Bitcoin and crypto platforms are in trouble. What’s behind the collapse?

The plummeting value of Bitcoin and turmoil across major cryptocurrency platforms has many investors fretting about their digital wallets and leaders in the space warning about a “crypto winter.”

So what’s happening, and what does it mean for your portfolio? Here’s what you need to know.

Bitcoin is continuing a downward spiral that has marked much of 2022 for the popular cryptocurrency.

The digital currency continued to sink Tuesday following a 16-per cent drop on Monday that sent its value as low as US$22,400. Bitcoin has lost more than two-thirds of its value compared to all-time highs in November of last year.

Bitcoin is not the only crypto asset facing a downturn.

Ethereum, another widely-followed cryptocurrency, was down roughly 17 per cent on Monday. The crypto market as a whole dropped below a value of US$1 trillion this week.

Investors have been selling riskier assets such as digital currencies and technology stocks as the Federal Reserve raises interest rates to combat high inflation.

Monday marked the start of a bear market on Wall Street as the S&P 500 fell 20 per cent below a previous high point in January.

Alex Tapscott, managing director of the digital asset group at Ninepoint Partners, tells Global News that cryptocurrencies have suffered through the same “broad-based selloff” in 2022 that’s hit the value of higher-risk assets including tech stocks such as Netflix and Meta.

He says that trend has “accelerated” recently as investors look to get riskier assets off their portfolios.

“Investors are looking to de-risk all over the board and Bitcoin and crypto assets are getting washed up along with it,” he says.

Bitcoin’s latest falls are also being tied in part to alarming moves from some major crypto exchanges and lending platforms who have announced plans this week to stem operations or cut jobs.

On Sunday, the cryptocurrency lending platform Celsius Network announced that it was pausing all withdrawals and transfers between accounts in order to “honor, over time, withdrawal obligations.”

Celsius, with roughly 1.7 million customers and more than US$10 billion in assets, gave no indication in its announcement when it would allow users to access their funds.

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Caisse de dépôt et placement du Québec, the province’s pension fund, is among Celsius’ backers.

“That has created a crisis of confidence, I think, in many other companies in the sector and people are now wondering just how at risk their investments might be,” Tapscott says.

Meanwhile on Tuesday, crypto exchange Coinbase announced it was cutting 1,100 jobs, or 18 per cent of its workforce. It joins companies including BlockFi and Crypto.com in slashing hundreds of jobs amid the collapse.

Coinbase CEO Brian Armstrong said in a blog post announcing the decision that the platform grew too quickly as it tried to capitalize on the crypto boom last year and would need to cut costs as it prepares for an economic downturn.

“We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period,” Armstrong wrote.

The “crypto winter” that Armstrong reference in his post typically refers to a prolonged period or months or years in the cryptocurrency sphere when digital assets are declining in value with very little interest in the space as a whole.

“It is what it sounds like. It’s a winter, it’s cold, it’s cool. Investors don’t want to be in it. More sellers than buyers,” says Genevieve Roche-Decter, CEO of Grit Capital.

0:32 Crypto market value falls below US$1 trillion as bitcoin hits 18-month low

This could be a period when so-called alt-coins that popped up during the crypto mania of the past few years could plummet and lose all value, she says, similar to the dot-com bubble of the late 1990s.

Tapscott is less convinced that winter has come for cryptocurrencies.

While there have been previous busts and declines across the crypto world, he notes that recent years have seen institutional investors take on a more vested interest in digital assets.

Payment processors such as Paypal, Visa and Mastercard have gotten into crypto and many exchange platforms still have a sizeable access to funding that they wouldn’t have had in earlier downturns.

“There’s a lot of funding. It’s quite sophisticated, it’s much more widely held, there’s far more innovation and therefore utility,” he says.

“And I think as a result we’re going to see the winter, such as it is, be a little less cold and a little less long than anything we’ve seen in the past. I think if anything, it will recover much faster this time.”

For many investors who got into the crypto space amid the recent hype of Super Bowl commercials and Reddit threads, this will be the first time seeing the value of their digital assets dwindle.

Roche-Decter says that owning cryptocurrencies is “not for the faint of heart” and that it could take years before assets such as Bitcoin return to their previous highs, if they ever do.

Bitcoin and other cryptocurrencies have seen great gains as well as great falls, and anyone counting on big payoffs in the space will likely have to take on a long investment horizon, she says.

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When it comes to making money with your portfolio, Roche-Decter says many young investors might be discouraged to hear that volatile assets such as crypto are not usually the best path forward.

“Boring is actually sexy. The way to make money long term is to be in just basic companies that generate revenue in up and down markets. And unfortunately, that’s not what that generation wants to hear,” she says.

For investors wanting to ride the crypto roller coaster, Roche-Decter recommends a more limited exposure. An overall portfolio could have 80 per cent safer assets and 20 per cent to have fun with in more speculative ventures, she suggests.

“I don’t support all of those things, but you have to keep some of it entertaining and keep yourself in the game. The rest of it — sleep at night,” she says.

— with files from Global News’s Anne Gaviola, The Associated Press, Reuters