Cryptocurrency has made many millionaires and even billionaires, but as the saying goes— easy come, easy go. Sam Bankman-Fried’s spectacular rise and fall epitomizes the fast moving and volatile world of cryptocurrency, but it also heralds major changes to the industry.
The collapse of Bankman-Fried’s FTX cryptocurrency exchange wiped out the savings and investments of thousands of retail investors, and the response by regulators and law enforcement is ongoing. What changes is this likely to bring? And how will it affect cryptocurrency as an investment class?
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The Rise and Fall of the (Not So) Wunderkind
Bankman-Fried rocketed from total obscurity to wealth and fame in the span of just a few years. At the peak of his wealth, he was ranked among the top 50 richest people in the United States and the top 100 worldwide, with a net worth of approximately $26 billion, making him the richest person under 30 in the world.
The problem was that this wealth and success didn’t have much substance. Most of his net worth was in FTT tokens, whose main appeal was giving holders discounts on the now defunct FTX. While FTT is still trading around $1, down from its peak of around $80 in 2021, Bankman-Fried will most likely have to forfeit most of his remaining assets.
The documents released in relation to the Bankman-Fried trial paint a stunning picture of incompetence and irresponsibility. The multi-billion dollar corporation did almost no record keeping, didn’t have an accounting department, and used QuickBooks to balance their budget. No safeguards were put in place to protect customer funds, which were used by Bankman-Fried to purchase real estate and make political contributions.
Crypto Goes on Trial
Critics think that all this is proof that cryptocurrency as a whole is no better than a giant ponzi scheme. The New York Times ran a headline about the trial which reads “Crypto goes on trial.”
In a way, this is a reckoning for the whole concept of cryptocurrency. But looking at history, every major wave of innovation had similar stories.
When wealth from trade started pouring into Europe during the Age of Sail, a giant speculative bubble formed around the South Sea Company, and then burst in 1720 wiping out the fortunes of many investors.
In the 1840s, the railroad mania struck, and again companies collapsed and investors were bankrupted. With the rise of the internet, the dotcom bubble brought yet another collapse.
There’s no denying that cryptocurrency is a dream for scammers and criminals, but it does have real, legitimate, and powerful uses. This usefulness is what drives the speculative mania and wild price swings.
The problems that cryptocurrency fixes— high-friction cross-border transactions, low confidence in national currencies, and censorship, among others— are not going away, so the collapse of FTX is not going to kill crypto.
And sometimes what doesn’t kill you makes you stronger.
The Upside of the Downside
The crash of FTX wreaked havoc on cryptocurrency markets. In the aftermath of the collapse, the total market capitalization of the already battered cryptocurrency market dropped by almost 25% from $1.1 trillion to $832 trillion.
Almost a year later, it’s looking like that might have been the bottom of the bear market. The market has recovered from the shock of the collapse, and has hovered between $1 trillion and $1.3 trillion for most of the year.
This relative stability is rebuilding confidence with spooked investors, and the ongoing trial could bring a number of other benefits to the market.
- More regulatory oversight. The collapse of FTX was a wakeup call for regulators. One of the interesting parts of the whole FTX story is that Bankman-Fried hired multiple former CFTC officials for the purpose of regulatory reform. This is bringing a lot of attention to regulatory issues, and more robust controls and safeguards are sure to result.
- Better transparency. One of the reasons things got as bad as they did at FTX was an extreme lack of transparency. In addition to increased regulatory oversight, it’s unlikely that investors will give a free hand to crypto entrepreneurs going forward. Investors may have been drunk from the lure of easy money during the boom phase, but now they’re being forced to sober up.
- Separating the wheat from the chaff. FTX was just one of a number of companies that went under during the “crypto winter.” BlockFi, Celcius Network, Luna, and Voyager Digital also all went under.
The companies that had sound and responsible corporate management are now being rewarded for it in the form of increased market share. This makes for an overall stronger crypto ecosystem. Survival of the fittest.
- More accountability. There’s no shortage of reckless tech bros in the cryptocurrency space. The Bankman-Fried trial is intended to send a message to them— mess around with other people’s money, and you could end up in jail. Going forward, entrepreneurs will be under pressure to behave more responsibly.
Growing Pains are Part of Growing Up
Far from an indictment of cryptocurrency, the Bankman-Fried trial is a sign that the industry is maturing. Investors, entrepreneurs, and regulators all learn a lot from fiascos like FTX, and this knowledge will help to improve the industry.
This is an inevitable part of cryptocurrency moving past its “wild west” days and becoming a core part of how we do business. Still, many questions remain.
Some believe that it’s important to keep regulations light to prevent US-based cryptocurrency companies from moving abroad, while others are more concerned with consumer protection. No matter what happens in terms of regulation, consumers will have more demands from digital asset service providers going forward, and executives will have to figure out how to deliver it.
This is not the first cycle like this; this seems to just be how cryptocurrency works. A boom cycle generates a speculative frenzy, followed by a collapse and many investors getting wiped out.
There is still room for further adoption and development of the technology, so for those who can figure out how to safely ride these waves, digital assets still have the potential to be a high-performing investment class over the long term.
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