Why Bitcoin’s Death Is Greatly Exaggerated (Again) Financial News Now

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Ding-dong, Bitcoin’s dead. At least that’s the prevailing narrative from the standard suspect (here’s taking a look at you, Jamie Dimon).[1]

Crypto veterans will be rolling their eyes proper now. After all, Bitcoin (BTC) has been declared useless a minimal of 467 occasions now.[2]

But there’s a nagging question… What if the pundits and naysayers are right? Despite recent recoveries, could 2023 be the 12 months that finally kills cryptocurrency?

To find out, let’s take a dive into what’s occurred within the crypto world over the past 12 months and what which means for cryptocurrency in 2023 — and we’re going to start with the worst of it. Yes, we’re going to get into the collapsed FTX crypto trade debacle.

The FTX Exchange Collapse: Was It Crypto or Corruption at Fault? 

By far the biggest piece of crypto news in 2022 was the failure of the main exchange, FTX. At its peak, FTX was valued at a staggering US$32 billion initially of 2022 and was thought of to be a key player within the offshore exchange crypto market. However, there have been problems brewing under the surface.[3]

Like many cryptocurrency exchanges, including giants like Binance, FTX issued its own token, known as FTT. These tokens are roughly analogous to shares, with out all these pesky rules or SEC governance. From a user’s perspective, the FTT token had three major functions:[4]

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  • FTT provided buyers with a approach to access discounted buying and selling options on the FTX platform and a approach to commerce at leverage on the platform without paying curiosity.
  • It functioned as a kind of trade owned “stablecoin” which enabled customers to trade in any cryptocurrency without truly having to transform their tokens.
  • Users might stake the coin for curiosity and use it to vote on many governance issues.
  • This is all relatively standard. Many cryptocurrency exchanges, together with Binance, offer some type of token native to their ecosystem. The problem was the corporate managing the funds backing FTT: Alameda Research, a sister fund also owned by FTX CEO Sam Bankman-Fried.

    FTT itself was unable to obtain wires. Instead, money was transferred to Alameda, and FTX would credit a user’s account as soon as Alameda acquired the funds. Unfortunately for FTX’s clients, Alameda wasn’t clear about how they had been utilizing these funds. In reality, they had been trading these funds, typically at a loss, with out informing clients, and utilizing the FTT token as collateral for high-risk loans.[5]

    The means Alameda actually made their cash was not difficult. It purchased Bitcoin in a single part of the world, offered it in another, and then pocketed the distinction. The company used leverage, that is borrowed money, to gas its trades and make bigger returns. As more traders and funds piled in and the worth of cryptocurrency skyrocketed, this business grew to become increasingly lucrative — until it didn’t.

    The problem with this mannequin is that leverage is a double-edged sword — if you win, it amplifies your features, however whenever you lose, it amplifies losses as nicely. And Alameda misplaced big. Unfortunately for FTX customers, the company wasn’t using its own sources as leverage, but those of FTX prospects, and Alameda had some very angry collectors demanding cost because the company’s trades went dangerous.

     

    A graph displaying the sudden FTT collapse as the scale of FTX’s liquidity crisis turned clear (Source: coinmarketcap.com)

     

    Everything began to really crumble when Binance realized something was mistaken and introduced that it was liquidating its FTT holdings following rumors that FTX was bancrupt.[6] This crashed the worth of FTT, which was now not adequate collateral to cowl Alameda’s loans. A market run then led to a liquidity crisis that in the end resulted in FTX ceasing trading and withdrawals following a hack that stole around US$477 million.[7]

    FTX collapsed as a outcome of a foul actor, particularly Mr. Sam Bankman-Fried himself, abusing the dearth of rules around cryptocurrency to misappropriate customer funds.[8] This is doubly concerning as FTX was extensively thought of to be a relatively responsible actor — till it wasn’t.

    A number of major celebrities had acquired solid sums of money to promote FTX. For example, Kevin O’Leary, who misplaced around US$10 million, has admitted that he was paid a staggering US$15 million to be a spokesman for the exchange.[9] O’Leary additionally revealed the regarding fact that everybody was relying upon all people else’s due diligence concerning FTX, highlighting a group-think that may have an result on even extremely subtle traders when significant gains are on the table.

    The true scale of the corruption at FTX is best described by its new CEO, chapter attorney, John J Ray III, the CEO who led Enron after its storied collapse in 2001:

    “Never in my career have I seen such a complete failure of company controls . . . as occurred right here.”[10]

    The corruption at FTX was intentionally nicely hidden, and it seems that solely a small cabal at the top of the corporate were even aware something was amiss. The fact that even institutional investors have been fooled raises a very terrifying thought for the relaxation of us…

    What if FTX Isn’t the Only Example of Crypto Corruption?

    Longtime followers of FNN in all probability have a nagging feeling that I’ve talked about this earlier than, and that’s as a outcome of I did right here.

    The biggest stablecoin in the marketplace right now, Tether (USDT), supposedly contains around US$65 billion in property.

    USDT is designed to act as a bridge between USD and the cryptocurrency market usually, but there are severe considerations that USDT is also being used as collateral for high-risk loans and that there aren’t sufficient actual assets to cowl USDT in the event of a financial institution rush.[11]

    A USDT collapse would undoubtedly be the worst thing that would happen to the cryptocurrency industry. It underpins the entire cryptocurrency ecosystem, and almost all exchanges depend on USDT to some extent. There are alternatives, but it’s unclear whether they’d be succesful of step in to plug a $65 billion gap. Some exchanges are beginning to wake up to this, and crypto.com has lately delisted Tether so as to comply with the Ontario regulator.[12]

    In an effort to reassure users, exchanges have gotten much more open about their holdings. For instance, crypto.com (CRO) has released a full audit of its reserves, which is constructive. Although, it did reveal the somewhat regarding proven fact that a full 20% of crypto.com’s reserves consist of the meme coin SHIB.[13] Other exchanges, like Binance and Coinbase, are also exhibiting proof of reserves.

    However, readers should remember that not all these audits are equal, and those carried out by unregulated offshore exchanges, like Binance, must be seen with specific skepticism. This is evidenced in Binance’s most up-to-date “audit,” where even the corporate conducting it, Mazars, has been cagey on the exact methodology used.[14] As a rule: Assume that any unregulated change is vulnerable to collapse until confirmed otherwise.

     

    Another deceptive “PoR” AUP (not an audit) released at present. Apparently, there is not a consistent process used across exchanges. Again, the process strays removed from the original spec.🤦‍♂️

    1. “interchangeable” assets
    2. unfavorable balances included
    3. no signing
    4. aggregation by “class” https://t.co/FGQ3Mn9kyo

    — Jesse Powell (@jespow) December 10, 2022

     

    It can additionally be of observe that Decentralized Exchanges (DEXs) appear to be weathering the storm.[15] Decentralized platforms are typically built with survivability in mind, and there is no “human factor” which may disrupt the greatest way they operate. This appears to have been attractive to users, and in November they controlled approximately 16.8% of spot commerce quantity.[16]

    DeFi also appears to have the power to win over certain crypto skeptics, with JP Morgan making their first transfer on a variant of the DeFi protocol Polygon in November 2022.[17] I am comfy stating that tokenization and other elements of DeFi will continue to develop in recognition at the same time as centralized crypto companies wrestle.

    So Will Crypto Die in 2023?

    The echos of Mt. Gox proceed until today

    In my estimation, it’s extremely unlikely that we will see a complete collapse of the cryptocurrency sector inside the subsequent 12 months, even if we see a complete breakdown of USDT. Crypto has proven remarkably resilient to these types of crashes.

    For example, when Mt. Gox collapsed in 2014, it accounted for a staggering 70% of world buying and selling volume — FTX accounted for just 10%.[18] To illustrate this level with a newer instance, Bitcoin has already recovered to pre-FTX ranges.

     

    Bitcoin has already recovered from the FTX catastrophe (source: coinmarketcap.com)

     

    However, this doesn’t mean that there aren’t troubles forward. The FTX debacle has attracted the ire of numerous world regulators, who’re utilizing it as a cause to crack down further on cryptocurrency.

    The European Central Bank specifically has been arguing the narrative that Bitcoin is on “the road to irrelevance” as just lately as November 30th.[19]

    Their argument rests on the reality that Bitcoin and blockchain (or distributed ledger expertise extra generally) have but to be shown to have a compelling sensible use and remains to be largely utilized in experiments or money grabbing operations. The European Central Bank (ECB) believes that Bitcoin can serve neither as a currency nor a steady funding, and as such shouldn’t be promoted by governments.

    The death of crypto might have been significantly exaggerated

    Setting aside the big move of venture capital and institutional funds that would disagree, the argument looks at Bitcoin in a vacuum, significantly in gentle of its significance to the cryptocurrency trade more typically.

    BTC acts as a crypto-specific retailer of value for many traders. To them, it’s analogous to a type of crypto-only savings account, with the high degree of risk that this entails.

    Crypto traders are sometimes pleased to swap the protection of a fully insured bank account for the comfort of being able to instantly convert BTC to a different cryptocurrency throughout bull markets. The ultimate impact of this is that Bitcoin has turn out to be the “reserve” forex of cryptocurrency and features because the USD of the cryptocurrency ecosystem.

     

    BTC might be struggling but remains to be above earlier bear market levels (Source: coinmarketcap.com)

     

    It’s also worth noting that BTC continues to be holding above earlier levels seen in the course of the 2018–2020 “crypto winter.” This is chilly consolation for anybody who invested over the past two years, nevertheless it does show that BTC isn’t exactly dying — extra like getting into a second crypto winter.

    For the uninitiated, a crypto winter is a term used to outline a prolonged bear market in the cryptocurrency area. It is usually characterised by loss of mainstream curiosity in cryptocurrency and spans multiple years. It is characterised by lower volumes and a consolidation of investments into blue-chip cryptocurrencies like BTC or ETH.

    This explicit crypto winter has been triggered by the identical problems afflicting the broader inventory market. However, there are nonetheless numerous fascinating developments happening in the cryptocurrency sector, similar to novel uses of NFTs, that we’ll get into quickly.

    For now, the takeaway is this: So long as the cryptocurrency sector remains related, so will Bitcoin. Which leads us to the subsequent massive question…

    If Cryptocurrency Doesn’t Die in 2023, What Happens Next?

    I (sadly) wouldn’t have a crystal ball, so please view these as my predictions based mostly on analyzing essential data and my understanding of prevailing crypto market tendencies, and not simply gospel beliefs. With that disclaimer out of the best way, there are a number of tendencies from 2022’s otherwise anemic performance that provide good insight into how the crypto market will evolve in 2023.

    #1 Cryptocurrency Will Remain a High-Risk Asset, With All That It Entails

    As Bloomberg strategist Mike McGlone just lately stated, “This isn’t a crypto winter, it’s an everything winter.”[20]

    Aside from the FTX collapse, cryptocurrency has confronted headwinds from unhealthy financial indicators. The Fed appears set to continue tightening up its financial policy, which has made buyers search for methods to shift out of high-risk property. This includes know-how shares, startups, and naturally cryptocurrencies.

    However, all winters must eventually come to an end. In my view, the reality that we noticed institutional investor exercise on the exchange BitStamp increase by 57% in November 2022 is an indication that Bitcoin may be thought-about de-risked by many traders, who will feel validated by the latest upswing in worth.

    This doesn’t simply extend to direct crypto possession. Goldman Sachs has expressed curiosity in purchasing a selection of cryptocurrency companies whereas their valuations are low.[21] This seems to chime with wider data exhibiting that Web 3.0 and decentralized finance investments nonetheless lead funding exercise within the venture capital area outpacing each FinTech and BioTech.[22]

    In quick, the large money is taking this opportunity to refill in advance of the following bull run, however crypto does still face a major external challenge: regulators.

    #2 Regulations Will Finally Begin to Take Form, and This Could Be Bad News for Offshore Exchanges

    The massive problem for cryptocurrency is still the fuzziness surrounding regulations. While many cryptocurrency nerds still cling to the mantra “code is regulation,” governments choose to implement actual regulation. Efforts by the business to self-regulate, either via Decentralized Finance devices or by becoming more clear about their reserves, will probably prove to be too little, too late.

    For the moment, the ECB is main the cost with the Markets in Crypto-Assets (MiCA) bill, which comes into force in late 2023. However, the Europeans are apprehensive that in the absence of a worldwide framework, incidents like FTX may impact broader markets and are on the lookout for a world strategy to insulate cryptocurrency.[23]

    Unfortunately for the EU, there is still little consensus within the United States about what form crypto regulation should truly take. Although, it’s likely we will see extra alignment between the US and European regulators after the US Treasury’s Wally Adeyemo known as for more international cooperation on crypto rules.[24]

    This will cause issues for numerous exchanges, particularly those which may be considered offshore or exterior of US laws, together with the behemoth Binance. If global rules begin to tighten, these exchanges will find it more and more difficult to operate with out fully altering their business mannequin. This will give established entities like Kraken, Coinbase, or crypto.com, who are already in compliance, a significant competitive edge.

    Whatever happens with regulators, it’s doubtless that crypto will begin to recover in 2023 if economic conditions improve — and there’s one token that will significantly benefit from this.

    #3 Ethereum Will Probably Play a Larger Role

    Out of all the cryptocurrencies on the market right now, it’s the 2nd largest that holds essentially the most promise — Ethereum (ETH). I’ve covered the explanations for this intimately on this piece, but in short:

    Ethereum provides the infrastructure for the whole decentralized app (dApps) ecosystem, and the gradual march in the direction of Ethereum 2.zero continues without any major hiccups.

    As a half of this march, Ethereum shifted towards Proof of Stake. This eliminated the necessity for miners, and has primarily eradicated any concerns about Ethereum’s environmental impact nearly overnight.[25] It has also helped to set the groundwork to get rid of the excessive charges and bottlenecks which have plagued the cryptocurrency ecosystem so far, and most importantly, acted as a restriction on the general supply of ETH.

     

    Ethereum is still nicely above earlier bear market ranges (Source: coinmarketcap.com)

     

    Aside from Ethereum’s own fundamentals, there might be an previous development which will help drive its adoption: non-fungible tokens (NFTs). While they’ve not attracted the same fanfare as the first wave of NFT artwork did, there was a quiet revolution happening within the space within the type of Reddit Avatars.

    Reddit, Inc. is a major social media platform, and in late 2022 they quietly launched a novel digital avatar venture.[26] While Reddit hasn’t brazenly referred to as these NFTs, and also you don’t need an external wallet to make use of them, Reddit avatars operate exactly the identical means as traditional NFTs do — with some promoting for as much $45,000 in the midst of a bear market.[27]

    These unusual little avatars have confirmed popular with customers. Over 225,000 avatars have been minted in a single day in early December.[28] An necessary thing to notice, Reddit avatars are based mostly on the Polygon (MATIC) blockchain, which relies on our good pal Ethereum to function. While Reddit isn’t willing to immediately affiliate itself with NFTs, the company has acknowledged that blockchain stays a half of its long-term plans.

    These kinds of initiatives will prove to be key drivers for Ethereum, and if the Reddit experiment lasts, it may provide extra confidence and utility for blockchain in a social media and group setting.

    Time In the Market Always Beats Timing the Market

    Whether you imagine these predictions imply that it is a good time to purchase or not is totally as a lot as you, but I will say this: I don’t consider that it’s attainable to “time” markets — at least not with out leaving a great deal as much as luck. I have been capable of meet this bear market relatively unflinchingly as a end result of I really have rigorously accrued assets over an extended time period, rather than making an attempt to catch falling knives, or chase tops.

    I am personally convinced that cryptocurrency, particularly Ethereum, will continue to be an essential, if niche, asset class. That is why I spend a lot time writing on this topic and why I proceed to place assets into ETH, ADA, and different cryptocurrencies. I imagine that now is a good moment to do your individual analysis and determine whether or not cryptocurrency is the proper investment for you.


    Saul Bowden, Contributor
    for Investors News Service

    P.S. To discover extra alternatives in the hottest sectors in North America, join now to the Financial News Now e-newsletter to get the newest updates and funding concepts instantly in your inbox!

    DISCLOSURE: Saul Bowden holds BTC, ADA, ETH, UNI, and other cryptocurrencies or cryptocurrency companies.

    DISCLAIMER: Investing in any securities or cryptocurrencies is highly speculative. Please make certain to always do your personal due diligence before making any funding decisions. Read our full disclaimer here.

    Published December 2022

    Sources:

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