The collapse of the cryptocurrency markets over the last year has come as a shock to many individuals, including myself, who were driven to cryptocurrencies in the hope of improving or replacing an antiquated, exclusive, and exploitative global financial system.
To be clear, technology did not play a major role in the majority of the significant financial blow to investors.
For the Bitcoin blockchain, for instance, none of the controversies from the previous year is relevant. It continuously adds a block of transactions to its ever-expanding ledger every ten minutes. It serves as a reminder that systems for intermediary-free value exchange that are impermeable to interference from any one person or entity are still being created by the vast, decentralized networks of computers running Bitcoin, Ethereum, and other permissionless blockchain protocols.
1. Cryptocurrency does not exist in a free market.
It’s simple to forget that much higher losses struck cryptocurrency markets in the opening months of the year because the Federal Reserve was raising interest rates, rather than a crypto-endemic scandal, given all the attention the collapse of FTX in November garnered. This stopped an overabundance of money from streaming into speculative assets worldwide, including cryptocurrency. The larger environment is important.
2. Excessive leverage invariably results in contagion.
There are several examples of the domino effect, which occurs when the failure of one crypto institution swiftly spreads to another. It was present throughout the 1997 Asian financial crisis, the Long-Term Capital Management failure in 1998, the subprime mortgage crisis in 2008, as well as several other similar events in financial history. They all shared the same traits: an excessive buildup of loans to speculators was fuelled by an unduly bullish conviction in the rising trend of financial assets. When those assumptions turned out to be false, the stampede for the door revealed a network of creditors and debtors that were reliant on one another and pulled one other down together. Despite the decentralized structure of the underlying cryptocurrency, crypto speculation was never going to be exempt from this.
3. DeFi is robust, but it requires ongoing technical and economic audits.
FTX, Celsius Network, Voyager Digital, Three Arrows Capital, and Genesis were among the high-profile bankruptcies in 2022 that featured custody-holding CeFi (centralized finance) businesses that placed client funds at risk. This has energized proponents of DeFi (decentralized finance), who correctly point out that the reason the most resilient decentralized market-making and exchange systems have endured is that they do not have a reliable middleman that can be used for such nefarious purposes.
4. A reminder that cryptocurrency cannot be supported by “number go up”
We should have all been asking more challenging questions in 2020 and 2021, when social media-driven meme coins were making young people millionaires overnight, DeFi projects were offering yields unheard of elsewhere in the world, and institutional and retail investment drove the market capitalization of cryptocurrencies up by a factor of 15 to almost $3 trillion. What’s behind all of this should have been the most crucial question.
We are left with nothing more than supposition for the sake of speculating when we peel back the layers of interconnecting processes and the explanations for the returns they were promised. Most of that was constructed based on predictions that “numbers go up” in momentum trading. It’s time to return to the fundamentals and look for the real world.
5. Crypto requires knowledgeable, unbiased, and aggressive press.
Yes, this one is self-serving, but 2022 shows that this sector does require a strong “Fourth Estate” to keep those involved in it responsible. Blockchains without permission should be considered public commodities, much like the air we breathe, the water we drink, or the roads we travel on. They need to be treated as such, which necessitates openness (balanced with a respect for individual privacy). There aren’t enough professional-managed, crypto-savvy, and independence-protected journalists covering this, to be honest.
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