Bloomberg: The Story of the Crypto Winter

Written by: Christopher Beam

Compiled by: Block unicorn

Some believers have lost faith, others blame the devil—while some have a harder time walking away. This article explores what happens after the failure of blockchain prophecies.

One day in early 2021, my old friend George called me. I always enjoyed our chats, usually discussing dating, movies, and his screenwriting career. But this time, he steered the conversation toward a new topic: Bitcoin.

To protect his privacy, I’ll omit George’s last name. He seemed genuinely eager for me to understand this cryptocurrency. He sent me some podcasts featuring blockchain "experts" and a plethora of charts about "on-chain analysis." He told me he was planning his financial future and didn’t want his friends to be left behind. At first, I brushed off his pleas—the whole thing seemed complicated and a bit annoying. But as Bitcoin’s price surged, his messages became more insistent. I agreed to look into it, and after doing "my own research," I sped up some podcasts to double speed. Halfway through, I decided to buy some Bitcoin.

Last year, a series of crypto implosions led to a dramatic drop in the value of cryptocurrencies. After that, George and I had a very different conversation. George said, "Let me make a full apology statement; I was leading you blind." Indeed, since I bought it, Bitcoin had lost three-quarters of its value. We were deep in what blockchain believers call the crypto winter—a prolonged downturn that has yet to thaw.

For George, apologizing to me wasn’t the hardest part. He convinced his immigrant parents from China to take out a mortgage for $50,000, which he used to buy Bitcoin. He stored the funds on Celsius, a crypto bank that could generate interest. That company went bankrupt, and now the money is frozen, with much of it likely lost. I said, "I’m really sorry; I feel ashamed. If you ask, I will perform a ritualistic seppuku." He replied, "My parents didn’t ask for that; they just want me to pay them back when I can."

It seems George, like many of us caught up in cryptocurrency, is experiencing not just financial loss but a kind of economic grief—entangled guilt, doubt, and that awful feeling of having been scammed. Since our conversation, Bitcoin’s price has rebounded somewhat, but if your money is stuck on a bad platform like Celsius, or you lost funds in Sam Bankman-Fried’s (SBF) fraudulent FTX exchange, or you hold now-worthless altcoins that sprang up like mushrooms after the COVID-19 monetary easing (QE), that’s no comfort. For many, cryptocurrency has become an identity, a way to feel smart, disruptive, and at the forefront of new technology. What happens to that self-image when its foundation erodes? When you’re no longer someone’s savvy son or daughter but have to explain where the family savings went, and then feel like a timid adult child?

It’s complicated. Despite the fraud, constant hacks, and market crashes, he said he still has faith: "I still believe blockchain is a revolutionary development. In 10, 20, 50 years, I truly believe—I really want to believe—that when we look back, we’ll say Bitcoin is a super invention like the printing press or the internet."

Leon Festinger, Henry Riecken, and Stanley Schachter described in their groundbreaking 1956 social psychology report "When Prophecy Fails" how followers of a doomsday cult reacted when their prophet’s precise prediction of the apocalypse proved wrong: they simply pushed the date back. Some even became more fervent believers and engaged in more evangelism. They had invested too much, perhaps quitting jobs or giving away money, to accept the meaningless truth. This study became a classic example of "cognitive dissonance," which occurs when evidence contradicts a person’s worldview.

I’m curious how people in the cryptocurrency space handle this dissonance. In the summer of 2021, as blockchain enthusiasm surged, I wrote an article about the cryptocurrency community and found it meaningful to categorize them into different factions based on their favorite investments. There are Bitcoin maximalists who believe the OG token is the only true way to resist the ills of modern finance and government; Ethereum enthusiasts who see blockchain as a beautiful Lego set for building new components; and DeFi (decentralized finance) day traders who are just gambling for fun. Each group has its own values and culture. Today, it feels more appropriate to categorize them based on narratives about what has happened to cryptocurrency and where it’s headed.

Fanatical Cryptocurrency Investors

At a male-dominated gathering, a group stood in a bar in Midtown Manhattan debating what went wrong with cryptocurrency. One blamed the market for having too many "bubble" factors because anyone can easily launch a token. Another pointed out the lack of transparency among many crypto institutions. A trader named Boris Friedman said, "Even though people are currently 'afraid' of cryptocurrency because of FTX, I expect the market to rebound in the next three to five years. In the long run, there will be more adoption."

Nearby, Corey Wilson, wearing two necklaces—one with the Egyptian Eye of Horus and the other with a blockchain logo called HEX—sipped a margarita. Wilson told me he lost money on the crypto scam BitConnect, then made back all his previous losses and more on HEX, and he still buys tokens every day. He said, "I see the market is low now, and the returns will be higher (the price of HEX has dropped nearly 90% from its peak)." Block unicorn specifically notes: HEX is a scam cryptocurrency; please do not take the content of this article as investment advice.

Rich Etienne, an engineer from Florida, lost about $100,000 in the Celsius collapse. He said in a phone interview that he now has a good feeling about the market. He said, "It’s a matter of observing chart patterns—small movements, fakeouts, the hype of certain individuals. It’s more of an art than a science; it’s starting to feel that way."

A Dutch institutional investor turned Bitcoin analyst, known as Plan B (a Twitter blogger), is most famous for predicting Bitcoin would break $100,000 in 2021. When that didn’t happen, his reputation took a hit. "You’ll see a lot of hate," Plan B told me on Zoom. (Like many cryptocurrency influencers, he prefers to introduce himself by his username for safety reasons.) He stands by his optimistic analysis, particularly his popular "stock-to-flow" model, which predicts Bitcoin will continue to rise as the issuance of new coins slows, a design programmed by Bitcoin’s creator, Satoshi Nakamoto. (The model assumes Bitcoin’s price is driven by scarcity, a logic familiar to gold enthusiasts and Beanie Babies collectors alike.) Plan B now estimates that by 2028, Bitcoin will be worth between $100,000 and $1 million, with its current price around $27,000. In other words, the date has been pushed back a few years. "For me, this is a long game," he said. He added that his bet on Bitcoin is very large: "It’s either going to zero or become the successor to the dollar."

Scholars say this type of thinking—doubling down on beliefs despite a crash—aligns with the psychology of trading and gambling. Investors are more likely to sell assets that have appreciated rather than give up on assets that have depreciated; this is a phenomenon known as the disposition effect. Tobin Hanspal, an assistant professor of finance at the Vienna University of Economics and Business, says there are different explanations for this. One theory is that traders whose assets have plummeted become risk-seeking because they feel they have nothing to lose. Another theory is that they are trying to avoid feelings of regret. Hanspal said, "People don’t want to admit failure, and they don’t want to face the awareness that they made a mistake." (This is also true for me.)

Some still firmly believe in cryptocurrency, viewing the crash as a reshuffling that proves cryptocurrency must return to its essence. According to Satoshi Nakamoto’s white paper, the entire purpose of Bitcoin is to allow people to transact directly without a "central authority" like governments, banks, or companies like FTX or Celsius. This decentralization idea has a totemic power for some, resonating both emotionally and intellectually.

Chris Blec is the author of an online newsletter called "The Blec Report," where he makes a career out of criticizing any crypto project that deviates from the original purpose of blockchain technology. He said, "Companies like FTX abused Satoshi’s invention; they used it in the wrong way. Most of the projects that collapsed in the past year faced the same issue: over-reliance on trust. Any system that requires trust in humans is inherently unstable and can create bubbles. Each time a bubble bursts, more people understand this."

Insiders

Frances Coppola, a writer on economics and banking in the UK, didn’t always hate cryptocurrency. She said, "When Bitcoin first emerged, I was quite enthusiastic about it." Frances Coppola has long believed in the need for alternatives to bank-based payment systems, and cryptocurrency seemed a promising development. But by 2021, she had turned into a skeptic. That summer, she tweeted an article explaining why even decentralized cryptocurrency systems run by code could be prone to catastrophic failure. She argued that if investors began to withdraw their funds rapidly, they would suffer a digital bank run, which algorithms could not prevent. She wrote, "Algorithms are built on the assumption that humans will never panic and rush for the exits, ignoring the overwhelming evidence that they will."

Frances Coppola predicted LUNA would crash

Her tweet caught the attention of Do Kwon, the creator of TerraUSD (LUNA), a hot token at the time that used decentralized algorithms to maintain a stable value of $1. TerraUSD was a popular dollar alternative among DeFi traders, which could be reinvested for high yields. Do Kwon commented under Frances Coppola’s tweet, "I won’t argue with poor people on Twitter."

Schadenfreude in the Right Way

Frances Coppola said, "That person who mocked me is now facing retribution; I’m now a witness to this case (she then laughed heartily)." In May 2022, TerraUSD experienced a bank run, just as Coppola described, leading to a crash. Kwon is now facing lawsuits from investors, and U.S. prosecutors have charged him with fraud; he denies the charges. For Coppola, the collapse of TerraUSD partially triggered the market crash, which is bittersweet; she doesn’t want to feel happy because many people were hurt. Then she said, "I also want to say that my schadenfreude is justified (meaning algorithmic cryptocurrencies will crash)."

Frances Coppola belongs to a group of skeptics who have long opposed the views lobbied by cryptocurrency enthusiasts. During the bull market, many proponents overwhelmed skeptics with mockery. Frances Coppola said, "I did receive a lot of abuse from those enjoying the poverty of others; since the big crash, skeptics have gained a huge victory." Another prominent cryptocurrency critic, Amy Castor, said, "She is a freelance writer who wrote a reader-supported blog. But they saw their ranks grow; there were only a few people criticizing her before, but now more and more people are starting to pay attention."

Accusers

In the cryptocurrency space, 2022 was dubbed "the year of crypto villains." These villains suddenly appeared everywhere, tarnishing what was once an unassailable technology. Instead of pointing out the structural issues of cryptocurrency (such as the lack of investor protections and how to prevent a completely decentralized, nearly anonymous cryptocurrency from being used to fund terrorism), supporters blamed the misdeeds of individuals (or organizations).

The worst villain—SBF—is undoubtedly now referred to in the cryptocurrency industry as "both a fraudster and a bankrupt." Twitter blogger Molly White published an article on her own Web3 news site titled "Web3 is Thriving," pointing out, "SBF is just a scapegoat for cryptocurrency enthusiasts." In a recent blog, she said, "People blame the collapse of cryptocurrency solely on SBF."

Scapegoaters are everywhere. On Fox News' "Tucker Carlson Tonight," guest host Tulsi Gabbard proposed a baseless theory that U.S. politicians were funneling taxpayer money to Ukraine, which then invested in FTX, and subsequently, FTX funneled money back to the Democrats. (Bankman-Fried was a major donor to the Democrats; his colleague Ryan Salame donated millions to the Republicans.) Ukraine's Deputy Minister of Digital Information stated on Twitter that Ukraine "never invested in FTX."

Pro-cryptocurrency lawmakers accused regulators of failing to rein in FTX before its collapse. Republican Representative Tom Emmer of Minnesota accused SEC Chair Gary Gensler of "striking deals in the shadows with those engaging in nefarious activities." However, Emmer has long advocated for a hands-off approach to cryptocurrency. Even those being accused have begun to point fingers at each other. DK (the founder of LUNA) recently hinted that SBF manipulated trades that led to the collapse of TerraUSD (federal prosecutors are investigating this possibility), while SBF blamed the collapse of FTX on a tweet from Binance CEO Changpeng Zhao (though it’s clear that FTX’s issues run much deeper). The entire industry is looking for scapegoats.

Publicists

In cryptocurrency vocabulary, perhaps the only word as powerful as decentralization is community. On platforms like Twitter, Telegram, and Discord, owners of the same asset gather to discuss the merits of their assets, share memes about it, and belittle competing assets. This is especially true for non-fungible tokens, or NFTs (those digital artworks that can trade for hundreds of thousands of dollars in some cases). Now, the once-bustling Discord chat rooms are quiet, with only a few fans waiting for updates. "Developers, do something," is their pitiful cry, like a digital version of poking a dead animal with a stick.

Looking back, were we all drunk? It’s really funny to think about it that way.

The dissolution of these communities leaves scars, some of which are literal. In February 2022, Emma Crudgington was browsing Twitter in her office in Brisbane, Australia, when she saw a hot new NFT. It was called Tasty Bones, featuring a cartoon skull with an upside-down ice cream cone. She thought the artwork was "cute," and more importantly, the project was generating a lot of hype. With demand for the presale exceeding supply, she needed to find a unique way to stand out. She said, "I thought, what’s the most extreme thing I can do for the community?" So she got an NFT tattoo on her arm and posted a photo in the Tasty Bones community’s Discord chat, where the creators put her on the list to receive two NFTs. A week later, she sold the NFTs for a net profit of about $12,000.

Emma Crudgington plans to remove her NFT tattoo

Now the Tasty Bones project has collapsed, and a Tasty Bones NFT currently sells for about $50. Crudgington finds her tattoo amusing. She said, "It’s a fun story to tell others. Looking back, were we all a bit drunk at that time?" She plans to either remove the tattoo or cover it up in some way in the future. Crudgington is currently involved in an NFT project called Sappy Seals. She spends a lot of time each week communicating with a small group of Seal owners—the Sappy Sisters. She said, "It’s like having a private therapist. We talk about all sorts of random things, from physics to lip gloss." Crudgington said these Sappy Sisters have gone beyond their initial connection. They’ve raised funds for a dog charity, supported a community member with cancer, and discussed issues of sexual harassment in the NFT space. She finds it hard to accurately describe the bond they share (the theme of this community is community), but she says that connection is real.

In the cryptocurrency space, interpersonal connections can become tricky. Molly White coined a term for this type of connection: "predatory community," which promotes group cohesion at the expense of user harm, much like multi-level marketing schemes. When emotions combine with money and a sense of belonging, it’s hard to see oneself and peers clearly, especially in communities that tout noble causes, making them easy to manipulate. Countless projects have been "rug-pulled," meaning creators sold off their holdings, leaving investors with worthless tokens. Even projects that simply faded away can yield the same result.

Crudgington said she realized such communities could be exploitative, but the Sappy Sisters are different. "There’s no commercial motivation," she said. "There’s no ulterior motive."

People Leaving the Industry

In 2021, after working in traditional finance for five years, Jill (who asked me not to use her full name so she could speak candidly about her job) found a position at a company specializing in DeFi. She was attracted to the idea of trading without intermediaries, especially in a world where governments could ban bank accounts for activities like sex work or contraception. "For a while, I believed in that idea," she said. "Then I realized no one really understood OFAC regulations." (The Office of Foreign Assets Control enforces sanctions against terrorist organizations.) The more she learned about the technical details of cryptocurrency, the more she felt it had nothing to do with financial freedom and was more about "evading capital controls." She also found herself drawn to the culture of luxury yachts and models in cryptocurrency consumerism: "I didn’t fit into that environment." She recently quit that job and is looking for work in traditional finance.

For another former cryptocurrency professional I spoke with, the ideas of luxury yachts and models didn’t seem to bother him; he even asked me not to disclose his name at all. (People in this group are cautious when discussing these issues.) After earning a six-figure income during the bull market in 2021, he dropped out of school and found a job at a cryptocurrency venture capital firm. He said his thinking was simple: school was terrible, he wanted freedom, to make a lot of money, and to own a Lamborghini. The business model in the industry was to find a project, promote it, wait for its token to rise, and cash out. This didn’t seem evil since everyone was making money. When he thought about the ethics of his work, it wasn’t hard to justify to himself; if someone was harmed, it was the rich. He now reflects that his indifferent attitude toward the actual situation at the time wasn’t very appropriate.

When the market began to decline, what once felt like a positive-sum game suddenly turned into a zero-sum game for him. He realized that if someone was getting excess returns, it wasn’t for free. Many of the projects his company invested in failed, and he found it hard to get excited about new projects. I asked if his colleagues thought these projects had real value. He said they did, while he thought it was a delusion. Last fall, he returned to school to continue his studies.

In early March, I told my barber David that I was writing an article about the crypto winter. He became excited, gesturing with his scissors while cutting my hair, and after a long pause, explained to me his analysis of an AI token that he assured me was the next big event.

Indeed, after the release of ChatGPT in November, the value of crypto tokens associated with AI technology (the connections aren’t always clear) skyrocketed. When I spoke with several people, they mentioned that the integration of AI with cryptocurrency might be the way forward. Perhaps chatbots will be able to use cryptocurrency to complete tasks. Maybe blockchain technology can help verify authenticity in a world filled with deepfakes. Influential Twitter account @punk6529 recently posted, "AI will reveal the true purpose of cryptocurrency." The tone of these conversations—somber, sympathetic, vague, or mysterious, with humorous speculation—felt familiar. I told David I would look into it, but I didn’t.

Christopher Beam is a freelance journalist who made his first cryptocurrency purchase in April 2021; he hasn’t made any trades since April 2022.