The collapse of several big players last year raised questions about the survival of cryptocurrency. But let’s not dig the grave yet on digital currency.
A variety of cryptocurrency tokens. Credit: Roger Brown
Memo to aspiring journalists: be wary of new year’s predictions, especially forecasts of the imminent death of the crypto industry.
Such predictions have come after some pretty scary drops in the value of some cryptocurrencies. In one example, crypto token Terra Luna fell from about $120 to two cents in less than 48 hours. Estimates of the capital wiped out by that crash range from $40 billion to a whopping $300 billion. That triggered the crash of Bitcoin — the oldest and most widely traded crypto currency. Bitcoin reached its peak value at almost $69,000 in November 2021, but plunged to about $17,000 in June 2022. It has not since recovered.
Crypto currencies are digital assets. Unlike a dollar bill, euro coin or rupee note, they have no physical being. You can’t toss a Bitcoin to settle an argument, or use it to buy most kinds of goods. The appeal of crypto to its fans is that the transactions for which it is used are not stored in a traditional bank, but recorded instead on a decentralized computer network, independent of any government or other authority.
The collapse of several big crypto players last year raised questions about its survival. Statements from the Federal Reserve in the U.S. and the European Central Bank (ECB) suggest, however, that they believe it will continue. It is more likely that we will see official efforts to regulate and supervise crypto in 2023 than its demise.
A crypto contagion could infect the global banking system.
On 4 January, the Federal Reserve warned banks of “contagion” from trading in the volatile crypto market. “It is important that risks related to the crypto-asset sector … do not migrate to the banking system,” it said.
President of the ECB, Christine Lagarde, earlier said that draft legislation before the European Parliament did not go far enough and that broader measures were “very much needed.”
Both statements contrasted with comments from two senior ECB economists that Bitcoin was “on the road to irrelevance.”
Crypto was born out of the 2007–2009 global financial crisis which led to the worst economic recession in 80 years. International banks and financial institutions were largely to blame, through excessive risk-taking and predatory, unregulated lending to low-income home buyers.
Very few bankers — none in the United Kingdom and only one in the United States — were convicted, while governments devoted huge sums to save the international banking system from meltdown.
Could Bitcoin go bust?
The effects of the crisis can still be felt today. In the United Kingdom, for example, the National Health Service remains severely under-funded as a result of the economic austerity policy adopted in and after 2010.
“My generation was outraged by the global financial crisis and the bailouts that followed,” said Paige Aarhus, director of DL News, a website specializing in crypto and decentralized finance, the industry’s financial services arm. “Bitcoin was seen as a solution to enduring, endemic corruption in the financial system. Look at wage growth statistics, or home ownership statistics for millennials and Gen Z, and it becomes easier to understand crypto’s appeal.”
Aarhus said that one day the technology that underpins crypto currencies may be a part of our everyday life in ways we won’t even notice.
Crypto transactions are recorded on a blockchain, a public digital ledger designed to make them transparent and immutable. The faith that believers had in cryptocurrency was badly shaken, however, by the series of disasters last year.
The immediate reason for Terra Luna’s collapse was that the crypto asset Luna was tied to a so-called stablecoin, TerraUSD, that proved less stable than expected. Most stablecoins are pegged to a traditional currency such as the U.S. dollar, but TerraUSD was not.
The crash brought down a crypto hedge fund, Three Arrows Capital, whose holding in Luna, reportedly worth $500 million, was suddenly worthless.
At the end of 2020, Three Arrows Capital had reported assets of $2.6 billion, with $1.9 billion in liabilities. But as its creditors started to call in their loans in the wake of Terra Luna, it was unable to meet their demands. Three Arrows Capital was so big that its failure had repercussions throughout the crypto market. But there was worse to come.
Duping investors in digital currency
In what would turn out to be a deeply ironic statement, Sam Bankman-Fried, the head of the second largest crypto trading exchange, FTX, was quoted as hinting at malpractice.
“We suspect that Three Arrows attempted to pledge some pieces of collateral to many people at once,” he told New York Magazine in an article published 15 August 2022.
He went on: “I would be pretty surprised if that was the entire extent of misrepresentations here … I strongly suspect they made more.”
The founders of Three Arrows Capital, Su Zhu and Kyle Davies, had by then gone into hiding. So did the founder of Terra Luna, Do Kwon, after a court in South Korea issued a warrant for his arrest on 15 September.
Less than two months later, on 11 November, FTX — a company formerly worth $32 billion — also collapsed after major creditors sold stakes in the company. The run was set off by media reports that Bankman-Fried and his partners had been transferring vast amounts from FTX to a sister company, Alameda Research.
Bankman-Fried, said to be the 60th richest person in the world with a personal fortune of more than $10 billion, was wiped out.
On 12 December, he was arrested at his home in the Bahamas and later extradited to the United States, where he was charged on multiple counts including fraud and money laundering.
“The crypto industry right now looks a little ridiculous; an outrageous spectacle filled with thieves and conmen,” Aarhus said.
It needs to become more serious, professionalise itself and accept some level of regulation, if it ever hopes to challenge, or even integrate with, the existing financial system. “It must behave less like a group of insane children,” she said.
The crypto debacle has an important lesson for journalists too. Before his trading empire failed, the 30-year-old Bankman-Fried was widely regarded as a financial genius. Named by Time magazine as one of the 100 most influential people in the world in 2022, his opinions were sought by the most respected media. Part of his aura was that he was an important donor to the Democratic Party in the United States.
Second memo to aspiring journalists: perhaps the most important quality in a reporter is scepticism.
questions to consider:
- What makes digital currency different from traditional money?
- How could a collapse in the price of cryptocurrency affect the wider economy?
- If you had some savings, would you invest it in cryptocurrency? Why or why not?
Robert Holloway had a long career at Agence France-Presse as a journalist and editor before becoming director of the AFP Foundation, the international media training arm of the global news agency. A British-born French citizen, he joined AFP in 1988 and served as Sydney bureau chief, foreign editor, head of the English desk in Paris, United Nations correspondent in New York, deputy managing editor and acting editor in chief.