2022 has been a terrible year for cryptocurrencies. In the spring there was the collapse of the Terra Luna cryptocurrency, while in November the bankruptcy of FTX, the second largest cryptocurrency platform in the world, which generated a lot of instability in the sector and caused the loss of billions of dollars in savings and investments. In recent weeks, in fact, other companies rather exposed to FTX have revealed many vulnerabilities: the company BlockFi has filed for bankruptcy and the platform Kraken has announced over a thousand layoffs.
Cryptocurrencies no longer enjoy much trust from investors, who fear losing their money and who are therefore gradually moving away from these investments, aggravating the situation even more. Many observers are wondering whether the end of this sector is approaching, or at least an exceptionally harsh and prolonged period of crisis.
The world of cryptocurrencies was already known for its sudden crashes, for prices that rise and fall very quickly, for entire estates that vanish overnight. But even by his standards, this year has been disastrous, so much so that among experts and insiders – including US Treasury Secretary Janet Yellen – the failure of the FTX platform has been called the “Lehman moment” of the sector, a reference to the collapse of the investment bank Lehman Brothers in 2008, which caused a global financial crisis and which exposed all the vulnerabilities and ruthlessness of Wall’s finance Street.
Even in Europe, where culturally there is already more mistrust towards this world, the European Central Bank, in a article on his blog, has come to define Bitcoin (i.e. the most well-known cryptocurrency) as «artificially backed» (meaning that according to the authors its value would be inflated) and that «it shouldn’t be legitimized by regulators or financial companies because it is similar to the gamble”. The authors of the article say they are convinced that Bitcoin is making “one last artificially induced leap before the road to irrelevance”.
A refresher on what happened to FTXFTX was the second platform in the world on which cryptocurrency trading took place. Its headquarters are in the Bahamas and it was founded and run by Sam Bankman-Fried. Mostly known as SBF, he is a 30-year-old American billionaire who is deeply rooted in the American Democratic Party.
FTX was until now considered one of the most mature companies in the cryptocurrency space, because it was stable and with solid capital, but also because it was able to resist in difficult times for the sector. It had helped rescue various cryptocurrency companies and was generally viewed by investors as a responsible company, never engaging in risky and speculative trading with client funds. So much so that its founder enjoyed a good reputation both within the sector but also among traditional finance operators and US financial authorities.
Bankman-Fried also founded a cryptocurrency trading firm, Alameda Research. The two companies operated separately: FTX had the role of “bank”, customers deposited FTT tokens, i.e. FTX’s cryptocurrency, while Alameda dealt with the sale of cryptocurrencies, like any trading company. From the investigations it is emerging how Alameda, in a moment of scarce liquidity, would have drawn on the deposits of FTX customers, creating a hole of about 8 billion.
In November, a crisis of confidence arose in FTX: fearing losing their money, investors within a few days withdrew billions and billions of dollars held in cryptocurrency, discovering, however, that a lot of money was missing, because SBF and his had used them in the Alameda. The company thus found itself looking for funds to fulfill its obligations to convert the cryptocurrency into dollars. Finally, the company had to block conversion requests because it could no longer cope with them, thus finding itself in the most serious situation that a financial company can find itself in (like a bank that blocks customers’ requests to withdraw money from their current accounts ). So FTX filed for bankruptcy.
In a’interview with New York Times Bankman-Fried said he didn’t “exactly know what was going on” because he “never felt comfortable with the risk of a possible conflict of interest” with Alameda Research, and because of this he always kept his distance from its operations. However, the point of the accusation against SBF is that he allegedly used the money deposited in FTX to cover Alameda’s huge losses.
The effects on the whole cryptocurrency sectorThe sudden collapse of FTX has raised many questions about the future of cryptocurrencies. First, about what will happen to FTX customers and their money. Unlike deposits into a traditional checking account, deposits on cryptocurrency exchanges are not guaranteed by the state and it is not known whether FTX has sufficient resources to pay everything back. With the bankruptcy petition filed by the company, the matter will move to court.
The scale of this story is enormous for the cryptocurrency sector, which has lost one of its key institutions. Many observers compare it to the failure of Lehman Brothers, a large American investment bank which in 2008 found itself bankrupt after very risky speculative investments. From there began the greatest financial crisis in history.
The FTX affair had an impact on the whole market, because a crisis of confidence was grafted on the whole sector, as in the case of Lehman Brothers. So much so that the value of many cryptocurrencies has dropped significantly. A year ago, in November 2021, in the phase of the greatest upswing, the total value of cryptocurrencies was around 3 trillion dollars globally. Today it is around 800 billion, almost 70 percent less.
But the similarities with 2008 end there. Back then, the Wall Street Crash spawned a global financial crisis that led to millions of Americans losing their jobs and homes, while the fallout from the FTX crash should remain within the cryptocurrency industry.
The story will also likely have an important impact on the sector’s regulatory activities: Bankman-Fried was trying to persuade those authorities who are still skeptical about the potential of cryptocurrencies to better regulate the sector, but who will now have another reason to believe the sector is out of control and potentially dangerous for investors.
L’Economistin an editorial entitled «Is it the end of cryptocurrencies?» points out how this crisis, however, comes from farther away and concerns precisely the reasons why cryptocurrencies were born.
According to the weekly, the reason why they were invented has been betrayed: to guarantee a transparent, secure and more convenient payment system than traditional banks. In fact, the conventional banking system requires a vast infrastructure to maintain trust between operators: an expensive infrastructure, which often translates into costs for customers, sometimes not even so transparent. Public blockchains, the technology underlying cryptocurrencies, are built on networks that make their transactions transparent and, in theory, trustworthy.
14 years after the invention of Bitcoin, cryptocurrencies are still very unstable and many consumers, fearing for their money, do not trust them. Instead, they have been used for speculative, legitimate activities, but also for criminal activities, to launder money and to circumvent international sanctions-
According to theEconomistcryptocurrencies will save themselves if they can be useful for something beyond speculation and scams, trying to find that original purpose of wanting to make financial intermediation faster, more efficient and less expensive.