It’s been a brutal year for cryptocurrencies.
Even before the dramatic collapse of trading platform FTX last month, the price of bitcoin had fallen significantly in 2022 — a result of rising interest rates, its increasing correlation with failing tech stocks, and volatility stemming from other parts of the crypto ecosystem. .
After hitting an all-time high of $64,400 in November 2021, these moves pushed bitcoin’s price down to as low as $20,000 by this fall.
Then FTX, one of the most famous crypto exchanges in the world, melted down in November when allegations of embezzlement of client funds started flying. Last week, a federal judge in New York ordered FTX founder Sam Bankman-Fried released on $250 million bail. He will be under house arrest at his parents’ home in Palo Alto, California while awaiting trial.
The price of bitcoin fell further as the FTX drama unfolded. But not only did its price not drop to zero, it settled at around $17,000 and held around that point for over a month. Even with this year’s roller coaster ride, if you had bought one bitcoin at the start of the Covid-19 pandemic, in March 2020, you would still have made about $11,000.
While it’s still very early in cryptocurrency’s next chapter, there are plenty of optimists who insist that recent events are just another of the ecosystem’s occasional faints.
“The problems we see in this space are caused by individuals and institutions that have made mistakes or taken too much risk, or worse,” said Daniel Stabile, a partner at the law firm Winston and Strawn and co-chairman of the firm’s digital assets and blockchain technology group.
Experts say it’s critical that nothing that happens in the crypto market in 2022 undermines the inherent value of blockchain. It is a distributed, peer-to-peer network that processes bitcoin transactions and which technologists see as the key innovation of cryptocurrency.
While they allow users to easily buy and sell cryptocurrencies, centralized exchanges like FTX go against the spirit of cryptocurrency by relying on a centralized body, experts say.
True blockchain-based products, on the other hand, empower end users by giving them control over their transactions. Although most consumers will continue to rely on mainstream financial products, a growing number of users believe that such solutions are inherently less secure and more expensive than those based on blockchain technologies.
It doesn’t do anything to question the strength of the technology itself,” Stabile said. “While this was a shock to the market, many people in the space remain confident in the future of blockchain technology.”
Among the blockchain’s staunch believers: a Goldman Sachs executive. In a recent Wall Street Journal op-ed, David Solomon said he still believes in the promise that an encrypted database system can disrupt finance. For example, he said, individual investors could own and trade digital shares — or “tokens” — of real estate. Blockchains also enable faster settlement of complex financial instruments, he said.
“Blockchain technologies such as peer-to-peer payments and the tokenization of traditional assets are changing corporations, from how they raise money to how investors trade stocks,” Solomon wrote. “This has far-reaching implications for the global economy.”
In other words: the same technology that allows people to buy and sell bitcoins could one day change the way people buy and sell everything else.
However, recent events have made many pause and consider that there are few recognizably successful blockchain-based projects to date other than those solely focused on cryptocurrency trading.
For most people, the concept of blockchain technology is still difficult to grasp, said Avivah Litan, senior vice president analyst at technology consultancy Gartner. She compared the evolution of blockchain to the advent of email, which more easily evolved into a consumer-facing product, like the early days when households accessed email through Internet service providers like AOL.
To that end, some vendors now avoid using the term “blockchain” altogether, she said.
Indeed, there have been two major blockchain meltdowns in the last two months alone. First, the Australian Securities Exchange canceled a project designed to replace its outdated clearinghouse system with a blockchain-based system. And another attempt, called Tradelens, by global shipping giant Maersk in collaboration with IBM, which aimed to put its supply chain management system on the blockchain, failed.
“The first generation of these projects simply cost too much money, and many were too broad in scope,” Litan wrote in a Dec. 2 blog post.
Barley seed monitoring
Still, Litan said, there are individual cases of crypto- and blockchain-related projects springing up around the world. She highlighted the Indian state of Jharkhand, which is using blockchain to track and trace seed distribution, and a project by AB InBeva, the beverage maker behind Budweiser and Michelob beer, which is using blockchain to track and trace barley stocks.
Both of these projects are led by Belgium-based technology group Settlemint. Its CEO, Matthew Van Niekerk, acknowledged that it will be easier to implement blockchain-based use cases in areas where there is no existing system or in developing countries, where financial regulations may be lax.
“In the developed world, we have systems that are already working,” Van Niekerk said.
But the fundamental ideas that make blockchain attractive, such as the ability to prove ownership of any asset — including digital — or verify information without needing to trust a third party, should have universal appeal, Van Niekerk said.
It’s simply a matter of creating the right apps that engage users. Van Niekerk estimates that nearly a million farmers have now signed up to the seed tracking platform in India, almost none of whom are technologically sophisticated, he said.
Blockchain-based solutions could challenge large, developed world processes in the long term, said Gil Luria, director of institutional equity research at financial group DA Davidson. He said stock trading, buying and selling real estate, and borrowing and lending money remain ripe for disruption from blockchain technology.
These processes, he said, are full of intermediaries who may charge fees that he deems ultimately unnecessary. Real estate transactions, for example, require multiple third parties and can take 30 to 45 days to settle, if not longer.
“Even though we (buyer and seller) both agree on the price,” Luria said, “it could be done right now.”
Luria acknowledged that many attempts to reform these systems remain at the “sandstone” level — but “the promise is there,” he said.
David Abner, a former managing director at crypto group Gemini and now a director at Dabner Capital Partners, said he was reticent to judge the trajectory of bitcoin’s price. However, he suggested that its price could fall even further from current levels given that it has so far proven to be of less practical use than ethereum.
Although the price of that cryptocurrency also fell significantly earlier this year, it has remained stable at around $1,175 for the past six months.
“The Ethereum blockchain could prove to be a major infrastructure layer for the future of technology services,” Abner said. “The investment merit of bitcoin and its uses are not as clear to people as the use cases or potential use cases for ethereum. There has been more development of applications that are on the ethereum network as opposed to bitcoin.”
Gartner’s Litan said the key difference between bitcoin and ethereum is that the ethereum blockchain enables smart contracts, which allow users to program the conditions for using tokens.
“Bitcoin is good as an alternative to gold, and ethereum is good for programming and building applications,” Litan said, adding, “It’s a killer application for blockchain.”
Still, she said, the ability to program or even access ethereum’s applications remains elusive.
“Most mortals can’t use it—it’s too complicated,” she said.
The future of regulation
Ryan Hunter, CEO of Alphaverse Capital, an institutional asset manager focused exclusively on crypto, said his fund is betting on ethereum’s long-term viability, noting that its network has never crashed since it was created in 2015.
He said potential users of the cryptocurrency must prepare for a steep learning curve going forward, as it ultimately involves trusting yourself to be in charge of your assets. The philosophy, known as “not your keys, not your coins,” would save many the grief of putting their assets in the hands of a centralized exchange that eventually failed, like FTX.
Others, like Davidson’s Luria, believe the crypto ecosystem won’t truly mature until US regulations are clarified. While the initial push for cryptocurrency may have been to conduct transactions outside of any formal legal restrictions, “that’s not the world we live in,” Luria said.
While there has been debate over whether existing regulations were adequate to stop the alleged fraud that occurred on FTX, it is in the long-term interest of crypto builders to accept further regulations, Winston and Strawn’s Stabile said.
A lack of regulatory certainty — such as whether cryptocurrencies should be treated as stocks or commodities — likely prevented the creation of new, revolutionary applications, he said.
“It’s causing growth companies in this space to not enter the U.S. market,” Stabile said. “Who knows how many jobs could have developed here. But entrepreneurs felt the risk was too much to bear. So that’s a very important thing that regulators and legislators need to clarify.”
Groundwork on building crypto applications continues, however, Luria said.
“This idea of decentralizing the financial system to put more power in the hands of the users and less in the middle men and governments? That will continue to be plausible,” he said.
“It doesn’t change because people lost money.”