The collapse of the FTX platform is the latest episode in a black year for cryptocurrencies. Its shockwave threatens the future of an industry demanding regulation to survive.
2021 was an exceptional year for cryptocurrencies. Bitcoin, the best known, marked its peak at almost $69,000. The total value of digital assets reached $3 trillion. Thanks to the abundant liquidity in the markets with the expansive policies of central banks during the pandemic.
The outlook, however, could not be more different in 2022. Cryptocurrencies have plummeted in the financial markets. Throughout the year, a succession of cases has undermined the credibility of digital assets. The novelty of the crypto world also helped fuel a bullish spiral. It began to break with the monetary tightening that central banks have applied since the first quarter to combat high inflation.
First Warning
The first collapse came in the spring with the fall of TerraUSD. The stablecoin maintained its parity with the dollar through a complex algorithm linked to Luna (an unbacked cryptocurrency). It lost virtually all its value in five days—the collapse of the latter spread and affected exchange platforms. Celsius Network suspended all client transactions. It also froze fund withdrawals in June and, the following month declared bankruptcy.
The final episode came in autumn with the bankruptcy of the FTX exchange platform, with a past peak value of $32 billion. Experts say this is a clear example of the sector’s lack of controls and supervisors. Its CEO, known in the past as the “crypto king,” is in prison in the Bahamas, a tax haven from which the platform operated, and is wanted by the US justice system for fraud and money laundering, among other crimes. The scandal threatens Binance, the largest venue in the sector.
Crypto Regulation Needed
The lack of a regulatory framework is essential in explaining these events, and its implementation will be vital in shaping the industry in the coming years. Julius Baer’s head of research, Carsten Menke, believes that the crisis will defer the adoption and recognition of cryptocurrencies as the primary investment asset. At the same time, the arrival of a legal framework will instill confidence in digital assets, which many questioned after the FTX scandal.
Pointing in the same direction is Bit2Me spokesman Javier Pastor, who is “convinced” that a regulated environment will enable the industry’s growth—the entry of institutional investors integrating bitcoin and other crypto-assets into their portfolios. Alejandro San Nicolás Medina, a Valencia International University (VUI) professor and industry expert has similar predictions. Despite the current situation, bitcoin will regain its pulse and the entire crypto ecosystem.
Dot.com similarities
Experts agree in establishing an analogy between the dot.com crisis and the emergence of the Internet in the 2000s. Some cryptocurrencies and players will vanish. Many others will survive and will shape the digital assets of the future. After spring events, bitcoin plummeted 67% from all-time highs. It stabilized around $20,000 until the FTX crash, which plunged the asset to its annual low of $15,485, not seen since November 2020.
Ethereum, the second most valuable cryptocurrency, suffered a similar fate after touching $5,000 in November 2021. It was trading this Friday at $1,200, down 73%. Experts rule out that cryptocurrencies will become a means of payment. For now (except in very few exceptions, such as El Salvador, where bitcoin is legal tender). Their utility will reside as long-term value vaults.
According to Menke, this explanation acquires more weight in those institutions and countries without high levels of corruption and inflation. They’ll enjoy a high level of trust from the public. In these cases, he points out. They must demonstrate usefulness for society and the economy to establish themselves and be accepted.
Pastor assures that bitcoin would play a “historical role” and that citizens begin to understand the importance of using crypto assets as a haven. Out of the reach of third parties and with a monetary issuing defined by mathematics. Without a central authority to back it up, but secure.
San Nicolás considers that after reconfiguring the industry with more solvent and transparent companies, NFTs (non-fungible tokens), bitcoin, and ethereum, will remain. He places special focus on the decentralized community intrinsic to the Ethereum ecosystem.