SAN FRANCISCO (NYTIMES) - No one wanted to miss out on the cryptocurrency mania.

Over the past two years, as the prices of bitcoin and other virtual currencies surged, crypto start-ups proliferated. Companies that market digital coins to investors flooded the airwaves with TV commercials, newfangled lending operations offered sky-high interest rates on crypto deposits and exchanges like Coinbase that allow investors to trade digital assets went on hiring sprees.

A global industry worth hundreds of billions of dollars rose up practically overnight. Now it is crashing down.

After weeks of plummeting cryptocurrency prices, Coinbase said last Tuesday (June 14) that it was cutting 18 per cent of its employees, after layoffs at other crypto companies such as Gemini, BlockFi and Crypto.com. High-profile start-ups like Terraform Labs have imploded, wiping away years of investments. On June 12, an experimental crypto bank, Celsius, abruptly halted withdrawals.

The pullback in the crypto ecosystem illustrates the precariousness of the structure built around these risky and unregulated digital assets.

The total value of the cryptocurrency market has dropped by about 65 per cent since autumn, and analysts predict the sell-off will continue. Stock prices of crypto companies have cratered, retail traders are fleeing and industry executives are predicting a prolonged slump that could put more companies in jeopardy.

"The tide has gone out in crypto, and we're seeing that many of these businesses and platforms rested on shaky and unsustainable foundations," said former Federal Reserve official Lee Reiners, who teaches at Duke University Law School. "The music has stopped."

Cryptocurrencies are digital coins exchanged using networks of computers that verify transactions, rather than a centralised entity like a bank. For years, they have been marketed as a hedge against inflation caused by central banks flooding the economy with money.

Bitcoin, the most valuable cryptocurrency, has a built-in limit to its supply. But now with stocks crashing, interest rates soaring and inflation high, cryptocurrency prices are also collapsing, showing they have become tied to the overall market.

As people pull back from crypto investments, the outflow is exposing the unstable foundations of many of the industry's most popular companies.

Many of these companies are equipped to survive a downturn in cryptocurrency prices. But cutbacks are likely to continue as they adjust their strategies after years of excessive growth. Among the most vulnerable may be start-ups that launched their own cryptocurrencies, as prices plummet across the board.

Some industry experts have long said the exuberant growth of the past two years was not going to last forever, comparing it with the late-1990s dot.com boom. At the time, dozens of dot.com companies were going public amid hysteria over the early promise of the Internet, even though few of them made money.

When confidence evaporated in the early 2000s, many of the dot.com companies went bust, leaving just the biggest - such as eBay, Amazon and Yahoo - standing. This time, investors predict there will be more survivors.

"You certainly have some overhyped companies that don't have the fundamentals," said investor Mike Jones at venture firm Science. "But you also have some really strong companies that are trading way below where they should."

There have been warning signs that some crypto companies were not sustainable. Sceptics have pointed out that many of the most popular firms offered products underpinned by risky financial engineering.

Terraform Labs, for example, offered TerraUSD, a so-called stablecoin with a fixed value linked to the United States dollar. The coin was hyped by its founder, Mr Do Kwon, who raised more than US$200 million (S$278 million) from major investment firms such as Lightspeed Venture Partners and Galaxy Digital, even as critics warned that the project was unstable.

The coin's price was algorithmically linked to a sister cryptocurrency, Luna. When the price of Luna plummeted in May, TerraUSD fell in tandem - a "death spiral" that destabilised the broader market and plunged some investors into financial ruin.

Celsius' announcement that it was freezing withdrawals had a similar effect. Celsius had aggressively marketed its bank-like lending service to customers, promising yields as high as 18 per cent if they deposited their crypto holdings with the company.

For months, critics wondered how Celsius could sustain such high yields without putting its depositors' funds in jeopardy through risky investments. The company drew scrutiny from several state regulators.

In the end, a drop in crypto prices appeared to put the company under more pressure than it could withstand. With the price of bitcoin tumbling, Celsius announced that it was freezing withdrawals "due to extreme market conditions".

The company did not respond to a request for comment.

The market instability has also triggered a crisis at Coinbase, the largest US crypto exchange.

Between the end of 2021 and late March, Coinbase lost 2.2 million active customers, or 19 per cent of its total, as crypto prices dropped. The company's net revenue in the first three months of the year shrank 27 per cent from a year earlier, to US$1.2 billion. Its stock price has plunged 84 per cent since it went public last year.

This month, Coinbase said it would rescind job offers and extend a hiring freeze to battle the economic downturn. Last Tuesday, it said it would cut about 1,100 workers.

Coinbase's chief executive Brian Armstrong informed employees of the layoffs in a note last Tuesday morning, saying the company "grew too quickly" as crypto products became popular. "It is now clear to me that we overhired," he wrote.

A Coinbase spokesman declined to comment. "It had been growth at all costs over the last several years," said Mr Ryan Coyne, who covers crypto companies and financial technology at the Mizuho Group. "It's now turned to profitable growth."

Gemini, a crypto exchange led by billionaires Tyler and Cameron Winklevoss, also announced this month that it was laying off 10 per cent of its workforce. In a memo to staff, the Winklevoss twins said the industry had entered a "crypto winter".

But they also expressed optimism about the future of the industry. "The crypto revolution is well under way and its impact will continue to be profound," they wrote in a memo. "But its trajectory has been anything but gradual or predictable."

Last year, Singapore-based exchange Crypto.com aired a now-notorious TV commercial starring actor Matt Damon, who declared that "fortune favours the brave" as he encouraged investors to put their money in the crypto market.

Earlier this month, Crypto.com's CEO Kris Marszalek announced that he was laying off 5 per cent of the staff, or 260 people. Last Monday, BlockFi, a crypto lending operation, said it was reducing its staff by roughly 20 per cent. Gemini and BlockFi declined to comment.

A Crypto.com spokesman said the company remains focused on "investing resources into product and engineering capabilities to develop world-class products".

Some of the companies have remained defiant. During Game 5 of the NBA Finals last Monday night, Coinbase aired a commercial that alluded to past boom-and-bust cycles.

Crypto is dead," it declared. "Long live crypto."