactions as they come through, if chosen by the algorithm. The selection is semi-random – the more crypto you stake, the more likely you’ll be chosen as a validator.
The lock-up of your funds serves as a sort of collateral that can be destroyed if you as a validator act dishonestly or insincerely.
This is true only for proof-of-stake networks like Ethereum, Solana, Polkadot and Cardano. A proof-of-work network like Bitcoin uses a different process to confirm transactions.
Staking as a service
In most cases, investors won’t be staking themselves – the process of validating network transactions is just impractical on both the retail and institutional levels.
That’s where crypto service providers like Coinbase, and formerly Kraken, come in. Investors can give their crypto to the staking service and the service does the staking on the investors’ behalf. When using a staking service, the lock-up period is determined by the networks (like Ethereum or Solana), and not the third party (like Coinbase or Kraken).
It’s also where it gets a little murky with the SEC, which said Thursday that Kraken should have registered the offer and sale of the crypto asset staking-as-a-service program with the securities regulator.
While the SEC hasn’t given formal guidance on what crypto assets it deems securities, it generally sees a red flag if someone makes an investment with a reasonable expectation of profits that would be derived from the work or effort of others.
Coinbase has about 15% of the market share of Ethereum assets, according to Oppenheimer. The industry’s current retail staking participation rate is 13.7% and growing.
Proof-of-stake vs. proof-of-work
Staking works only for proof-of-stake networks like Ethereum, Solana, Polkadot and Cardano. A proof-of-work network, like Bitcoin, uses a different process to confirm transactions.
The two are simply the protocols used to secure cryptocurrency networks.
Proof-of-work requires specialized computing equipment, like high-end graphics cards to validate transactions by solving highly complex math problems. Validators gets rewards for each transaction they confirm. This process requires a ton of energy to complete.
The source of return in staking is different from traditional markets. There aren’t humans on the other side promising returns, but rather the protocol itself paying investors to run the computational network.
Despite how far crypto has come, it’s still a young industry filled with technological risks, and potential bugs in the code is a big one. If the system doesn’t work as expected, it’s possible investors could lose some of their staked coins.
Volatility is and has always been a somewhat attractive feature in crypto but it comes with risks, too. One of the biggest risks investors face in staking is simply a drop in the price. Sometimes a big decline can lead smaller projects to hike their rates to make a potential opportunity more attractive.
Short selling can be controversial, especially among management teams of companies whose stocks traders are betting that their prices will fall. And a new spike in alleged “naked short selling” among microcap stocks is making several management teams angry enough to threaten legal action:
Taking a long position means buying a stock and holding it, hoping the price will go up.
Shorting, or short selling, is when an investor borrows shares and immediately sells them, hoping he or she can buy them again later at a lower price, return them to the lender and pocket the difference.
Covering is when an investor with a short position buys the stock again to close a short position and return the shares to the lender.
If you take a long position, you might lose all your money. A stock can go to zero if a company goes bankrupt. But a short position is riskier. If the share price rises steadily after an investor has placed a short trade, the investor is sitting on an unrealized capital loss. This is why short selling traditionally has been dominated by professional investors who base this type of trade on heavy research and conviction.
Brokers require short sellers to qualify for margin accounts. A broker faces credit exposure to an investor if a stock that has been shorted begins to rise instead of going down. Depending on how high the price rises, the broker will demand more collateral from the investor. The investor may eventually have to cover and close the short with a loss, if the stock rises too much.
And that type of activity can lead to a short squeeze if many short sellers are surprised at the same time. A short squeeze can send a share price through the roof temporarily.
Short squeezes helped feed the meme-stock craze of 2021 that sent shares of GameStop Corp. GME, +10.45%
and AMC Entertainment Holdings Inc. AMC, +2.54%
soaring early in 2021. Some traders communicating through the Reddit WallStreetBets channel and in other social media worked together to try to force short squeezes in stocks of troubled companies that had been heavily shorted. The action sent shares of GameStop soaring from $4.82 at the end of 2020 to a closing high of $86.88 on Jan. 27, 2021, only for the stock to fall to $10.15 on Feb. 19, 2021, as the seesaw action continued for this and other meme stocks.
Naked shorting
Let’s say you were convinced that a company was headed toward financial difficulties or even bankruptcy, but its shares were still trading at a value you considered to be significant. If the shares were highly liquid, you would be able to borrow them through your broker for little or almost no cost, to set up your short trade.
But if many other investors were shorting the stock, there would be fewer shares available for borrowing. Then your broker would charge a higher fee based on supply and demand.
For example, according to data provided by FactSet on Jan. 23, 22.7% of GameStop’s shares available for trading were sold short — a figure that could be up to two weeks out-of-date, according to the financial data provider.
According to Brad Lamensdorf, who co-manages the AdvisorShares Ranger Equity Bear ETF HDGE, -2.65%,
the cost of borrowing shares of GameStop on Jan. 23 was an annualized 15.5%. That cost increases a short seller’s risk.
What if you wanted to short a stock that had even heavier short interest than GameStop? Lamensdorf said on Jan. 23 that there were no shares available to borrow for Carvana Co. CVNA, +10.63%,
Bed Bath & Beyond Inc. BBBY, -12.24%,
Beyond Meat Inc. BYND, +11.31%
or Coinbase Global Inc. COIN, +1.45%.
If you wanted to short AMC shares, you would pay an annual fee of 85.17% to borrow the shares.
Starting last week, and flowing into this week, management teams at several companies with microcap stocks (with market capitalizations below $100 million) said they were investigating naked short selling — short selling without actually borrowing the shares.
This brings us to three more terms:
A short-locate is a service a short seller requests from a broker. The broker finds shares for the short seller to borrow.
A natural locate is needed to make a “proper” short-sale, according to Moshe Hurwitz, who recently launched Blue Zen Capital Management in Atlanta to specialize in short selling. The broker gives you a price to borrow shares and places the actual shares in your account. You can then short them if you want to.
A nonnatural locate is “when the broker gives you shares they do not have,” according to Hurwitz.
When asked if a nonnatural locate would constitute fraud, Hurwitz said “yes.”
How is naked short selling possible? According to Hurwitz, “it is incumbent on the brokers” to stop placing borrowed shares in customer accounts when supplies of shares are depleted. But he added that some brokers, even in the U.S., lend out the same shares multiple times, because it is lucrative.
“The reason they do it is when it comes time to settle, to deliver, they are banking on the fact that most of those people are day traders, so there would be enough shares to deliver.”
Hurwitz cautioned that the current round of complaints about naked short selling wasn’t unusual and even though short selling activity can push a stock’s price down momentarily, “short sellers are buyers in waiting.” They will eventually buy when they cover their short positions.
“But to really push a stock price down, you need long investors to sell,” he said.
Different action that can appear to be naked shorting
Lamensdorf said the illegal naked shorting that Verb Technology Co. VERB, +69.65%,
Genius Group Ltd. GNS, +45.37%
and other microcap companies have been recently complaining about might include activity that isn’t illegal.
An investor looking to short a stock for which shares weren’t available to borrow, or for which the cost to borrow shares was too high, might enter into “swap transactions or sophisticated over-the-counter derivative transactions,” to bet against the stock,” he said.
This type of trader would be “pretty sophisticated,” Lamensdorf said. He added that brokers typically have account minimums ranging from $25 million to $50 million for investors making this type of trade. This would mean the trader was likely to be “a decent-sized family office or a fund, with decent liquidity,” he said.
More than 55,000 global technology sector employees have been laid off in the first few weeks of 2023, according to data compiled by the Layoffs.fyi website.
The website’s tally of global tech layoffs has almost doubled from just over 25,000 on Tuesday.
The data suggest 2023 is on pace to surpass 2022 for global tech redundancies, with 154 tech companies laying off 55,324 employees in the first few weeks of the year. Last year, 1,024 tech companies laid off 154,336 employees, according to Layoffs.fyi.
Layoffs.fyi was set up by San Francisco-based startup founder Roger Lee to track layoffs during the COVID-19 pandemic. Lee is the co-founder of Human Interest, a digital 401(k) provider for small businesses and Comprehensive, an employee compensation platform.
GOOG, +4.80%
confirmed plans to lay off about 12,000 workers globally and Intel Corp. INTC, +1.62%
said it is slashing hundreds of jobs in Silicon Valley.
In a blog post, Microsoft CEO Satya Nadella said that while the company is eliminating roles in some areas, the company will continue to hire in key strategic areas. The CEO did not specify which areas will see hiring but did describe advances in artificial intelligence as “the next major wave of computing.”
Earlier this month Coinbase Global Inc. COIN, +8.56% announced 950 job cuts in an attempt to cut costs.
“I’m confident that Microsoft will emerge from this stronger and more competitive,” CEO Satya Nadella announced in a memo to employees that was posted on the company website Wednesday. Some employees will find out this week if they’re losing their jobs, he wrote.
Earlier this month, Amazon CEO Andy Jassy said the company was planning to lay off more than 18,000 employees, primarily in its human resources and stores divisions. It came after Amazon said in November it was looking to cut staff, including in its devices and recruiting organizations. CNBC reported at the time that the company was looking to lay off about 10,000 employees.
Amazon went on a hiring spree during the Covid-19 pandemic. The company’s global workforce swelled to more than 1.6 million by the end of 2021, up from 798,000 in the fourth quarter of 2019.
Google parent company Alphabet had largely avoided layoffs until January, when it cut 15% of employees from Verily, its health sciences division. Google itself has not undertaken any significant layoffs as of Jan. 18, but employees are increasingly growing worried that the ax may soon fall.
Crypto.com announced plans to lay off 20% of its workforce Jan. 13. The company had 2,450 employees, according to PitchBook data, suggesting around 490 employees were laid off.
CEO Kris Marszalek said in a blog post that the crypto exchange grew “ambitiously” but was unable to weather the collapse of Sam Bankman-Fried’s crypto empire FTX without the further cuts.
“All impacted personnel have already been notified,” Marszalek said in a post.
The exchange plans to cut 950jobs, according to a blog post. Coinbase, which had roughly 4,700 employees as of the end of September, had already slashed 18% of its workforce in June saying it needed to manage costs after growing “too quickly” during the bull market.
“With perfect hindsight, looking back, we should have done more,” CEO Brian Armstrong told CNBC in a phone interview at the time. “The best you can do is react quickly once information becomes available, and that’s what we’re doing in this case.”
In a letter to employees, co-CEO Marc Benioff said customers have been more “measured” in their purchasing decisions given the challenging macroeconomic environment, which led Salesforce to make the “very difficult decision” to lay off workers.
Salesforce said it will record charges of $1 billion to $1.4 billion related to the headcount reductions, and $450 million to $650 million related to the office space reductions.
Meta‘s disappointing guidance for the fourth quarter of 2022 wiped out one-fourth of the company’s market cap and pushed the stock to its lowest level since 2016.
The tech giant’s cuts come after it expanded headcount by about 60% during the pandemic. The business has been hurt by competition from rivals such as TikTok, a broad slowdown in online ad spending and challenges from Apple’s iOS changes.
Lyftannounced in November that it cut 13% of its staff, or about 700 jobs. In a letter to employees, CEO Logan Green and President John Zimmer pointed to “a probable recession sometime in the next year” and rising ride-share insurance costs.
For laid-off workers, the ride-hailing company promised 10 weeks of pay, health care coverage through the end of April, accelerated equity vesting for the Nov. 20 vesting date and recruiting assistance. Workers who had been at the company for more than four years will get an extra four weeks of pay, they added.
CEO Patrick Collison wrote in a memo to staff that the cuts were necessary amid rising inflation, fears of a looming recession, higher interest rates, energy shocks, tighter investment budgets and sparser startup funding. Taken together, these factors signal “that 2022 represents the beginning of a different economic climate,” he said.
Stripe was valued at $95 billion last year, and reportedly lowered its internal valuation to $74 billion in July.
In a memo to staff, CEO Tobi Lutke acknowledged he had misjudged how long the pandemic-driven e-commerce boom would last, and said the company is being hit by a broader pullback in online spending. Its stock price is down 78% in 2022.
Netflix announced two rounds of layoffs. In May, the streaming service eliminated 150 jobs after the company reported its first subscriber loss in a decade. In late June, it announced another 300 layoffs.
In a statement to employees, Netflix said, “While we continue to invest significantly in the business, we made these adjustments so that our costs are growing in line with our slower revenue growth.”
Snap CEO Evan Spiegel told employees in a memo that the company needs to restructure its business to deal with its financial challenges. He said the company’s quarterly year-over-year revenue growth rate of 8% “is well below what we were expecting earlier this year.”
Retail brokerage firm Robinhood slashed 23% of its staff in August, after cutting 9% of its workforce in April. Based on public filings and reports, that amounts to more than 1,100 employees.
Robinhood CEO Vlad Tenev blamed “deterioration of the macro environment, with inflation at 40-year highs accompanied by a broad crypto market crash.”
“Tesla will be reducing salaried headcount by 10% as we have become overstaffed in many areas,” Musk wrote. “Note this does not apply to anyone actually building cars, battery packs or installing solar. Hourly headcount will increase.”
The Securities and Exchange Commission on Thursday charged crypto firms Genesis and Gemini with allegedly selling unregistered securities in connection with a high-yield product offered to depositors.
Gemini, a crypto exchange, and Genesis, a crypto lender, partnered in February 2021 on a Gemini product called Earn, which touted yields of up to 8% for customers.
According to the SEC, Genesis loaned Gemini users’ crypto and sent a portion of the profits back to Gemini, which then deducted an agent fee, sometimes over 4%, and returned the remaining profit to its users. Genesis should have registered that product as a securities offering, SEC officials said.
“Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws,” SEC chair Gary Gensler said in a statement.
Gemini’s Earn program, supported by Genesis’ lending activities, met the SEC’s definition by including both an investment contract and a note, SEC officials said. Those two features are part of how the SEC assesses whether an offering is a security.
Regulators are seeking permanent injunctive relief, disgorgement, and civil penalties against both Genesis and Gemini.
The two firms have been engaged in a high-profile battle over $900 million in customer assets that Gemini entrusted to Genesis as part of the Earn program, which was shuttered this week.
Gemini, which was founded in 2015 by bitcoin advocates Cameron and Tyler Winklevoss, has an extensive exchange business that, while beleaguered, could possibly weather an enforcement action.
But Genesis’ future is more uncertain, because the business is heavily focused on lending out customer crypto and has already engaged restructuring advisers. The crypto lender is a unit of Barry Silbert’s Digital Currency Group.
SEC officials said the possibility of a DCG or Genesis bankruptcy had no bearing on deciding whether to pursue a charge.
It’s the latest in a series of recent crypto enforcement actions led by Gensler after the collapse of Sam Bankman-Fried’s FTX in November. Gensler was roundly criticized on social media and by lawmakers for the SEC’s failure to impose safeguards on the nascent crypto industry.
Gensler’s SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are the two regulators that oversee crypto activity in the U.S. Both agencies filed complaints against Bankman-Fried, but the SEC has, of late, ramped up the pace and the scope of enforcement actions.
The SEC brought a similar action against now bankrupt crypto lender BlockFi and settled last year. Earlier this month, Coinbasesettled with New York state regulators over historically inadequate know-your-customer protocols.
Since Bankman-Fried was indicted on federal fraud charges in December, the SEC has filed five crypto-related enforcement actions.
Following a record-smashing tech IPO year in 2021 that featured the debuts of electric car maker Rivian, restaurant software company Toast, cloud software vendors GitLab and HashiCorp and stock-trading app Robinhood, 2022 has been a complete dud.
The only notable tech offering in the U.S. this year was Intel’s spinoff of Mobileye, a 23-year-old company that makes technology for self-driving cars and was publicly traded until its acquisition in 2017. Mobileye raised just under $1 billion, and no other U.S. tech IPO pulled in even $100 million, according to FactSet.
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In 2021, by contrast, there were at least 10 tech IPOs in the U.S. that raised $1 billion or more, and that doesn’t account for the direct listings of Roblox, Coinbase and Squarespace, which were so well-capitalized they didn’t need to bring in outside cash.
The narrative completely flipped when the calendar turned, with investors bailing on risk and the promise of future growth, in favor of profitable businesses with balance sheets deemed strong enough to weather an economic downturn and sustained higher interest rates. Pre-IPO companies altered their plans after seeing their public market peers plunge by 50%, 60%, and in some cases, more than 90% from last year’s highs.
In total, IPO deal proceeds plummeted 94% in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young’s IPO report published in mid-December. As of the report’s publication date, the fourth quarter was on pace to be the weakest of the year.
With the Nasdaq Composite headed for its steepest annual slump since 2008 and its first back-to-back years underperforming the S&P 500 since 2006-2007, tech investors are looking for signs of a bottom.
But David Trainer, CEO of stock research firm New Constructs, says investors first need to get a grip on reality and get back to valuing emerging tech companies based on fundamentals and not far-out promises.
As tech IPOs were flying in 2020 and 2021, Trainer was waving the warning flag, putting out detailed reports on software, e-commerce and tech-adjacent companies that were taking their sky-high private market valuations to the public markets. Trainer’s calls appeared comically bearish when the market was soaring, but many of his picks look prescient today, with Robinhood, Rivian and Sweetgreen each down at least 85% from their highs last year.
“Until we see a persistent return to intelligent capital allocation as the primary driver of investment decisions, I think the IPO market will struggle,” Trainer said in an email. “Once investors focus on fundamentals again, I think the markets can get back to doing what they are supposed to do: support intelligent allocation of capital.”
Lynn Martin, president of the New York Stock Exchange, told CNBC’s “Squawk on the Street” last week that she’s “optimistic about 2023” because the “backlog has never been stronger,” and that activity will pick up once volatility in the market starts to dissipate.
For companies in the pipeline, the problem isn’t as simple as overcoming a bear market and volatility. They also have to acknowledge that the valuations they achieved from private investors don’t reflect the change in public market sentiment.
Companies that were funded over the past few years did so at the tail end of an extended bull run, during which interest rates were at historic lows and tech was driving major changes in the economy. Facebook’smega IPO in 2012 and the millionaires minted by the likes of Uber, Airbnb, Twilio and Snowflake recycled money back into the tech ecosystem.
Venture capital firms, meanwhile, raised ever larger funds, competing with a new crop of hedge funds and private equity firms that were pumping so much money into tech that many companies were opting to stay private for longer than they otherwise would.
Money was plentiful. Financial discipline was not.
In 2021, VC firms raised $131 billion, topping $100 billion for the first time and marking a second straight year over $80 billion, according to the National Venture Capital Association. The average post-money valuation for VC deals across all stages rose to $360 million in 2021 from about $200 million the prior year, the NVCA said.
Those valuations are in the rearview mirror, and any companies who raised during that period will have to face up to reality before they go public.
Some high-valued late-stage startups have already taken their lumps, though they may not be dramatic enough.
Stripe cut its internal valuation by 28% in July, from $95 billion to $74 billion, the Wall Street Journal reported, citing people familiar with the matter. Checkout.com slashed its valuation this month to $11 billion from $40 billion, according to the Financial Times. Instacart has taken a hit three times, reducing its valuation from $39 billion to $24 billion in May, then to $15 billion in July, and finally to $13 billion in October, according to The Information.
Klarna, a provider of buy now, pay later technology, suffered perhaps the steepest drop in value among big-name startups. The Stockholm-based company raised financing at a $6.7 billion valuation this year, an 85% discount to its prior valuation of $46 billion.
“There was a hangover from all the binge drinking in 2021,” said Don Butler, managing director at Thomvest Ventures.
Butler doesn’t expect the IPO market to get appreciably better in 2023. Ongoing rate hikes by the Federal Reserve are looking more likely to tip the economy into recession, and there are no signs yet that investors are excited to take on risk.
“What I’m seeing is that companies are looking at weakening b-to-b demand and consumer demand,” Butler said. “That’s going to make for a difficult ’23 as well.”
Butler also thinks that Silicon Valley has to adapt to a shift away from the growth-first mindset before the IPO market picks up again. That not only means getting more efficient with capital, showing a near-term path to profitability, and reining in hiring expectations, but also requires making structural changes to the way organizations run.
For example, startups have poured money into human resources in recent years to handle the influx in people and the aggressive recruiting across the industry. There’s far less need for those jobs during a hiring freeze, and in a market that’s seen 150,000 job cuts in 2022, according to tracking website Layoffs.fyi.
Butler said he expects this “cultural reset” to take a couple more quarters and said, “that makes me remain pessimistic on the IPO market.”
One high-priced private company that has maintained its valuation is Databricks, whose software helps customers store and clean up data so employees can analyze and use it.
Databricks raised $1.6 billion at a $38 billion valuation in August of 2021, near the market’s peak. As of mid-2021, the company was on pace to generate $1 billion in annual revenue, growing 75% year over year. It was on everybody’s list for top IPO candidates coming into the year.
Databricks CEO Ali Ghodsi isn’t talking about an IPO now, but at least he’s not expressing concerns about his company’s capital position. In fact, he says being private today plays to his advantage.
“If you’re public, the only thing that matters is cash flow right now and what are you doing every day to increase your cash flow,” Ghodsi told CNBC. “I think it’s short-sighted, but I understand that’s what markets demand right now. We’re not public, so we don’t have to live by that.”
Ghodsi said Databricks has “a lot of cash,” and even in a “sky is falling” scenario like the dot-com crash of 2000, the company “would be fully financed in a very healthy way without having to raise any money.”
Snowflake shares in 2022
CNBC
Databricks has avoided layoffs and Ghodsi said the company plans to continue to hire to take advantage of readily available talent.
“We’re in a unique position, because we’re extremely well-capitalized and we’re private,” Ghodsi said. “We’re going to take an asymmetric strategy with respect to investments.”
That approach may make Databricks an attractive IPO candidate at some point in the future, but the valuation question remains a lingering concern.
Snowflake, the closest public market comparison to Databricks, has lost almost two-thirds of its value since peaking in November 2021. Snowflake’s IPO in 2020 was the largest ever in the U.S. for a software company, raising almost $3.9 billion.
Snowflake’s growth has remained robust. Revenue in the latest quarter soared 67%, beating estimates. Adjusted profit was also better than expectations, and the company said it generated $65 million in free cash flow in the quarter.
Still, the stock is down almost 20% in the fourth quarter.
“The sentiment in the market is a little stressed out,” Snowflake CEO Frank Slootman told CNBC’s Jim Cramer after the earnings report on Nov. 30. “People react very strongly. That’s understood, but we live in the real world, and we just go one day at a time, one quarter at a time.”
The collapse of FTX, once a $32 billion crypto exchange, has shattered investor confidence in cryptocurrencies. Market players are trying to gauge the extent of damage it has caused — and how it will reshape the industry in the years to come.
Sam Bankman-Fried, FTX’s former boss who stepped down on Nov. 11, was arrested in the Bahamas last week. He has been charged by the U.S. government with wire fraud, securities fraud and money laundering.
“It’s hugely disappointing for investors, or more so devastating for investors,” said Louise Abbott, a partner at law firm Keystone Law who specializing in crypto-asset recovery and fraud.
It’s clear the FTX drama could radically reshape crypto in the years to come. Here are three big ways the industry could change.
For one, the disaster will looks certain to stir regulators into action.
Crypto as an industry is still largely unregulated, meaning investors don’t have the same protections they would have placing their funds with a licensed bank or broker.
That may be about to change. Governments in the U.S., European Union and the U.K. are taking steps to clean up the market.
If there’s no regulation, the investors are left without that protection that they need.
Louise Abbott
Partner, Keystone Law
The EU’s Markets in Crypto-Assets is the most comprehensive regulatory framework to date. It aims to reduce the risks for consumers buying crypto, making exchanges liable if they lose investors’ assets.
But MICA is not due to start until 12 months from now. Keystone Law’s Abbott said it’s important that regulators act quickly.
“People need to see that there’s steps being taken to regulate it. And I think If we are able to offer some regulation, we will build confidence,” she said. “If there’s no regulation, the investors are left without that protection that they need.”
Read more about tech and crypto from CNBC Pro
The saga has set back adoption of crypto assets by “one or two years,” according to Evgeny Gaevoy, founder and CEO of crypto market maker Wintermute.
“Everything that failed this year, if you look at Celsius, Three Arrows, FTX now — all those guys were taking the worst of both worlds because they were not completely decentralized, and they were not properly centralized either,” he said.
For Kevin de Patoul, CEO of crypto market maker Wintermute, the biggest lesson from FTX’s bankruptcy is that “you cannot have complete centralization and lack of oversight.”
“We are evolving to a world where you are going to have both centralization and decentralization,” he said. “When you do have that centralization, you need to have proper oversight and a proper balance of power.”
I don’t think all the dominoes have fallen out from the contagion. The impact that this will have is that a lot of projects actually are not going to have the funds…
Marieke Flament
CEO, Near Foundation
“The challenge for the whole space when you think about contagion is that FTX and Alameda were extremely active investors in this space,” Peter Smith, CEO of Blockchain.com, said in a CNBC-moderated talk at a crypto conference in London.
Near Foundation, which is behind a blockchain network called Near, was among the firms that took investment from FTX. Marieke Flament, Near’s CEO, said the firm had limited exposure to FTX — though the collapse was still “a surprise and a shock.”
“I don’t think all the dominoes have fallen out from the contagion,” Flament said. “The impact that this will have is that a lot of projects actually are not going to have the funds, and therefore the resources, for them to continue and develop.”
Fears have risen over the financial health of other major crypto exchanges after FTX’s failure. Since early 2020, about 900,000 bitcoins have flowed out of exchanges, according to data from CryptoQuant.
Binance, the world’s largest exchange, is facing questions about the reserves it holds to backstop customer funds. The company saw billions of dollars in outflows in the past week.
Currently, there is no reason to suspect Binance faces any risk of bankruptcy. But exchanges like Binance and Coinbase face a bleak market backdrop ahead amid falling trading volumes and account balances.
Experts believe they’ll continue to play a role — though their survival will be determined by how seriously they take risk management, governance and regulation.
“There will be exchanges that are doing things the right way and that will survive,” said Abbott.
As for tokens — bitcoin, being the longest-living digital currency, may be better positioned than its smaller rivals.
“My bet would be that bitcoin and DeFi [decentralized finance] are decoupled from the rest of crypto and actually start to have a life of its own,” Gaevoy from Wintermute told CNBC.
Despite the depressed state of crypto markets, and the toll it’s taken on investors, the digital asset industry is likely to pull through.
Proponents of “Web3,” a hypothetical blockchain-based internet, expect 2022’s crypto winter to pave the way for more innovative uses of blockchain, rather than the speculative uses crypto is associated with today.
“What we’re seeing a lot is companies having digital innovation arms or metaverse innovation arms,” Flament said. “They understand that the technology is here. It’s not going to go away.”
NFTs, or nonfungible tokens, could alter users’ relationships with properties in games and events, for example. These are digital assets that track ownership of unique virtual items on the blockchain.
“Digital assets will be an increasing part of our lives, whether that is a collectible, a ticket, value, identity,” Ian Rogers, chief experience officer at crypto wallet firm Ledger, told CNBC. “Identity could be membership … [people] using NFTs they own to get access to a particular event or something like that.”
But for many, there’s still a learning curve to overcome. “It’s hard creating wallets and storing keys and going through different platforms,” Cordel Robbin-Coker, CEO of mobile games firm Carry1st, told CNBC at the Slush startup conference in Helsinki, Finland.
Robbin-Coker compared Web3 today with the internet in the early 90s. “It was clunky. You had dial-up, it took four minutes to get on, the original web browsers were not very intuitive,” he said.
“It’s really the early adopters that really engage at that stage. But over time, companies build smoother interfaces. And they cut steps out of it.”
Monitors display Coinbase signage during the company’s initial public offering (IPO) at the Nasdaq MarketSite in New York, U.S., on Wednesday, April 14, 2021.
Michael Nagle | Bloomberg | Getty Images
Heading into 2022, Coinbase debtholders showed little reason for concern. Even though third-quarter earnings missed estimates, revenue at the crypto exchange had more than quadrupled from the prior year and the company was wildly profitable.
Coinbase ended last year with $7.1 billion in cash and equivalents as crypto traders swarmed to the app to get in on the boom in prices of bitcoin, ether and other digital currencies. The company was minting so much money that, in April of last year, it went public through a direct listing instead of an IPO, foregoing the opportunity to reel in a bundle of money from new investors.
Rather than raising dilutive cash through a stock sale, Coinbase tapped the bond market over the course of the year for $3.4 billion in long-term debt, choosing to pad its balance sheet with what it described as “low-cost capital.”
As 2022 nears its end, Coinbase’s debt load is looking more worrisome. Cash and equivalents dropped to $5 billion as of Sept. 30, having fallen for three straight quarters — and that was before the FTX collapse in November caused a panic across the crypto industry.
Bond holders have been running for the exits. For over a month, Coinbase notes set to mature in 2031 have been trading around 50 cents on the dollar, down from about 92 cents at the beginning of the year. The company laid off 18% of its staff in July, when CEO Brian Armstrong admitted that he’d hired too quickly and needed to cut costs “to ensure we can successfully navigate a prolonged downturn.”
Coinbase CFO Alesia Haas said in an emailed statement that the company is in a “strong capital position” and does “not have a liquidity problem.”
For now, debt investors are in the clear. The first tranche of bonds — $1.4 billion in convertible notes — don’t mature until June 2026. But the company is projected by analysts to run up a $2.6 billion loss this year and another deficit of $1.4 billion in 2023, according to Refinitiv estimates. Bankruptcies in the industry have hit with such speed that the future has become increasingly hard to predict.
Moody’s Investors Service has placed its rating outlook for Coinbase under review for possible downgrade. The firm currently has a Ba3 rating on the corporate family, which is three notches below investment grade. It has a Ba2 rating on the bonds, one notch higher.
“They had a very strong 2020 and 2021, but those are in the rearview mirror now,” said Fadi Abdel Massih, senior analyst at Moody’s, in an interview. “The company is in a strong liquidity position, but at the same time they have to deal with a changing operating environment.”
Brian Armstrong, CEO and Co-Founder, Coinbase, speaks during the Milken Institute Global Conference on May 2, 2022. in Beverly Hills, California.
Patrick T. Fallon | AFP | Getty Images
Equity investors started bailing on Coinbase long ago, selling their positions as they saw the price of bitcoin and ether tumble and as other high-multiple tech stocks got whacked. The stock fell by at least 30% a month for three straight months starting in April, and is down 83% this year, pinning the company’s market cap under $10 billion.
Coinbase’s bond prices also dropped significantly over that stretch, reflecting the deteriorating operating environment in crypto and the number of firms being forced to exit the market. But the alarming slide came last month, when the 2031 notes fell below 50 cents on the dollar for the first time. They’re now at close to 52 cents. The yield is near 13%, just below its high. Bond yields move in the opposite direction of price.
Coinbase’s $1 billion worth of notes that mature in October 2028 are trading at about 55 cents on the dollar, up just barely from their November low and down from about 94 cents at the start of the year.
Analysts at Mizuho Securities raised additional concerns on Friday, in downgrading the firm’s rating on Coinbase shares to the equivalent of a sell from a hold. Mizuho’s stock price target of $30 is the lowest among analysts tracked by FactSet. The stock closed Monday at $42.60
Coinbase’s 2022 slump
CNBC
The Mizuho analysts flagged Coinbase’s tight relationship with Circle, the company behind the stablecoin USD Coin (USDC), as a potential emerging problem. While transaction revenue has been plummeting at all the major exchanges, Coinbase has been able to soften the blow because of a dramatic increase in revenue from its holdings of USDC.
Backed by U.S. dollars, USDC has gained value with the rise in interest rates. In the third quarter, the value of Coinbase’s USDC holdings climbed to $368.1 million from $100.1 million at the end of 2021. Net interest income soared to $101.8 million from $8.4 million a year earlier.
Mizuho estimates that roughly 80% of interest income was due to Coinbase’s relationship with Circle, which was supposed to go public through a special purpose acquisition corporation but canceled that transaction last week.
Mizuho speculates that Circle may be looking to “rethink its business model” and to eventually take advantage of the leverage it has with respect to its control over USDC.
“Any potential change to COIN’s USDC income from Circle could have an amplified adverse effect on its profitability,” the analysts wrote in a report subtitled, “Is interest income the next shoe to drop?”
In the risk factors section of its latest quarterly report, Coinbase pointed to “ongoing relationships with third parties” as an area where “operating results could fluctuate” should there be changes.
Moody’s puts Coinbase’s USDC holdings in the category of cash and cash equivalents, where the firms says the company has “financial strength.” Massih, the analyst covering Coinbase, said bond holders aren’t in a dire situation because Coinbase has enough cash on hand that it could pay off all its debt now if it so desired.
“Why would they do that?” he said, answering his own question with, “There’s no reason to do that.”
For bondholders, today isn’t what matters. Rather, they’re betting that Coinbase won’t keep bleeding cash at the rate it has over the course of the past year. To get paid back, investors don’t need revenue growth to return to the crypto hype days of 2021 — they just need to see some measure of stability.
To build a fire — but not destroy the market by doing so. That’s the goal right now. It’s not as easy as in the famous Jack London short story (“To Build a Fire”) where, in the end, the survivors profit rather than freeze to death in their sleep. In the early part of this decade, we saw the rise of Robinhood (HOOD) and the distribution of investments from the serious to the ephemeral. These days, Robinhood has the appearance of one gigantic bonfire of young people’s money. The gamification concept was real and the exodus of investors was noisy — culminating with the ridiculous self-immolation of GameStop (GME), AMC Entertainment (AMC) and the meme stocks. Those who fought this trend abandoned Twitter, hired bodyguards and tried to hide from the angry mob that was attempting to will stocks higher by savaging the sellers. No tinder from these clowns. Then there was the much larger-than-expected romp to crypto. The people who bought it somehow ensconced their brains into something they didn’t understand. As a result, they overran their brains and outsourced them to others who claimed to know more than they did. You had to oppose a phalanx of vociferous, self-promoting scoundrels and their fintech allies in government and venture capital — all of whom should feel shame, but shame eludes them. They will not accept their intellectual disgrace, and instead, continue to argue that it was all about blockchain and DeFi (decentralized finance). They want to explain to you why they got it right and you got it wrong, even as they lost everything and you were safe keeping your cash at JPMorgan. I wish I had a hubris scale, something like a gigantic thermometer that could measure these arrogant promoters and give them the hook when they contend that they are smarter than you for believing in something with a best-use case as untraceable ransom money. But this era is running out. It’s going to be done with a fight, of course, as we see its representatives defend themselves with specious arguments that sound so self-serving and outright phony that even neutral minds are repelled and rebelling. The money furnace that was Robinhood burns blandly compared to the napalm of crypto. The interests that defended crypto can’t go quietly because they will empty the coffers of their crypto banks and cause waves of bankruptcies; the $34 billion that we know of that was destroyed by Sam Bankman-Fried — the disgraced former boss of failed crypto exchange FTX — pretty much propped up everything. We keep getting stung by the alleged due diligence done by so many who should have known better, with only a couple of institutions writing their investments to nothing, along with their explanations, or lack thereof. Here’s the problem: If it all goes away — crypto and all the institutions supporting it — the money that’s left won’t help push equity prices higher. It was once a magnet to a couple of trillion dollars. Now I wonder if there’s $400 billion to the entire edifice. The whole thing reminds me of a line from the film “Beau Geste,” when two of the main characters are under attack: “You’ll do your duty better dead than you ever did alive.” The biggest guns are most likely liquidating as they talk, the duplicitous cads. They will tell us that we are fools not to believe in blockchain as if somehow that is dispositive to something other than lies and blunders. My point is this: The crypto con and the Robinhood dollar conflagration can’t produce enough money to buoy stocks. There’s not enough left in these embers to do anything but marvel at how much there used to be and how little bankruptcy produces. No matter how many hearings, we will never know the full culpability behind those in Congress and those in the Securities and Exchange Commission who opposed SEC Chairman Gary Gensler. He came on CNBC specifically to warn us of made-up coins and institutions that give you too high a return compared to cash in a real bank. Self-serving cryptocurrency players have been critical of the SEC. They want to school Gensler and let him know he can only go so far before running into all the well-endowed entities and their secret paid supporters. The horror! The horror! So where else will the money come from? Unlike the chimerical trillions that vanished into thin crypto air, the fuel will come from four stocks that have a combined total of $6 trillion to donate: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL) and Amazon (AMZN). There is simply too much money in these names to take us higher, or at least how high we can go after the Federal Reserve’s next meeting this week. But I think some of that investor money will be transferred into the stocks of companies that have the most voracious buybacks. Those are the companies without enough stock available to handle all the money that will flood in. Money in those four stocks will be pulled out, kicking and screaming, until the valuations become earthly — better than Meta Platforms (META) and more like the S & P as they are revealed to be mortal. Not until then can the rally start in earnest. Can these valuations be played out? It’s happening as you read this. Of course, there’s one other enemy to the advance and it’s a powerful one: The 4.5% yield from 2-year Treasurys is outrageously bountiful in a market where anything north of 4% in equities is likely tied to plummeting oil. However, we cling to the oils, betting that they can maintain their well above market prices when Russia can’t produce its endless reserves and China goes voracious upon reopening. I think we will win. Bottom line We will hold Apple, Microsoft, Alphabet and Amazon, even as we’ve trimmed them higher. Their spiral down to earth, however, will be painful. If we hadn’t sold some, it would be getting late in the game. But I suspect there’s more pain to come. Why take it? Because these companies still have value, even though it won’t surface until the selling’s done and we don’t know when that will occur. It’s too dangerous now to depart, although Apple could see $120 and Microsoft a 10-point decline. Amazon and Alphabet control their own destinies through headcount reductions. The good news? The selling could end after the Fed meeting. The bad news: If it does, there will not be enough rocket fuel. The big four need to shed a trillion minimum to power things higher. I think it will happen in time. Which would mean a brutal week until the transfer begins to be made. Hold on to what you have, but get ready to be lifted by the stocks with the strongest buybacks. That’s where the accumulation will matter the most. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Satya Nadella, chief executive officer of Microsoft Corp., during the company’s Ignite Spotlight event in Seoul, South Korea, on Tuesday, Nov. 15, 2022. Nadella gave a keynote speech at an event hosted by the company’s Korean unit.
SeongJoon Cho | Bloomberg | Getty Images
To build a fire — but not destroy the market by doing so.
That’s the goal right now. It’s not as easy as in the famous Jack London short story (“To Build a Fire”) where, in the end, the survivors profit rather than freeze to death in their sleep.
In the early part of this decade, we saw the rise of Robinhood (HOOD) and the distribution of investments from the serious to the ephemeral. These days, Robinhood has the appearance of one gigantic bonfire of young people’s money. The gamification concept was real and the exodus of investors was noisy — culminating with the ridiculous self-immolation of GameStop (GME), AMC Entertainment (AMC) and the meme stocks. Those who fought this trend abandoned Twitter, hired bodyguards and tried to hide from the angry mob that was attempting to will stocks higher by savaging the sellers. No tinder from these clowns.
Kris Marszalek, CEO of Crypto.com, speaking at a 2018 Bloomberg event in Hong Kong, China.
Paul Yeung | Bloomberg | Getty Images
Kris Marszalek wants everyone to know that his company, Crypto.com, is safe and in good hands. His TV appearances and tweets make that clear.
It’s an understandable approach. The crypto markets have been in freefall for much of the year, with high-profile names spiraling into bankruptcy. When FTX failed last month just after founder Sam Bankman-Fried said the crypto exchange’s assets were fine, trust across the industry evaporated.
Marszalek, who has operated out of Asia for over a decade, subsequently assured clients that their funds belong to them and are readily available, in contrast to FTX, which used client money for all sorts of risky and allegedly fraudulent activities, according to court filings and legal experts.
Bankman-Fried has denied knowing about any fraud. Regardless, FTX clients are now out billions of dollars with bankruptcy proceedings underway.
Crypto.com, one of the world’s largest cryptocurrency exchanges, may well be in fine health. After the FTX collapse, the company published its unaudited, partial proof of reserves. The release revealed that nearly 20% of customer funds were in a meme token called shiba inu, an amount eclipsed only by its bitcoin allocation. That percentage has dropped since the initial release to about 15%, according to Nansen Analytics.
Marszalek said in a Nov. 14 livestream on YouTube that the wallet addresses were representative of customer holdings.
While no evidence has emerged of wrongdoing at Crypto.com, Marszalek’s business history is replete with red flags. Following the collapse of a prior company in 2009, a judge called Marszalek’s testimony unreliable. His business activities before 2016 — the year he founded what would become Crypto.com — involved a multimillion-dollar settlement over claims of defective products, corporate bankruptcy and an e-commerce company that failed shortly after a blowout marketing campaign left sellers unable to access their money.
Court records, public filings and offshore database leaks reveal a businessman who moved from industry to industry, rebooting quickly when a venture would fail. He started in manufacturing, producing data storage products for white label sale, then moved into e-commerce, and finally into crypto.
CNBC reached out to Crypto.com with information on Marszalek’s past and asked for an interview. The company declined to make Marszalek available and sent a statement indicating that there was “never a finding of wrongdoing under Kris’s leadership” at his prior ventures.
After CNBC’s requests, Marszalek published a 16-tweet thread, beginning by telling his followers: “More FUD targeting Crypto.com is coming, this time about a business failure I had very early in my career. I have nothing to hide, and am proud of my battle scars, so here’s the unfiltered story.” FUD is short for fear, uncertainty and doubt and is a popular phrase among crypto executives.
In the tweets, Marszalek described his past personal bankruptcy and the abrupt closure of his e-commerce business as learning experiences, and added that “startups are hard,” and “you will fail over and over again.”
Marszalek founded a manufacturing firm called Starline in 2004, according to his LinkedIn profile. Based in Hong Kong, with a plant in mainland China, Starline built hardware products like solid state drives, hard drives, and USB flash drives. Marzsalek’s LinkedIn page says he grew the business into a 400-person company with $81 million in sales in three years.
There was much more to the story.
Marszalek owned 50% of the company, sharing ownership and control with another Hong-Kong based individual, who partnered with Marszalek in multiple ventures.
In 2009, Marzsalek’s company settled with a client over a faulty shipment of flash drives. The $5 million settlement consisted of a $1 million upfront payment and a $4 million credit note to the client, Dexxon. The negotiations over the settlement began at some point after 2007.
CNBC was unable to locate Marszalek’s business partner.
Court documents don’t show whether Starline made good on either the $1 million “lump sum settlement fee” or the $4 million credit note. Starline was forced into bankruptcy proceedings by the end of 2009, court records from 2013 show.
Over the course of 2008 and 2009, Marszalek and his partner were transferred nearly $3 million in payments from Starline, according to the documents.
Over $1 million was paid out to Marszalek personally in what the court said were “impugned payments.” His partner took home nearly $1.9 million in similar payments.
“It appears that there was a concerted effort to strip the cash from Starline,” Judge Anthony Chan later wrote in a court filing.
Some $300,000 was paid by Starline to a British Virgin Islands holding company called Tekram, the document says. That money went through Marszalek, and Tekram eventually returned it to Starline.
By 2009, Starline had collapsed. Marszalek’s representatives told CNBC in a statement that Starline went under because customers failed to pay back credit lines that the company had extended them during the financial crisis of 2007 and 2008. Starline borrowed that money from Standard Chartered Bank of Hong Kong (SCB).
“The bank then turned to Starline and the co-founders to repay the lines of credit and filed for liquidation of the company,” the statement said.
Starline owed $2.2 million to SCB.
Marszalek said on Twitter that he had personally guaranteed the loans from the bank to Starline. As a result, when the bank forced Starline into liquidation, Marszalek and his partner were forced into bankruptcy as well.
The court found that the $300,000 transfer to Tekram was “in truth a payment” to Marszalek.
Marszalek said the money in the Tekram transfer was repayment of a debt Starline owed to Tekram. The judge described that claim as “inherently incredible.”
“There is no explanation why the repayment had to be channelled through him or why the money was later returned to the debtor,” the judge said.
Bankruptcy didn’t sever the ties between Marszalek and his partner or keep them out of business for long. At the same time Starline was shutting down, the pair set up an offshore holding company called Middle Kingdom Capital.
Middle Kingdom was established in the Cayman Islands, a notorious hub for tax shelters. The connection between Middle Kingdom and Marszalek and his partner, who each held half of the firm, was exposed in the 2017 Paradise Papers leak. The Paradise Papers, along with the Panama Papers, contained documents about a web of offshore holdings in tax havens. They were published by the International Consortium of Investigative Journalists.
Middle Kingdom was the owner of Buy Together, which in turn owned BeeCrazy, an e-commerce venture that Marszalek had started pursuing. Similar to Groupon, retailers could use BeeCrazy to sell their products at steep discounts. BeeCrazy would process payments, take a commission on goods sold, and distribute funds to the retailers.
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Sellers and buyers flocked to the site, drawn in by considerable discounts on everything from spa passes to USB power banks. Buy Together drew attention from an Australian conglomerate called iBuy, which was on the verge of an IPO and pursued an acquisition of BeeCrazy as part of a plan to build out an Asian e-commerce empire.
Court filings and Australian disclosures show that to seal the deal, Marszalek and his partner had to remain employed by iBuy for three years and clear their individual bankruptcies in Hong Kong court. The partner’s uncle came forward in front of the court to help his nephew and Marszalek clear their names and debts, filings show.
While the judge called the uncle’s involvement “suspicious,” he allowed him to repay the debt. As a result, both Marszalek and his partner’s bankruptcies were annulled. A few months later, in October 2013, BeeCrazy was purchased by iBuy for $21 million in cash and stock, according to S&P Capital IQ.
A month and a half after buying BeeCrazy, iBuy went public. Marszalek was required to remain until 2016.
The company struggled after its IPO as competition picked up from bigger players like Alibaba. Marszalek was eventually promoted to CEO of iBuy in August 2014, according to filings with Australian regulators.
Alibaba headquarters in Hangzhou, China.
Bloomberg | Bloomberg | Getty Images
Marszalek renamed iBuy as Ensogo in an effort to retool the company. Ensogo continued to suffer, running up a loss in 2015 equal to over $50 million.
By the following year, Ensogo had already reportedly laid off half its staff. In June 2016, Ensogo closed down operations. The same day, Marszalek resigned.
After the sudden shuttering of Ensogo, sellers on the site told the South China Morning Press that they never received proceeds from items they’d already delivered as part of a final blowout sale.
“[Many] sellers had already sold their goods but had yet to receive any money from the platform at that time, their money thus vanished altogether with the online shopping platform,” according to translated testimony from a representative for a group of sellers before Hong Kong’s Legislative Council.
One seller told Hong Kong’s The Standard that she lost more than $25,000 in the process.
“It seems to us that they wanted to make huge business from us one last time before they closed down,” the seller told the publication.
Marszalek’s representative acknowledged to CNBC that “the shutdown angered many customers and consumers” and said that was “one of the reasons Kris was opposed to the decision.”
Marszalek moved quickly on to his next thing. The same month he resigned from Ensogo, Foris Limited was incorporated, marking Marszalek’s entry into the crypto market.
Foris’ first foray into crypto was with Monaco, an early exchange.
With a leadership team composed entirely of former Ensogo employees, Monaco told prospective investors they could expect three million customers and $169 million in revenue within five years.
The exterior of Crypto.com Arena on January 26, 2022 in Los Angeles, California.
Rich Fury | Getty Images
By 2021, the company had smashed its own goals, crossing the 10 million user mark. Revenue for the year topped $1.2 billion, according to the Financial Times. That’s when crypto was soaring, with bitcoin climbing from about $7,300 at the beginning of 2020 to a peak of over $68,000 in November of 2021.
The company inked a deal with LeBron James for a Super Bowl ad, aired a prior commercial with Matt Damon and spent a reported $700 million to put its name on the arena that’s home to the Los Angeles Lakers. It’s also a sponsor of the World Cup in Qatar.
The market’s plunge in 2022 has been disastrous for all the major players and goes well beyond the FTX collapse and the numerous hedge funds and lenders that have liquidated. Coinbase’s stock price is down84%, and the company laid off 18% of its staff. Kraken recently cut 30% of its workforce.
Crypto.com has laid off hundreds of employees in recent months, according to multiple reports. Questions percolated about the company in November after revelations that the prior month Crypto.com had sent more than 80% of its ether holdings, or about $400 million worth of the cryptocurrency, to Gate.io, another crypto exchange. The company only admitted the mistake after the transaction was exposed thanks to public blockchain data. Crypto.com said the funds were recovered.
Marszalek went on CNBC on Nov. 15, following the FTX failure, to try and reassure customers and the public that the company has plenty of money, that it doesn’t use leverage and that withdrawal demands had normalized after spiking.
Still, the market cap for Cronos, Crypto.com’s native token, has shrunk from over $3 billion on Nov. 8 to a little over $1.6 billion today, reflecting a loss of confidence among a key group of investors. During the crypto mania at this time last year, Cronos was worth over $22 billion.
Cronos has stabilized of late, hovering around six cents for the last three weeks. Bitcoin prices have been flat for about four weeks.
Marszalek’s narrative is that he’s learned from past mistakes and that “early failures made me who I am today,” he wrote in his tweet thread.
He’s asking customers to believe him.
“I’m proud of my scar tissue and the way I persevered in the face of adversity,” he tweeted. “Failure taught me humility, how to not overextend, and how to plan for the worst.”
Correction: Crypto.com’s Super Bowl ad featured LeBron James, not Matt Damon. The commercial with Damon came out in late 2021.
Clarification: This story has been updated to more accurately reflect where in Asia Marszalek has operated.
Shares in Coinbase came under renewed selling pressure this week on concerns about spillover from FTX’s collapse earlier this month. But many other companies are also exposed to FTX’s failure. Strategists at Morgan Stanley on Nov. 17 compiled a list of 63 institutions that may be exposed to losses or have their capital stuck on FTX’s platform. The investment bank said it sourced its information through public disclosures, media reports and its own research. Companies named include lenders, traders, exchanges and investors. FTX owes its creditors at least $3.1 billion , according to its own filing with regulators last week. The below table shows 19 of the companies identified by Morgan Stanley as having significant exposure to FTX. Of the 19 companies listed, 15 have confirmed some exposure to FTX (although figures may differ from Morgan Stanley’s estimates). Paradigm, Layer Zero and Ikigai Asset Management did not immediately respond to CNBC’s request for comment. Venture capital firm Sequoia Capital was the most exposed entity on the list, with $213.5 million at risk across two funds. Sequoia has said it will mark down to zero its investment in FTX. Temasek, the Singaporean state-owned holding company, said it had invested more than $200 million in FTX and FTX’s U.S. subsidiary. The fund said in a statement that its investment thesis was “to invest in a leading digital asset exchange … To clarify, we currently have no direct exposure in cryptocurrencies.” Some listed companies, such as Mike Novogratz’s crypto-focused hedge fund Galaxy Digital , Voyager , Coinbase and Softbank , also featured high on Morgan Stanley’s list of exposed firms. The four companies have $194.8 million at risk in total, according to the bank. Morgan Stanley also named Ledn, BlockFi, Amber Group, Skybridge Capital and Selini Capital as among the funds with potential exposure to FTX, but where values had not been disclosed. The risk of contagion from the FTX fiasco remains, Morgan Stanley said, adding that “crypto exchanges will continue to see outflows in the near term as institutions and retail investors either sell assets or move their holdings into offline wallets.” Hopes of recovery for some creditors were raised Tuesday, however, after FTX reported that it had located $1.24 billion cash ahead of a U.S. court hearing.
Chairman Sherrod Brown (D-OH) questions Treasury Secretary Janet Yellen and Federal Reserve Chairman Powell during a Senate Banking, Housing and Urban Affairs Committee hearing on the CARES Act, at the Hart Senate Office Building in Washington, DC, September 28, 2021.
Kevin Dietsch | Pool | Reuters
Four Democratic lawmakers on the Senate Banking Committee urged federal regulators to look into SoFi’s cryptocurrency trading activity in a letter on Monday, warning its “digital asset activities pose significant risks to both individual investors and safety and soundness.”
SoFi shares were down more than 6% Monday afternoon.
“Over the past year, several meltdowns in the crypto market have wiped out trillions in value, including another huge crash last week,” the letter to Noto said.
SoFi is unique among institutions singled out for regulatory scrutiny because it operates as both a bank holding company and as a crypto exchange, through a subsidiary.
SoFi pitches itself as a digital financial services company with 3.9 million members as of Q1 2022. SoFi began as a student loan company in 2011. Since then, the San Francisco-based, Nasdaq-traded company made its first foray into crypto through a partnership with Coinbase in 2019. But lawmakers have honed in on SoFi’s February 2022 acquisition of Golden Pacific Bancorp.
That acquisition converted SoFi into a bank holding company and, according to lawmakers, subjected it to “consolidated supervision by the Federal Reserve.” It’s this new regulatory oversight that has prompted lawmakers’ objections to SoFi’s expanding cryptocurrency offerings.
Bank holding companies have to conform to strict regulations on the kinds of financial products they can offer. Heightened financial and risk controls mean that SoFi’s crypto activities “pose significant risks to both individual investors and safety and soundness,” the lawmakers said.
The lawmakers — Senate Banking Chair Sherrod Brown, D-Ohio, and fellow committee members Jack Reed, D-R.I., Chris Van Hollen D-Md., and Tina Smith D-Minn. — point to SoFi’s financial guidance as evidence. Investor education material from SoFi warns that a cryptocurrency offered on SoFi’s crypto platform, Dogecoin, has “no special use case or features.” SoFi’s literature calls it a pump-and-dump scheme.
To offer products that the company knows are “pump-and-dumps” flies in the face of SoFi’s new obligation to “fundamental principles of investor protection and safety and soundness,” lawmakers wrote.
In the letter to Noto, the Democrats said they are “concerned that SoFi’s continued impermissible digital asset activities demonstrate a failure to take seriously its regulatory commitments and to adhere to its obligations.” They urged leaders of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency to “ensure that SoFi complies with all consumer financial protection and banking regulations.”
“SoFi takes our regulatory and compliance commitments seriously, including our non-bank operations within the digital assets space,” a SoFi spokesperson said in a statement. “We believe we have been fully compliant with the mandates of our bank license and all applicable laws. Additionally, we maintain consistent, constructive dialogue with each of our regulators. Cryptocurrency remains a non-material component of our business. We look forward to sharing the requested information with the Senators in a timely fashion.”
The letters to regulators and SoFi come as crypto markets weather their worst crisis yet. The implosion of cryptocurrency exchange FTX and the engagement that FTX founder Sam Bankman-Fried had with U.S. regulators, have drawn the ire of Congress and the public.
Lawmakers have demanded an explanation from SoFi on its risk management, credit, financial and compliance systems by Dec. 8. The company has already endured tumult over potential plans to forgive student loan balances, with shares down over 24% since President Biden announced his intentions.
The logo of Crypto.com is seen at a stand during the Bitcoin Conference 2022 in Miami Beach, Florida, April 6, 2022.
Marco Bello | Reuters
As the crypto universe reckons with the fallout of FTX’s rapid collapse last week and tries to figure out where the contagion may head next, questions have been swirling around Crypto.com, a rival exchange that’s taken a similarly flashy approach to marketing and celebrity endorsements.
Like FTX, which filed for bankruptcy protection on Friday, Crypto.com is privately held, based outside the U.S. and offers a range of products for buying, selling, trading and storing crypto. The company is headquartered in Singapore, and CEO Kris Marszalek is based in Hong Kong.
Crypto.com is smaller than FTX but still ranks among the top 15 global exchanges, according to CoinGecko. FTX spooked the market not just by its speedy downfall but also because the company was unable to honor withdrawal requests, to the tune of billions of dollars, from users who wanted to retrieve their funds during the run on the firm. When it became clear that FTX didn’t have the liquidity necessary to give users their money, concern mounted that rivals may be next.
Twitter lit up over the weekend with speculation that Crypto.com was facing problems, and crypto experts held Twitter Spaces sessions to discuss the matter. Meanwhile, revelations landed on Sunday that, in October, Crypto.com mistakenly sent more than 80% of its ether holdings, or about $400 million worth of the cryptocurrency, to Gate.io, another crypto exchange. It was only after the transaction was exposed through public blockchain data that Marszalek acknowledged the mishap.
Kris Marszalek, CEO of Crypto.com, speaking at a 2018 Bloomberg event in Hong Kong, China.
Paul Yeung | Bloomberg | Getty Images
Changpeng Zhao, CEO of rival exchange Binance, fanned the flames of speculation, tweeting on Sunday that if an exchange has to move large amounts of crypto before or after it demonstrates the wallet addresses, “it is a clear sign of problems.” He added, “Stay away.”
Confidence is clearly shaken. Crypto.com’s native Cronos (CRO) token has dropped nearly 40% in the last week. The crumbling of FTX’s FTT token was one sign of the crisis that company faced.
“I would just get your money out of Crypto .com now,” said Adam Cochran, an investor in blockchain projects and founder of Cinneamhain Ventures, in a tweet over the weekend. “If they are full reserves they shouldn’t care if you sit on the sidelines for a week, but their handling of this hasn’t met the bar.”
Marszalek has spent the early part of the week trying to reassure users and regulators that the business is fine. On Monday, he said on YouTube that the company had a “tremendously strong balance sheet” and that it’s “business as usual” with deposits, withdrawals and trading activity. He followed up with a tweet Monday evening, indicating that “the withdrawal queue is down 98% within the last 24 hours.”
He spoke to CNBC’s “Squawk Box” on Tuesday morning, answering questions about the state of his company, the market and how he’s differently positioned than FTX. He said in the interview that the company has engaged with over 10 regulators about the “shocking events” surrounding FTX and how to keep them from happening again.
“I understand that right now in the market, you’ve got a situation where everyone is done taking people’s word for anything,” Marszalek said. “We focused on demonstrating our strength and stability through our actions.”
Marszalek acknowledged that Crypto.com, like other exchanges, has faced increased withdrawals since the FTX news broke, but he said his platform has since stabilized.
FTX CEO Sam Bankman-Fried said his company’s assets were “fine” two days before he was desperate for a rescue because of a liquidity crunch. It’s a familiar tactic. Alex Mashinsky, CEO of the now bankrupt crypto lending platform, Celsius, reassured customers of solvency days before halting wtihdrawals and ultimately filing for bankruptcy.
The exterior of Crypto.com Arena on January 26, 2022 in Los Angeles, California.
Rich Fury | Getty Images
There are other similarities, too.
Just as FTX signed a massive deal last year with the NBA’s Miami Heat for naming rights to the team’s arena, Crypto.com agreed to pay $700 million last November to put its name and logo on the arena that hosts the Los Angeles Lakers, among other teams in L.A. FTX had Tom Brady and Steph Curry promoting its products. Crypto.com reeled in Matt Damon as a pitchman. Both companies bought Super Bowl ads and partnered with Formula One.
Marszalek has personal issues from his past that may also be concerning. The Daily Beast reported in November 2021 that Marszalek departed his last job “amid accusations from customers and business partners that they had been ripped off.” The Australian company was called Ensogo, and it offered online coupons. It abruptly shut down in 2016.
According to documents filed with the Australian Securities Exchange, Ensogo requested its stock be suspended from trading in June 2016. The board accepted Marszalek’s resignation at that time and the company said in a filing that it “is yet to announce the appointment of a new CEO.”
A spokesperson for Crypto.com told the Daily Beast that the board decided to shutter Ensogo, and “there was never a finding of wrongdoing under Kris’s leadership.”
Last week, Crypto.com released unaudited information about its assets to blockhain analytics firm Nansen, who used the information to create a chart showing where those assets were held. One startling revelation: Crypto.com had 20% of its assets in wallets in shiba inu, a so-called “meme token” that exists purely for speculation, building off the shiba-inu dog image of the similarly popular joke token, dogecoin.
When asked by CNBC on Tuesday if Crypto.com holds tokens on its balance sheet, Marszalek said it’s a “very conservatively run business” that holds “mostly fiat and stablecoins as our source of capital.”
“Yeah but how much?” asked CNBC’s Becky Quick, reminding Marszalek that FTX had “billions of dollars” in its self-created FTT token before it declared bankruptcy.
Marszalek declined to say.
“We’re a privately held company,” he said, adding that he’s not going to provide specifics “about our balance sheet.”
He was quick to say that the company is “very well capitalized,” and reiterated comments from his YouTube session on Monday, telling CNBC that the company has “a very strong balance sheet” with “zero debt and zero leverage in the business, and we are cash flow positive.”
The company has already been hammered during the crypto winter, which has pushed bitcoin and ether down by two-thirds this year. In recent months, Crypto.com reportedly slashed over one-quarter of its workforce. Daily trading volume in CRO is down to about $365 million, according to data from Nomics. Last year, that figure was above $4 billion.
Marszalek’s main goal now is evident: avoid an FTX-type run that could see the company lose a boatload of customers. But he also wants to make it abundantly clear that all the reserves are available to honor any withdrawal requests, and that there’s no hedge fund activity taking place with user deposits.
“We run a very simple business,” he said. “We give 70 million users globally access to digital currencies and take a fee for that.”
Coinbase and Binance have similarly been on media tours trying to assuage customer concerns.
Blockchain.com CEO Peter Smith expects the whole way that crypto enthusiasts hold their investments to change dramatically. Smith, whose company operates an exchange and offers a crypto wallet, told CNBC last week that consumers don’t need to trust third parties to hold their crypto funds, and are increasingly doing it themselves.
“You’re going to see people shift toward crypto on their own private keys,” Smith said, adding that the company has about 85 million users who already do it that way. “The ultimate reality and coolest part of crypto is you can store your funds on your own private key where you have no counterparty exposure.”
From a governance standpoint, FTX was uniquely troubled. The company had no board, no finance chief and no head of compliance, despite raising billions of dollars, some from top firms like Sequoia and Tiger Global, and racing to a $32 billion valuation.
Marszalek has a more traditional corporate structure. Crypto.com has a four-person advisory board as well as a CFO, a head of legal and a senior vice president of risk and operations. That doesn’t mean there can’t be fraud (see: Theranos) or bad behavior (read: WeWork), but it’s at least a sign that some controls are in place as Crypto.com and other players try to weather a crypto winter that keeps getting colder.
“We feel quite good about where we are as a company and our operations,” said Marszalek, pointing out that the company generated over $1 billion in revenue last year and has topped that number this year. “What worries me is the impact of this collapse on the whole industry. It sets us back a good couple of years in terms of the industry’s reputation.”
An attendee wears a “Will Work for NFTs” shirt during the CoinDesk 2022 Consensus Festival in Austin, Texas, US, on Thursday, June 9, 2022. The festival showcases all sides of the blockchain, crypto, NFT, and Web 3 ecosystems, and their wide-reaching effect on commerce, culture, and communities.
Jordan Vonderhaar | Bloomberg | Getty Images
A year ago this week, investors were describing bitcoin as the future of money and ethereum as the world’s most important developer tool. Non-fungible tokens were exploding, Coinbase was trading at a record and the NBA’s Miami Heat was just into its first full season in the newly renamed FTX Arena.
As it turns out, that was peak crypto.
In the 12 months since bitcoin topped out at over $68,000, the two largest digital currencies have lost three-quarters of their value, collapsing alongside the riskiest tech stocks. The industry, once valued at roughly $3 trillion, now sits at around $900 billion.
Rather than acting as a hedge against inflation, which is near a 40-year high, bitcoin has proven to be another speculative asset that bubbles up when the evangelists are behind it and plunges when enthusiasm melts and investors get scared.
And the $135 million that FTX spent last year for a 19-year deal with the Heat? The crypto exchange with the naming rights is poised to land in the history books alongside another brand that once had its logo on a sports facility: Enron.
In a blink this week, FTX sank from a $32 billion valuation to the brink of bankruptcy as liquidity dried up, customers demanded withdrawals and rival exchange Binance ripped up its nonbinding agreement to buy the company. FTX founder Sam Bankman-Fried admitted on Thursday that he “f—ed up.”
“Looking back now, the excitement and prices of assets were clearly getting ahead of themselves and trading far above any fundamental value,” said Katie Talati, director of research at Arca, an investment firm focused on digital assets. “As the downturn was so fast and violent, many have proclaimed that digital assets are dead.”
Whether crypto is forever doomed or will eventually rebound, as Talati expects, the 2022 bloodbath exposed the industry’s many flaws and served as a reminder to investors and the public why financial regulation exists. Bankruptcies have come fast and furious since midyear, leaving clients with crypto accounts unable to access their funds, and in some cases scrapping to retrieve pennies on the dollar.
If this is indeed the future of finance, it’s looking rather bleak.
Crypto was supposed to bring transparency. Transactions on the blockchain could all be tracked. We didn’t need centralized institutions — banks — because we had digital ledgers to serve as the single source of truth.
That narrative is gone.
“Speaking for the bitcoiners, we feel like we’re trapped in a dysfunctional relationship with crypto and we want out,” said Michael Saylor, executive chairman of MicroStrategy, a technology company that owns 130,000 bitcoins. “The industry needs to grow up and the regulators are coming into this space. The future of the industry is registered digital assets traded on regulated exchanges, where everyone has the investor protections they need.”
Saylor was speaking on CNBC’s “Squawk on the Street” as FTX’s demise roiled the crypto market. Bitcoin sank to a two-year low this week, before bouncing back on Thursday. Ethereum also tanked, and solana, another popular coin used by developers and touted by Bankman-Fried, fell by more than half.
Equities tied to crypto suffered, too. Crypto exchange Coinbase tumbled 20% over two days, while Robinhood, the trading app that counts Bankman-Fried as one of its biggest investors, fell by 30% during the same period.
There was already plenty of pain to go around. Last week, Coinbase reported a revenue plunge of more than 50% in the third quarter from a year earlier, and a loss of $545 million. In June, the crypto exchange slashed 18% of its workforce.
“We are actively updating and evaluating our scenario plans and prepared to reduce operating expenses further if market conditions worsen,” Alesia Haas, Coinbase’s finance chief, said on the Nov. 3 earnings call.
The downdraft started in late 2021. That’s when inflation rates started to spike and sparked concern that the Federal Reserve would begin hiking borrowing costs when the calendar turned. Bitcoin tumbled 19% in December, as investors rotated into assets deemed safer in a tumultuous economy.
The sell-off continued in January, with bitcoin falling 17% and ethereum plummeting 26%. David Marcus, former head of crypto at Facebook parent Meta, used a phrase that would soon enter the lexicon.
“It’s during crypto winters that the best entrepreneurs build the better companies,” Marcus wrote in a Jan. 24 tweet. “This is the time again to focus on solving real problems vs. pumping tokens.”
The crypto winter didn’t actually hit for a few months. The markets even briefly stabilized. Then, in May, stablecoins became officially unstable.
A stablecoin is a type of digital currency designed to maintain a 1-to-1 peg with the U.S. dollar, acting as a sort of bank account for the crypto economy and offering a sound store of value, as opposed to the volatility experienced in bitcoin and other digital currencies.
When TerraUSD, or UST, and its sister token called luna dove below the $1 mark, a different kind of panic set in. The peg had been broken. Confidence evaporated. More than $40 billion in wealth was wiped out in luna’s collapse. Suddenly it was as if nothing in crypto was safe.
The leading crypto currencies cratered, with bitcoin dropping 16% in a single week, putting it down by more than half from its peak six months earlier. On the macro front, inflation had shown no sign of easing, and the central bank remained committed to raising rates as much as would be required to slow the increase in consumer prices.
In June, the bottom fell out.
Lending platform Celsius paused withdrawals because of “extreme market conditions.” Binance also halted withdrawals, while crypto lender BlockFi slashed 20% of its workforce after more than quintupling since the end of 2020.
Prominent crypto hedge fund Three Arrows Capital, or 3AC, defaulted on a loan worth more than $670 million, and FTX signed a deal giving it the option to buy BlockFi at a fraction of the company’s last private valuation.
Bitcoin had its worst month on record in June, losing roughly 38% of its value. Ether plummeted by more than 40%.
Then came the bankruptcies.
Singapore-based 3AC filed for bankruptcy protection in July, just months after disclosing that it had $10 billion in assets. The firm’s risky strategy involved borrowing money from across the industry and then turning around and investing that capital in other, often nascent, crypto projects.
After 3AC fell, crypto brokerage Voyager Digital wasn’t far behind. That’s because 3AC’s massive default was on a loan from Voyager.
“We strongly believe in the future of the industry but the prolonged volatility in the crypto markets, and the default of Three Arrows Capital, require us to take this decisive action,” Voyager CEO Stephen Ehrlich said at the time.
Next was Celsius, which filed for Chapter 11 protection in mid-July. The company had been paying customers interest of up to 17% to store their crypto on the platform. It would lend those assets to counterparties willing to pay sky-high rates. The structure came crashing down as liquidity dried up.
Meanwhile, Bankman-Fried was making himself out to be an industry savior. The 30-year-old living in the Bahamas was poised to pick up the carnage and consolidate the industry, claiming FTX was in better position than its peers because it stashed away cash, kept overhead low and avoided lending. With a net worth that on paper had swelled to $17 billion, he personally bought a 7.6% stake in Robinhood.
SBF, as he’s known, was dubbed by some as “the JPMorgan of crypto.” He told CNBC’s Kate Rooney in September that the company had in the neighborhood of $1 billion to spend on bailouts if the right opportunities emerged to keep key players afloat.
“It’s not going to be good for anyone long term if we have real pain, if we have real blowouts, and it’s not fair to customers and it’s not going to be good for regulation. It’s not going to be good for anything,” Bankman-Fried said. “From a longer-term perspective, that’s what was important for the ecosystem, it’s what was important for customers and it’s what was important for people to be able to operate in the ecosystem without being terrified that unknown unknowns were going to blow them up somehow.”
It’s almost as if Bankman-Fried was describing his own fate.
FTX’s lightning-fast descent began this past weekend after Binance CEO Changpeng Zhao tweeted that his company was selling the last of its FTT tokens, the native currency of FTX. That followed an article on CoinDesk, pointing out that Alameda Research, Bankman-Fried’s hedge fund, held an outsized amount of FTT on its balance sheet.
Not only did Zhao’s public pronouncement cause a plunge in the price of FTT, it led FTX customers to hit the exits. Bankman-Fried said in a tweet Thursday that FTX clients on Sunday demanded roughly $5 billion of withdrawals, which he called “the largest by a huge margin.” Lacking the reserves to cover the virtual bank run, FTX turned to Zhao for help.
Binance announced a nonbinding agreement to acquire FTX on Tuesday, in a deal that would’ve been so catastrophic for FTX that equity investors were expecting to be wiped out. But Binance reversed course a day later, saying that FTX’s “issues are beyond our control or ability to help.”
Bankman-Fried has since been scrambling for billions of dollars in an effort to stay out of bankruptcy. He says he’s also been working to maintain liquidity so clients can get their money out.
Venture firm Sequoia Capital, which first backed FTX in 2021 at an $18 billion valuation, said it was marking its $213.5 million investment in FTX “down to 0.” Multicoin Capital, a crypto investment firm, told limited partners on Tuesday that while it was able to retrieve about one-quarter of its assets from FTX, the funds still stranded there represented 15.6% of the fund’s assets, and there’s no guarantee it will all be recouped.
Additionally, Multicoin said it’s taking a hit because its largest position is in solana, which was tumbling in value because it “was generally considered to be within SBF’s sphere of influence.” The firm said it’s sticking to its thesis and looking for assets that can “outperform market beta across market cycles.”
“We are not short term or momentum traders, and we do not operate on short time horizons,” Multicoin said. “Although this situation is painful, we are going to remain focused on our strategy.”
It won’t be easy.
Ryan Gilbert, founder of fintech venture firm Launchpad Capital, said the crypto world is facing a crisis of confidence after the FTX implosion. While it was already a tumultuous year for crypto, Gilbert said Bankman-Friedman was a trusted leader who was comfortable representing the industry on Capitol Hill.
In a market without a central bank, an insurer or any institutional protections, trust is paramount.
“It’s a question of, can trust exist at all in this industry at this stage of the game?” Gilbert said in an interview Thursday. “To a large extent the concept of trust is as bankrupt as some of these companies.”
Ever since she was young, Cheryl Sew Hoy always knew she wanted to run her own business.
“When teachers asked what’s your ambition … and a lot of kids wanted to be doctors or lawyers. My ambition was [to be] a businesswoman,” she told CNBC Make It.
That childhood dream is now a reality for the 39-year-old serial entrepreneur, whose ventures include Reclip.It, a consumer software startup that was acquired by Walmart Labs in 2013.
Now, she runs Tiny Health, a health tech startup that sells at-home gut health tests for moms and babies from 0 to 3 years old. The CEO and founder said the test can help detect gut imbalances early on and prevent chronic conditions.
Just last week, the company raised $4.5 million in seed money and said its backers include U.S. cryptocurrency exchange Coinbase, Google‘s X, and Dropbox.
Cheryl Sew Hoy (centre) with her mom and 4-year-old daughter Charlize.
Tiny Health
Sew Hoy, a Malaysian now based in Austin, Texas, attributes her success to her mother who was also a businesswoman running her own marketing business in Malaysia.
“My momowned her own business and she was the boss. Before work-from-home was popular, she was already working from home and I always had this role model,” she added.
Things have come “full circle” for Sew Hoy, who is now a momto two kids aged 2 and 4, as she begins imparting lessons she has learned to them.
What tips does she have in raising entrepreneurial kids? CNBC Make It finds out.
It’s hard to teach children what business they can create at a young age, but kids “remember stories” — and that’s the best way to expose them to entrepreneurship, said Sew Hoy.
While she modelled after her motherby simply observing, Sew Hoy said she wanted to be “more intentional” about speaking to her children about running a business.
For example, she explains to her children about her job as a CEO, the “backstory” of why she started Tiny Health.
I teach them why I’m working hard. Yes, it’s to make money but it’s not just to buy food or to spend it.
Cheryl Sew Hoy
CEO and founder, Tiny Health
“Talk to them like adults, even if you think they are too young to understand. The more you talk to them like adults, [you’ll realize] they actually understand a lot and they learn a lot from that.”
By explaining to her children what she does, Sew Hoy said she’s also teaching them the value of money.
“I teach them why I’m working hard. Yes, it’s to make money but it’s not just to buy food or to spend it. While making money, you need to build something of value to people. What problems do you want to solve in the world?”
Entrepreneurship is all about problem-solving and that’s something that children can learn through adversity, said Hoy.
“There’s a difference between great entrepreneurs and good entrepreneurs. The great entrepreneurs are the ones who will bounce back continuously because it’s really freaking hard running a company everyday,” said Sew Hoy.
If children have only “smooth journeys” where problems are always solved for them, they will never learn that value, she added.
If children have only “smooth journeys” where problems are always solved for them, they will never learn about adversity, said Cheryl Sew Hoy, pictured here with her family.
Tiny Health
“It requires a lot of patience. My daughter would whine and be like, ‘Mommy, I can’t do it.’ I’ll encourage her to try again, and maybe help her a little bit,” she said.
“If she succeeds — especially if she succeeds on her own — she learns a lesson that ‘If you had given up before, you wouldn’t have accomplished this.’”
Sew Hoy said she noticed “a spark” going off in her 4-year-old daughter after going through the same scenario with her a few times.
“I know she’s learning because the next time [she tries to do something], she’s telling me, ‘Mommy, I can do it. I’m strong.’”
“So if our life gets too easy, I would create adversity [for my kids].”
