What this year has taught us in cryptocurrency

At various times during 2022 — especially since the collapse of the terra/luna ecosystem in May and then the FTX stock market in November — people have suggested to me that I embark on some sort of virtual victory lap for calling out, over several years, the seething pile of horse manure that is crypto.

And I guess I feel a certain sense of vindication in seeing the market start to implode, after standing up to the many crypto brethren who told me to “have fun staying poor”. But I hesitated to write “I told you so,” because I’m not sure if I actually did.

In April, I explained why I still refuse to take crypto seriously despite many supposedly serious people doing so. (The market has since more than halved.) In May, I made a moral case against cryptocurrency, arguing that it’s not just “harmless entertainment” for the many who can’t afford it. (FTX lost about $8 billion, ruining the lives of many of its customers.) And last year, I argued that NFTs are not the future of art or asset ownership, just the latest get-rich-quick scheme in crypto. (These days, the only person who thinks they’re cool is Donald Trump.)

But I’ve never called a market top – given that the whole thing is backed by sheer belief, it always seemed like a fool’s errand – and I certainly didn’t predict exactly how it would start to unravel. In many ways, I myself have been shocked by what has happened in the crypto world over the past year. It proved more shameless, dishonest, interconnected and fantasy-based than even its fiercest critics could have imagined.

So what, specifically, have we learned from all this?

First, the entire ecosystem was backed by much more influence than anyone could have imagined — and it was lending in real money, not just the magical strings of 1s and 0s that make up crypto tokens. This meant that when interest rates started rising from the near-zero level from which the entire market was born, and as cryptocurrency prices fell, many platforms — like Celsius and Voyager — were simply wiped out after billion-dollar holes appeared in their balance sheets. Turns out you need real assets to cover real liabilities (OK yes, we knew this part).

Second, the idea that the crypto world is decentralized was dismissed once and for all this year. We already knew that the vast majority of crypto activity takes place on highly centralized exchanges and that power and wealth in crypto is even more concentrated than in traditional finance. But 2022 was the year we learned the extent to which Big Crypto was a real thing: a cartel of interconnected players from exchanges, stablecoin companies, and crypto-networks working together via group chats — one Signal’s chat was reportedly called “exchange coordination” and it included executives from FTX, Binance and Tether.

Third, the economy of the crypto market can be a pyramid or Ponzi structure, but it is also circular. Not only did crypto companies count their worthless tokens as money, but so did those of others. As Martin Walker of the Center for Evidence-Based Management and a long-time crypto critic tells me, “their books are full of nonsense from them and their friends,” and when one of them explodes, “whole parts of the industry can disappear very quickly.”

Fourth, the collapse of so many crypto exchanges and platforms has allowed us to see up close for the first time the utter lawlessness that crypto fosters. Freed from the burdensome yoke of regulation that the non-crypto world has to deal with, the likes of FTX were free to do as they pleased, allegedly misappropriating billions of dollars of client funds and perpetrating fraud on a massive scale. “My big takeaway from this year is that we saw inside the black boxes, and it was even scarier. . . than we expected,” software engineer and crypto critic Stephen Diehl tells me.

During an interview for an FT event last month, I asked Charles Hoskinson, founder of the Cardano crypto token, if it was possible for crypto to crash to zero. No, he said – not surprisingly, but his reason startled me: “At this point it’s actually a religion.” He, the crypto-prophet, seemed to be saying the silent part out loud.

This is the last thing I learned about cryptocurrency this year: it has a strange resilience. The market and many of the biggest platforms may have collapsed, and the prophets and core tenets of this quasi-religion may have been proven false. But many people are still willing to suspend disbelief, clinging to the hope that one day their miracle internet money might continue its trajectory to the moon.

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