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Will Cryptocurrency Survive?

Some bitcoins spilling out of a wallet

The volatility of cryptocurrency values over the last few years is nothing new. The ebb and flow of exchange values of various digital coins have been difficult to predict. But this has not prevented experts from rationalizing precisely why values rise and fall. Inevitably, when a cryptocurrency crash occurs, it will recover in the months to follow. But what happens when a recovery never comes? What if experts are wrong, and the future of digital assets aren’t the sure thing we thought they were? These questions about whether we’re destined for a cryptocurrency collapse are important ones. Especially given the recent demise of the cryptocurrency exchange, FTX.

On November 11th, cryptocurrency exchange FTX filed for bankruptcy. Over the course of about 9 days, the company worth billions of dollars effectively faded out of existence. Through a series of rapid-fire events, traders on the platform pulled their digital assets resulting in an $8 billion shortfall. And being unable to secure a buyer, a bailout or funding, FTX had little choice but to fold. As a result, the cryptocurrency crash sent ripples throughout the sector. And once again, many are questioning the merit of digital assets in general. It might just be that we’re witnessing a real cryptocurrency collapse that’s signaling its inevitable future.

“Had I been a bit more concentrated on what I was doing, I would have been able to be more thorough. That would have allowed me to catch what was going on on the risk side [of FTX].”- Sam Bankman-Fried, CEO of FTX

An Overview of the FTX Collapse

You may have not previously heard of Sam Bankman-Fried. But in finance circles, he has been compared to elites like Warren Buffett and John Pierpont Morgan. Only 30 years of age, Bankman-Fried launched FTX in 2019 as a cryptocurrency marketplace. The platform allowed traders to buy, sell and store cryptocurrency as well as leverage future values. Interestingly, this served Bankman-Fried well since it offered his other company, Almeda, an ideal place to trade. As a cryptocurrency trading firm, Almeda made billions by exploiting inefficiencies in Bitcoin markets. And within FTX, it thrived when other traders struggled. This wasn’t the ultimate reason for FTX’s demise, but it highlights notable conflicts of interest that existed.

(Bold has written extensively about crypto–dive into some of it here!)

In terms of the cryptocurrency collapse triggered by FTX’s failures, two events can be identified. The first involved Almeda’s large margin position in FTX. In essence, Almeda borrowed roughly $10 billion in funds from FTX, contributing to the subsequent shortfall. The second involved trader panic set off by the CEO of another cryptocurrency trading platform, Binance. Changpeng Zhao, who owned large amounts of FTT, a cryptocurrency created by FTX, announced a sell-off. The sell of FTT by Zhao triggered trader reactions to pull their FTX assets. And FTX was unable to cover these requests due to a lack of funds. This is what led to FTX’s collapse and a relative cryptocurrency crash throughout the market.

Notably, there were many red flags leading up to the latest cryptocurrency crash. For one, FTX had relocated from California, to Hong Kong, to eventually the Bahamas to escape regulatory oversight. These moves eventually allowed FTX to take on risker trading of digital assets including hedging on cryptocurrency futures. Also, Bankman-Fried’s own actions heralded an impending cryptocurrency collapse to come. Not only was he purchasing numerous smaller cryptocurrency companies, but he was trying to manage them all within limited staff. This as well as excessive spending on charities, political campaigns and stocks further drained value from FTX. In the end, there was little to show for his efforts.

“Cryptocurrency is a giant scam, although a complicated scam that uses technobabble, heterodox economics and populist anger to obfuscate its functioning. A pitch perfect scam for the post­-truth era of social media where trust in institutions and experts is at an all-time low.” – Stephen Diehl, Co-author of ‘Popping the Crypto Bubble’

The Future of Money or Simply a Ponzi Scheme?

The introduction of cryptocurrency years ago touted that it represented a new type of peer-to-peer payment system. Free of the need for banks and financial institutions, cryptocurrency traders could electronically exchange currency values with one another. There was no need for regulatory oversight as a result of this freedom. Likewise, its fixed supply was assumed that cryptocurrency was better able to be managed by market forces alone. But with each cryptocurrency crash, these assumptions do not appear to be valid. The most recent cryptocurrency collapse actually suggests the opposite. With some type of regulatory oversight and flexibility in supply, risk mounts and traders stand to lose. This is precisely what happened with FTX.

Some bitcoins lying on a screen
A cryptocurrency crash is never a good thing for investors, but sometimes market corrections are necessary for long-term survival.

The existing currencies in the world as well as their related financial institutions are here for a reason. More than a century of economic lessons were leveraged to create existing laws, regulations and oversight bodies. Likewise, the ability to alter monetary supply provides protections to consumers and traders. And most important, existing currencies are tied to objective values rather than blind faith. When a cryptocurrency crash occurs, it generally does so because traders have lost faith in its value. The cryptocurrency collapse linked to FTX occurred because Zhao’s sudden sell of FTT crypto undermined this faith. Without something more solid to define a cryptocurrency’s value, it’s not surprising that volatility followed.

The bottom line is that the current cryptocurrency crash is yet another bubble-bursting event. With a specific value, traders determine how much cryptocurrency is worth. When faith increases, the bubble expands, and cryptocurrency platforms like FTX do well. When faith is lost, the bubble bursts, and companies go bankrupt. And with each cryptocurrency collapse, some innocent people get hurt, including those with their pensions tied to the FTX platform. In short, cryptocurrency platforms like FTX and trading firms like Almeda are just part of another Ponzi scheme. When inputs no longer cover outputs, the pyramid implodes. This may not mean that digital assets are doomed. Blockchain technology has many advantages. But in terms of digital trading platforms today, a periodic cryptocurrency crash can be expected.

 

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