Are stock market layoffs the first sign of crypto winter, or is it already over?

Are stock market layoffs the first sign of crypto winter, or is it already over?

Coinbase, Gemini and other crypto exchanges are laying off employees. It could get worse from here - but there is reason to hope for a soft landing.

On Thursday, June 2, came a truly shocking announcement from Coinbase (COIN). The publicly traded crypto exchange would not only extend a hiring freeze that was put in place two weeks ago, but also rescind existing offers for new hires, it said in a statement.

This is perhaps the most dramatic in a series of layoff decisions by crypto exchanges coming as both the stock and token markets continue to deflate in the face of the U.S. Federal Reserve's attempts to fight inflation by raising interest rates.

But are these cuts just part of a broader cyclical downturn that is hitting other speculative "growth" companies like Tesla (TSLA)? Or is it something narrower and crypto-specific?

In short, are these layoffs just the beginning of something much worse? Are we on the brink of another crypto winter?

Welcome aboard! Oh, wait, forget it

Coinbase's decision to withdraw existing job offers is simply abhorrent. Imagine Coinbase offered you a job a week ago. You immediately put in your two-week notice at the box factory where you struggled to feed your family while spending nights and weekends playing cryptocurrencies. On Thursday, you woke up looking forward to starting a new job in the exciting world of digital assets.

Then you got a damn form email titled "Update on your Coinbase offer," and the update read, "Oops, forget it." Seriously, Coinbase, get a grip. This is shameful behavior.

The public reaction was predictable scorn. Most importantly, this is further evidence of Coinbase's general incompetence in dealing with its employees. This is the same company that inadvertently recruited a bunch of murderous fascist spies and unleashed a wave of layoffs by imposing a clumsy workplace gag order (the exchange offered separation packages to employees who left).

But these latest layoffs (?) don't just confirm what Coinbase seems to have been doing for a long time: disrespecting its employees. They reveal a dramatic tactical gaffe: pulling the emergency brakes on spending so hard suggests that no one at Coinbase saw trouble on the horizon, even as the crypto market steadily cooled for more than six months. Did no one grasp the significance of the Fed's rate hike cycle? The retraction is a sweaty scare tactic that stems from a failure to plan for clear changes in market conditions. The Fed is literally announcing its forecasts ahead of time!

Blood in the snow

But while Coinbase is once again managing to make its mark in the public eye, it's not the only company facing headwinds. As the crypto economy slows, exchanges have been among the first to announce cuts, in part because most of them are public or regulated companies. Robinhood (HOOD), which offers stock and crypto trading and saw strong growth during the coronavirus pandemic, changed course and laid off 9% of its staff. Mexican exchange Bitso and Middle Eastern exchange Rain Financial have also made cuts.

The announcement of layoffs at the Winklevoss twins' Gemini exchange is perhaps the most provocative. In announcing it was laying off 10% of its staff, Gemini predicted that the entire industry was "entering a period of stagnation" and specifically warned of a coming "crypto winter."

But if crypto winter is coming, we haven't seen it yet. These layoffs on exchanges are kid's stuff - beginner's numbers. The term "crypto winter" became popular during the 2019 market meltdown and industry retreat, when total crypto market capitalization plummeted to $100 billion in December 2018 from nearly $830 billion at the beginning of the year. The resulting layoffs were many times worse in percentage terms than the current round, until now. And I know this firsthand, because I lost my crypto job back then, along with a hell of a lot of others.

We're dealing with anecdotal numbers here, but the differences are striking. In 2019, token swap service ShapeShift laid off 30% of its employees in one fell swoop. Also in early 2019, many over-the-counter crypto exchanges - which are less affected by market fluctuations than retail-focused exchanges - laid off or closed staff. Job cuts at Ethereum incubator Consensys were particularly symbolic, with 13% of its staff laid off in December 2018, then several incubation "spokes" spun off, leading to even more sweeping cuts. In February 2020, the company laid off another 14% of its remaining employees.

Note the timeline here: these layoffs across the industry largely occurred a full year after the token markets collapsed. It's been about eight months since Bitcoin (BTC) hit its all-time high in November 2021 and the current market decline began. Certainly, we have not yet entered a crypto winter in earnest. It could still be waiting in the wings.

Is winter coming?

So if it can get that much worse, will it come?

First, let me briefly describe what triggers a "crypto winter": the combined decline in new customer revenue from outside the industry, the decline in venture capital (VC) investment, and the decline in retail speculation.

As in previous cycles, the retail speculation part of the equation was the first to get hit, thanks in no small part to the disastrous breakup of the Terra network. (It should be noted that Coinbase Ventures backed Terraform Labs, so the current panicked layoffs at Coinbase are to some degree due to its own decision to protect the obvious bad actors in the industry.)

The macroeconomic environment is also, of course, critical to retail behavior. There is definitely good news here, with new labor market data showing that unemployment in the U.S., the main crypto retail market, remains at a very low (albeit nominal) 3.6%.

A bigger headwind is interest rates, which will pull money away from speculative assets if they rise, which the Fed says they will continue to do. However, in a post worth reading published on June 1, BitMEX founder Arthur Hayes made a compelling argument that the Fed could end its rate hike campaign early if the pain in asset markets becomes too great. As macro policy, that's pretty bad, of course, but it's the reality we live in.

Hayes also suggested that the bitcoin price, which briefly fell below $26,000, may have marked the bottom of the market, basing his view on historical trends. However, this optimistic view of the price level is by no means the consensus and is dependent on the Fed changing its interest rate stance.

Other analysts point to other areas of the bitcoin price cycle for their forecasts. If the last BTC peak represents a low point for the next cycle, then BTC would bottom at around $20,000, which would represent a further 30% decline from current levels. More pessimistically, markets could follow the 85% decline from 2018 highs, which would take BTC below $12,000 per token.

On the other hand, there are factors at play that didn't exist in 2018. Most importantly, there is a lot of venture capital willing to back viable ideas. Andreessen Horowitz's new $4.5 billion venture fund alone will keep a lot of developers employed. There are also now large segments of the crypto economy that are generating real revenue from outside the industry, from mass-market non-fungible tokens (NFTs) like NBA Top Shot to analytics for law enforcement provided by companies like Chainalysis.

While painful for some, crypto winters are often necessary and ultimately good. A tougher environment leads to more scrutiny from regulators and industry participants alike, and hopefully helps focus capital into immediately viable and revenue-generating projects. This also leads to a greater reallocation of talent from less profitable to more profitable projects. For example, we are seeing developers who used to work on Terra being courted by other projects, which is tantamount to a transfer of labor value from a more-than-useless dead end to things that may not be. This dynamic includes exchanges like Coinbase, which critics accuse of having a long-term sustainable business model because it relies too heavily on inflated fees.

No one has a crystal ball. But overall, the situation looks bad, but not bleak, and not as if 2018 will repeat itself. Crypto won't disappear or be "over," and a little brushfire to clear out fools and operators like Do Kwon is a positive outcome. Most likely, cryptocurrency will follow the general economy, with a quiet year or two followed by a resumption of growth and adoption.

Still, it's a good time to be extremely cautious. Keep your cash, plan ahead - and feel free to remind me of this prediction when we're all working at McDonald's in nine months.