Key Takeaways
Crypto.com is laying off 20% of its workforce, having cut 5% last summer
Fellow exchanges Coinbase, Kraken, Huobi and Swyftx have all downsized over last month
Tech sector as a whole is laying off thousands, with Amazon, Salesforce, Meta and Twitter just a few of the big names
Crypto sector misjudged its vulnerability to price levels in the market
Volatility of Bitcoin was overlooked as companies expanded aggressively during COVID
Crypto.com has become the latest crypto company to lay employees off, announcing 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 crypto CEOs have blamed, as the bear market continues to take victims.
As I shared with the team today, while we continue to perform well, market conditions and recent industry events have made this the right decision for the company at this time.
— Kris | Crypto.com (@kris) January 13, 2023
Layoffs flood the industry
Crypto.com is far from the only exchange that has been forced to make workers redundant. Kraken, Swyftx and Huobi have all laid off workers in the last month. Kraken cut 30% of its staff, Australian exchange Swyftx chopped 40% and Huobi chopped 20%. Coinbase also announced earlier this week that it was chopping 20% of its workforce, having already laid off 18% in June.
It is not only crypto companies that have been affected, however. The tech industry at large has wobbled. 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 increasing interest rates over the past year. Given so many tech companies fail to turn a profit, valuations are often derived from the discounting of future cash flows back to the present. When interest rates were zero, this led to high valuations across the board.
However, with inflation spiralling, central banks have been forced to raise rates aggressively. This has lowered the value of these discounted cashflows and reduced company valuations.
Contagion in the cryptocurrency industry
But crypto has faced its own battles separate from the macro climate, too. There is no shortage of scandals to point to when Marszalek says “recent industry events”, but the most recent is the staggering collapse of FTX.
The exchange was one of the top three, alongside Coinbase and Binance, and its demise has triggered a fresh wave of contagion across the industry.
While $8 billion is the amount of customer assets that are missing in the FTX scandal, the LUNA crash of May was perhaps even more devastating, as the one-time $60 billion ecosystem collapsed following the death spiral of its not-so-stable stablecoin, UST.
This triggered a series of bankruptcies and collapses across the industry, including crypto lender Celsius and hedge fund Three Arrows Capital.
These scandals have decimated prices. With dropping prices, volumes and interest, alongside the macro headwinds mentioned earlier, crypto companies have been forced to pare back operations in order to survive.
Crypto.com’s expansion was too rapid
In a criticism that is far from limited to Crypto.com, the exchange expanded too rapidly amid the hysteria of the pandemic bull market.
“We grew ambitiously at the start of 2022, building on our incredible momentum and aligning with the trajectory of the broader industry. That trajectory changed rapidly 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 missteps along the way. In February, it received widespread criticism for a rather cringe-worthy Matt Damon Superbowl advert. The commercial cost $10 million, and Crypto.com laid off 5% of its workforce only four months later, in what was the biggest signal of all that it had misjudged the sustainability of the bull run.
“The reductions we made last July positioned us to weather the macro economic downturn” said Marszalek.
However, he added that “it did not account for the recent collapse of FTX, which significantly damaged trust in the industry. It’s for this reason, as we continue to focus on prudent financial management, we made the difficult but necessary decision to make additional reductions in order to position the company for long-term success”.
Crypto companies misjudged correlated nature
While these events were described as “unforeseeable”, some analysts point towards a mismanagement of risk, given how correlated the industry is to the Bitcoin price. Bitcoin has been notoriously volatile historically, with the below chart showing how many pullbacks the industry has suffered.
There was a bullishness during COVID that crypto had finally beaten this tendency for violent bear markets. Ultimately, this was misguided, with much of the expansion predicted on cheap money and a warm printer.
The federal reserve hiking rates pulled liquidity out of the system and risk assets dropped harshly. There are few assets further out on the risk spectrum than crypto, which got crushed.
A glance at the Coinbase share price during 2022 is all that needs to be done in order to see how rapidly things have turned south for crypto exchanges. Since going public in April 2021, Coinbase has shed close to 90% of its value.
A chart which illustrates quite how beholden to the crypto gods these exchanges are is the plotting of Coinbase’s share price against the Bitcoin price.
The correlation is extreme, with a falling Bitcoin price linked with a drop in volume and interest in the industry, and ultimately less revenue for crypto exchanges.
Final thoughts
Of course, this is all well and good in hindsight. Not many predicted a pullback of this magnitude, and as said above, the tech industry outside of crypto is also getting punished.
While Crypto.com have certainly made some errors and misjudged how vulnerable they are to the overall price level and volatility in the crypto market, they are far from the only one.
The macro climate has shifted immeasurably over the last year, with the speed of interest rate hikes catching all corners by surprise. It was never going to be pretty for crypto, even aside from all the scandals that have rocked the space.
