Businesses are worried about a recession, and many in the crypto space are bracing for a crypto winter.
Coinbase is laying off 18% of its workforce, or about 1,100 people, according to an email sent to employees Tuesday morning. CEO Brian Armstrong said the company grew “too quickly” during a bull market and expressed concerns about an impending recession.
“We appear to be entering a recession after an economic boom of more than 10 years. A recession could lead to another crypto winter and could last for an extended period of time,” Armstrong said in the email. “Although it is difficult to predict the economy or the markets, we always plan for the worst so that we can operate the business in any environment.”
Here’s why companies are preparing for a crypto winter and what it means for investors.
What is a crypto winter?
Bitcoin is down around 55% since the start of the year and sits at around $21,000 per coin. It is down about 70% from the all-time high of $69,000 per coin in November. The overall market capitalization of crypto assets has fallen to less than $1 trillion from its peak of $3 trillion in November.
The most recent crypto winter occurred in late 2017 and early 2018, when bitcoin crashed 80% from all-time highs and took around 18 months to recover. Meanwhile, stocks officially entered bearish territory this week, with the S&P 500 index down about 23% year-to-date on Friday afternoon. Experts predict that a recession could be imminent.
It’s hard to say how the current swing will shake, says William Luther, a professor of economics at Florida Atlantic University and director of the Sound Money Project at the American Institute for Economic Research.
He says it’s important to keep a long-term view: if you think they’re valuable assets, then you think their use will be more widespread in the future and “you see that as more of a seasonal swing. C That’s why people call it a crypto winter, because it suggests there’s a spring on the horizon.”
“Judging from past experience, there have been these ebbs and flows in the crypto market,” he told CNBC Make It.
Why Leaders Care
Companies fear that with the falling price of crypto assets, investors will reduce their trading activity, which is how companies make money.
This means that companies must find ways to reduce costs, for example by reducing their workforce. Coinbase joins a growing list of crypto companies, including BlockFi and Crypto.comwhich recently announced hiring freezes followed by staff reductions in order to reduce costs.
For most companies, current market fluctuations are still relatively small, “so you don’t see most companies in the economy laying off 20% of their workers when the market goes down,” Luther says.
With cryptocurrencies, however, “their value may fluctuate a lot more than other assets, and so you see businesses adjacent to these coins expand and contract a lot more.”
What this means for investors
Luther says the good news is that the current volatility in crypto shouldn’t change your broader portfolio strategy. “You should have a strategy in place where you have a diversified portfolio of stocks and bonds and potentially crypto assets as well, where you have thought through that asset allocation carefully.”
Other than rebalancing your portfolio if the value of your assets has changed, “I don’t see anything that’s happened in the last six months that would cause me to change my portfolio strategy,” Luther says.
Experts generally advise that crypto remain a small part of your total portfolio, between 1% and 5%, and that you only invest the amount of money that you are comfortable losing.
However, for those looking to get into crypto, now is not the best time, Ivory Johnson, Certified Financial Planner and Founder of Delancey Wealth Management, recently told CNBC. He made an exception for people with very long time horizons who are averaging the dollar cost in the asset.
Those buying now should have a “long-term belief,” Tyrone Ross, CEO and co-founder of Turnqey Labs, Inc., previously told CNBC. He said buying crypto now comes with risk and potential reward. similar to those of an investment backed by venture capital.
On the contrary, Luther sees the current crypto fluctuations as a reminder of what he tells his students: be careful not to own too much stock in their employer, especially if they work in a volatile industry.
He knows it’s a tough sell to the people building the technology: “They’re very excited about it and they naturally want to own some of the assets they’re building.
“But they should at least recognize that it’s a very risky proposition, when they could diversify some of that risk by holding a more traditional portfolio.”
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