The only aspect of 2022 in which crypto investors can rejoice is that it is almost gone. A series of scandals, bankruptcies, and outrage in Washington over the industry’s reckless, if not fraudulent, behavior have forced it to struggle for its very existence. Since late 2021, Bitcoin has decreased by 67%. One of the largest financial bubbles to have burst, the token market, has fallen by $2 trillion. For sure, it’s time for the crypto ice age
The slaughter might go on. FTX’s bankruptcy and Sam Bankman-criminal Fried’s prosecution may continue to impact well into 2023. Due to exposure to FTX, many cryptocurrency companies have blocked customer deposits. Recently, Bitcoin has increased since inflation seems to be decreasing, boosting so-called risk assets. However, the macrodynamics that have been putting pressure on cryptocurrencies this year, such as higher interest rates and a smaller global money supply, aren’t going away.
Supporters of the industry claim that this is a temporary slump that will give way to a recovery that will reach new heights. In 2018, a “crypto winter” caused Bitcoin’s price to drop by more than 75% before rising by more than 2,000%.
After the fact, a bull case states that in a year, the industry’s dishonest players, dubious tokens, and dubious businesses will all have been exposed. Washington will implement broad regulations that will entice investors back in after being embarrassed and upset by FTX’s failure. U.S.-based exchanges and businesses, such as Coinbase Global (ticker: COIN), will succeed if regulation is more stringent by developing various revenue sources in institutional and retail services.
Proponents assert that blockchain technology will advance as well. These networks’ apps and services will demonstrate their value for international trade, digital asset rights, online gaming, and decentralized financial or DeFi services. According to its software regulations, Bitcoin will recover when its supply issue decreases, with another “halving” event set for March 2024.
Denelle Dixon, CEO of the Stellar Development Foundation, which backs a decentralized payments protocol, says it’s “so frustrating because nothing that transpired with FTX had anything to do with blockchain and cryptocurrency other than the fact that they happened to be crypto assets.”
But for this story to catch on, crypto must overcome significant obstacles. While some refer to the recent dip as another crypto winter, an ice age may be a more suitable metaphor.
One impending issue is reputational harm caused by FTX, which won’t be repaired very soon.
One of the largest scams in American history, according to Damian Williams, the U.S. attorney overseeing the prosecution of FTX. The Securities and Exchange Commission’s Gary Gensler described FTX as a “house of cards.” John Ray, the CEO of FTX who was in charge of managing the company’s bankruptcy, called it “old-fashioned embezzlement.” Bankman-Fried, currently detained in the Bahamas and seeking extradition to the United States, has asserted that he didn’t intentionally deceive anyone.
Even worse, FTX resulted from numerous crypto firms failing and leaving a trail of devastation. In 2022, large portions of the business fell apart, including the hedge fund Three Arrows Capital, the stablecoin Terra/Luna, and the crypto lenders Voyager Digital, Celsius Network, and BlockFi—the last three of which are now insolvent.
Cryptography’s interconnection has also shown to be troublesome. Genesis Global Trading, a premium brokerage, and lending firm halted withdrawals at its lending unit after FTX collapsed. As a result, the brokerage and lender Gemini decided to halt redemptions on its “earn” platform. Both businesses claim they plan to return to business as usual.
According to some critics, the entire industry is terminally broken and is similar to a pyramid marketing or Ponzi scheme.
Although it has developed into a compelling story, the claim that a legislative drive from Washington may suddenly save cryptocurrency has some flaws. The demise of FTX has fueled enthusiasm in Congress for creating significant investor and consumer protection laws. Bills to protect consumer funds at exchanges, classify some tokens as securities, and mandate that issuers of stablecoins—tokens pegged to the dollar—maintain 100% cash reserves and banklike insurance for the goods are just a few of the draft legislation that may be put to the vote in 2023.
The question of whether the CFTC, which is seen as far more friendly to the industry or the SEC, would ultimately regulate cryptocurrencies is also up for discussion.
In either case, the SEC is expected to keep policing the sector by accusing corporations of breaking the applicable securities rules. The agency has won over 100 lawsuits against cryptocurrency companies, winning almost all of them to date. If Congress doesn’t enact new rules, it has some initiatives that could lead to established case law-creating rules.
Tyler Gellasch, a former SEC lawyer and current executive director of Healthy Markets, a trade association for institutional investors, asserts that the SEC must ultimately launch aggressive enforcement actions and do its utmost to enforce the law.
The sector has a history of opposing laws and regulatory actions, even though it favors regulation in theory. Aspects of the new Internal Revenue Service tax reporting rules for individual transactions were attempted to be blocked. Industry associations disagreed with the Treasury Department’s classification of Tornado Cash as a criminally sanctioned entity, claiming that the government was creating a dangerous precedent by attempting to outlaw autonomous software code.
It’s critical, according to some industry insiders, to remember both what FTX was and wasn’t. It was primarily a foreign exchange that dealt with derivatives, an extremely tough market that differs much from the spot markets where most regular investors trade. According to Matt Hougan, a chief investment officer of Bitwise Asset Management, a cryptocurrency index fund and asset manager, the demise of FTX has no bearing on the benefits of blockchain technology, including the creation of “programmable money” and DeFi systems for trading, lending, and other services.
According to him, it doesn’t change how revolutionary cryptography is or might be as a new technology. He adds that FTX’s demise might hasten the adoption of crypto in the long run by introducing more regulation, “which is something that true believers in the crypto embrace.”
The Outlook for Bitcoin and Crypto Stocks
Bitcoin is the first market to monitor for signs of a comeback. The token, its biggest and most recognizable offering, is like the iPhone of cryptocurrency. Even while other blockchains and tokens, most notably Ethereum, have arisen, Bitcoin remains the industry standard, and its recovery will be required to increase revenue across exchanges and businesses established around it.
But Bitcoin has had a difficult year, partly because its justifications for existing have been attacked. The claim that it is a reliable store of value against the devaluation of fiat currencies has been undermined by its price collapse and a corresponding rise in inflation. The claim that governments cannot seize it has held up. However, many investors have Bitcoin through a brokerage, exchange, or loan site, many of which have stopped allowing withdrawals.
The case for owning bitcoin as an alternative asset has also been undermined by its increased vulnerability to macroeconomic influences. Over the past year, the relationship between bitcoin and stocks has tightened. For instance, the S&P 500 index fell 3.4% in a single day, while Bitcoin fell 4.6% after Federal Reserve Chairman Jerome Powell’s speech in August threatening to end inflation. On the other hand, it had lately risen due to indications of monetary easing.
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Hougan contends that once the macro situation normalizes, it will provide all risk assets, including cryptocurrency, an “enormous tailwind.” Cryptocurrency has enormous potential, he claims, as the money starts to flow back into risky investments.
There are currently no indications that it will ease as central banks worldwide continue to hike interest rates, albeit more slowly than they did early in 2022.
In light of this, the future of cryptocurrency stocks appears uncertain. For instance, Coinbase has demonstrated a strong correlation with Bitcoin; to attract more retail investors to the crypto ecosystem, open accounts, and engage in trading, the token must recover. The revenue of Coinbase has decreased as Bitcoin has lost momentum.
Bondholders of coinbase also seem pessimistic. Since FTX’s demise, the company’s debt obligations have dropped to below 60 cents on the dollar. A bond with a maturity date in June 2026 has a yield of 19%, which is considered distressed debt and an indication that bond owners are becoming more worried about default or a credit rating fall.
Requests for comment from Coinbase were not answered.
The network’s transaction-processing “miners” for bitcoin have also been attacked. Shares of Riot Blockchain (RIOT) and Marathon Digital Holdings (MARA) have both dropped more than 75%. Another miner, Core Scientific (CORZ), has warned of a potential bankruptcy and is currently traded as a penny stock.
Chris Brendler, a D.A. Davidson analyst who rates Marathon and Riot as Buy, contends that the industry shakeout will result in fewer miners competing for processing transactions on the network, increasing revenue for survivors like Marathon and Riot. They are now reporting significant losses: According to consensus projections, Marathon will lose $276 million this year, or $2.60 per share. Riot anticipates a $372 million loss or $2.82 per share.
According to some analysts, the regulatory risk may only grow, emphasizing the possibility that businesses could face penalties or be forced to cease operations if they are found to be breaking the law. According to Needham analyst John Todaro, “the worry is that new laws might be quite tight, prohibit some things, and severely influence crypto stocks.”
Will the technology someday serve as the foundation for a new class of digital assets that would include everything from stock trading to real estate transfers, online gaming, and international money transfers?
Blockchain networks, particularly Ethereum, are still undergoing a lot of growth. Other cryptos can be built on top of the network. It’s drawing the attention of programmers and developers, who utilize it for activities like producing nonfungible tokens, or NFTs, running DeFi protocols, and minting and transferring stablecoins. Since switching from its original “proof of work” transaction processing technology, Ethereum now uses one that reduces carbon emissions by 99%. Aside from Bitcoin, most other blockchains operate on networks that use little energy.
Hougan describes himself as “very bullish” on ether. According to him, the currency should gain from improvements to the Ethereum network and new software regulations that will control the rate of supply growth. Thanks to the most resilient third-party software development, the network is scaled for more uses.
Executives from Goldman Sachs Group (GS) stated following FTX’s collapse that they still believe blockchain technology has potential and intend to make investments there. Though the Department of Labor has objected, Fidelity Investments claims it is developing retail crypto brokerage services and intends to provide Bitcoin to 401(k) plan administrators.
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