By now, everyone has heard about the cryptocurrency news. And that’s part of the problem.
One of the largest exchanges in the world, FTX, has filed for bankruptcy. While details are yet to emerge, reports suggest that the exchange sent $10 billion of customer assets to sister trading firm, Alameda, in order to shore up loans which were called in by investors as the market crashed earlier this year.
Whether that is exactly what happened or not, two things remain clear. FTX collapsed as a result of the tangled relationship between it and Alameda, and client assets were misappropriated (to use a very polite term). If you want the full story, I wrote a deep here last week.
The damage is $8 billion, and the bill will be footed by customers of the exchange.
But how much of a blow is this whole sordid saga to crypto’s reputation?
Reputation damage
One of the problems beyond, well, the mammoth loss of wealth, is the blow to the image of cryptocurrency.
This scandal is worsened by the fact that it has arrived so hot on the heels of the crushing Terra crash, which occurred in May before the resulting contagion spread out over the ensuing months.
The question that immediately springs to mind, therefore, is how much this has tarnished cryptocurrency in the mainstream. What fund managers will be willing to allocate to it now? Who is going to be happy with their pension in Bitcoin? Will this prevent CEO’s buying it for their balance sheet?
A quick refresh of your Twitter timeline is all that is needed to see how bad the sentiment is in crypto right now. The industry has been fighting for legitimacy and a place at the big table for years now. During the pandemic, it finally felt like it was making inroads. Then, Terra happened. And now, FTX.
Sam Bankman-Fried was the golden boy. Sat in his suit chatting regulation with Congress only recently. Gracing the cover of Forbes magazine. A spokesman for not only his company, but the entire cryptocurrency industry.
A charitable soul, effective altruist, visionary extraordinaire. Now he is grovelling on Twitter and taking shots at his competitor (CZ of Binance) – who definitely was not the cause of this mess.
20) At some point I might have more to say about a particular sparring partner, so to speak.
— SBF (@SBF_FTX) November 10, 2022
But you know, glass houses. So for now, all I'll say is:
well played; you won.
How does the industry come back from this embarrassment?
The positives
There are reasons to be optimistic, however. Cryptocurrency has entirely transformed over the last few years. Studies indicate that close to 90% of American adults have now heard of crypto. It occupies column space in mainstream newspapers. It is even legal tender in certain jurisdictions – El Salvador (which I visited this summer), Central African Republic (albeit with concerns), Maderia, Lugano.
Not only that, but a flushing out of bad players like FTX is necessary if crypto is ever to “succeed”. Then again, it would be a lot better if they never existed in the first place. But while regulation gets bootstrapped up to deal with this nascent industry, the unfortunate reality is that the environment is vulnerable to bad actors like this.
We spoke with analysts at Bitfinex, who pleaded that a long-term vision needs to be taken.
While the crypto market has certainly taken a blow to its confidence following the apparent implosion of FTX, the value of Bitcoin to societies where access to financial services is difficult or prohibitive remains as relevant as ever.
Bitfinex market analysts
While Bitcoin remains immensely powerful and uniquely designed to achieve these goals, in order to get to a place where it can even start to deliver on this promise, it needs to gain firm acceptance and establish unquestioned legitimacy. These episodes precent exactly that.
The events of the past few months, triggered by figures such as Bankman-Fried and Terra founder Do Kwon, weigh the entire industry down. There are even those who believe it is a death sentence.
“FTX is a real game changer and not good for the industry,” Ian Katz, managing director at Capital Alpha Partners told Marketwatch. “(Sam Bankman-Fried) was to crypto what a lot of people had thought someone like Jeff Bezos or Bill Gates or Steve Jobs were to their industries.”
The fear is that the latter thought will dominate the former. Then again, emotions are high in the immediate aftermath of the FTX scandal. There will also likely be a reaction from lawmakers as the numbers here are too large to ignore. Perhaps down the line, this will be viewed as crypto’s nadir; the rock bottom from which it grew.
Time will tell. And one thing crypto has up its sleeve is its repeated track record of bouncing back from blow after blow.
Right now, however, people are scoffing at the entire industry. Honestly, it is hard to blame them. $8 billion of client assets have gone missing, a happening which has absolutely devastated some users. These crashes are immensely hurtful to people which, ironically, is the exact opposite to what crypto was meant to do.