Table of Contents
main conclusions
Crypto.com is laying off 20% of its workforce, having cut 5% last summer Coinbase, Kraken, Huobi and Swyftx exchanges reduced in size last month The tech sector as a whole is laying off thousands of people, with Amazon, Salesforce, Meta and Twitter being just a few of the big names The crypto sector misjudged its vulnerability to price levels in the market and showed arrogance Bitcoin’s volatility was overlooked as companies aggressively expanded during COVID A Crypto.com has become the latest cryptocurrency company to lay off employees, announcing on Friday that it is cutting 20% of its workforce. CEO Chris Marszalek cited “market conditions and recent industry events” for the downsizing, in line with what other cryptocurrency CEOs have blamed as the bear market continues to claim victims.
Today we announced the difficult decision to reduce our global workforce by about 20%. — Kris | Crypto.com (@kris) January 13, 2023
Layoffs flood the industry
Crypto.com is far from the only exchange that has been forced to lay off employees. Kraken, Swyftx and Huobi have laid off workers in the last month. Kraken cut 30% of its staff, Australian exchange Swyftx cut 40% and Huobi cut 20%. Coinbase also announced earlier this week that it was cutting 20% of its workforce, having laid off 18% in June. However, it’s not just crypto companies that have been affected. The tech industry in general has fluctuated. Amazon, Twitter, Meta and Salesforce are just a few names that have reduced their workforce by thousands. The tech sector is notoriously volatile and has been hurt by rising interest rates over the past year. Given that so many technology companies fail to make a profit, valuations are often derived by discounting future cash flows back to the present. When interest rates were zero, it led to high valuations across all industries. However, as inflation spiraled, central banks were forced to raise rates aggressively. This reduced the value of these discounted cash flows and lowered the company’s valuations.
Contagion in the cryptocurrency industry
But crypto also faced its own battles separate from the macro climate. There’s no shortage of scandals to point to when Marszalek says “recent industry events,” but the most recent was the stunning meltdown of FTX. The exchange was one of the top three, alongside Coinbase and Binance, and its demise has triggered a new wave of contagion across the industry. While $8 billion is the amount of client assets missing from the FTX scandal, the LUNA crash in May was perhaps even more devastating as the $60 billion ecosystem collapsed after the death spiral. of its not-so-stable stablecoin, UST. This triggered a series of bankruptcies and meltdowns across the industry, including cryptocurrency lender Celsius and hedge fund Three Arrows Capital. These scandals caused prices to decimate. With falling prices, volumes and yields, along with the aforementioned macro headwinds, cryptocurrency companies have been forced to scale back operations to survive.
Crypto.com expansion was very fast
In a criticism that is far from limited to Crypto.com, the exchange expanded too quickly amidst the hysteria of the pandemic bull market. “We grew ambitious in early 2022, building on our incredible momentum and aligning ourselves with the trajectory of the industry as a whole. That trajectory quickly changed with a confluence of negative economic developments,” said CEO Marszalek. Crypto.com has seen meteoric growth to 70 million users. But it has had its share of mistakes along the way. In February, it received widespread criticism for a rather frightening Matt Damon announcement at the Superbowl. The commercial cost $10 million, and Crypto.com laid off 5% of its workforce just four months later, in what was the biggest sign of all that it had misjudged the sustainability of the bull run. “The reductions we made last July positioned us to weather the macroeconomic slowdown,” said Marszalek. However, he added that he “did not take into account the recent collapse of FTX, which significantly damaged confidence in the sector. It is for this reason that, while we continue to focus on prudent financial management, we have made the difficult but necessary decision to make further reductions in order to position the company for long-term success.”
Crypto companies misjudged the correlated nature
While these events have been described as “unpredictable,” some analysts point to poor risk management given the industry’s correlation with Bitcoin’s price. Bitcoin has been notoriously volatile historically, with the chart below showing just how many pullbacks the sector has suffered. There was a rally during COVID with the thought that crypto had finally beaten this raging bear markets trend. Ultimately, this was misguided, with much of the anticipated expansion accomplished with cheap money and a hot printing press. The Federal Reserve rate hike took liquidity out of the system and risky assets dropped sharply. There are few assets more advanced on the risk spectrum than cryptocurrencies, which have been crushed. A look at Coinbase’s stock price during 2022 is all that needs to be done to see how quickly things have moved south for cryptocurrency exchanges. Since going public in April 2021, Coinbase has lost nearly 90% of its value. A chart illustrating just how much these exchanges are indebted to the crypto gods is the plot of Coinbase’s stock price against the price of Bitcoin. The correlation is extreme, with a drop in Bitcoin price linked to a drop in volume and interest in the industry, and ultimately, less revenue for cryptocurrency exchanges.
final thoughts
Of course, this is all pretty good in hindsight. Not many anticipated a pullback of this magnitude, and as stated above, the non-crypto tech industry is also being punished. While Crypto.com has certainly made some mistakes and misjudged how vulnerable they are to the general price level and volatility in the cryptocurrency market, they are far from the only ones. The macro climate has changed immensely over the past year, with the speed of interest rate hikes catching all corners by surprise. It was never going to be good for cryptocurrencies, even with all the scandals that have rocked the space.
