There’s never a dull moment in the cryptocurrency world. Hardly a week goes by without a cryptocurrency, broker or trading platform’s sensational crash or the saga of a multi-million fraud. The latest toppled tumbling domino in the cryptosphere is Genesis, whose fall leaves some 100,000 creditors high and dry.
Last year was dismal for crypto fans – the overall market saw $2 trillion wiped out (taking its overall market value to $1 trillion) and popular tokens lost considerable value, Bitcoin more than 60%. According to one survey, the percentage of Americans who think putting money into digital currencies is “highly risky” rose 15% in 2022, year-on-year, to 60%.
One US citizen who saw the light was Peter Thiel, the billionaire co-founder of PayPal. Despite saying last year “we’re at the end of the fiat money regime” and forecasting that Bitcoin’s price (then around $44,000) could increase by a factor of 100, Thiel’s venture capital firm, Founders Fund, which made its first investment in Bitcoin in 2014, sold almost all its stake in cryptocurrency by the end of March 2022. That wasn’t exactly a ringing endorsement of the ‘currency’ bit of cryptocurrency. Thiel got out before the crash; Bitcoin’s price rose from under $100 in 2013 to an all-time high of more than $65,000 by November 2021. Many others did not; that $2 trillion loss was shouldered by someone.
Sam was not alone
Sam Bankman-Fried, co-founder of the cryptocurrency exchange FTX, which collapsed last November owing creditors more than $3 billion, has come to personify all the things about cryptocurrency that some resent and distrust. His dishevelled appearance, his cavalier attitude, his apparently weak grasp on the truth, all confirm for many what they regard as the innate nature of cryptocurrency – it’s a scam run by flaky people.
Yet last year’s crypto rot didn’t start with FTX. Several crypto companies – Celsius, Voyager Digital and Three Arrows Capital – all went into bankruptcy before FTX. The LUNA digital token, once a top 10 cryptocurrency by market capitalization, lost virtually all its value in just one week in early 2022, and the collapse of the network behind it cost investors more than $60 billion.
One of the biggest problems for the cryptocurrency sector is the volume of cross-lending at its heart. Genesis collapsed owing more than $3 billion; Genesis is the biggest unsecured creditor of FTX. When FTX fell apart Genesis was living on borrowed time; it halted customer withdrawals, and it owes some $3.6 billion to its top 50 creditors.
Once upon a time to be a bankrupt was to be covered in shame. No longer. The founders of Three Arrows Capital, the crypto hedge fund that collapsed last year after being blown up by margin calls, are up and running again. Zombie-like, they are aiming to raise $25 million (by the end of February) to start a new crypto exchange to be called GTX. The pitchbook for GTX brazenly tells potential investors that its purpose is to get holders of claims against FTX to transfer those claims to GTX “and receive immediate credit in a [newly created] token called USDG”. Critics of cryptocurrencies sometimes accuse them of being Ponzi schemes; actually the crypto world is more like a financial Alice in Wonderland.
Hope springs eternal
The hopes of Satoshi Nakamoto (whoever that may be), the supposed creator of Bitcoin, that his model for electronic cash (cryptocurrency) would avoid the “inherent weaknesses of the trust based” version has clearly gone awry. Bankman-Fried’s biggest ‘crime’ is that he has chipped a bit more off that social pillar called trust. Trust is as necessary (at some level) for cryptocurrencies as for fiat money or indeed any means of exchange.
Yet although trust seems to have fled the cryptocurrency world the leading digital tokens have recovered some of 2022’s lost ground. Bitcoin has risen more than 30% year-to-date, briefly climbing above $23,000. In one week this month $40 billion went into Bitcoin. Cryptocurrencies keep mushrooming, with almost 22,000 different ones now being available.
It’s clear that the cryptocurrency world is in the midst of a bifurcation. It is splitting into two; the leading tokens such as Bitcoin and Ethereum will survive like cockroaches because they serve a purpose, whereas all the others will disappear like froth on a glass of beer, because they do not serve a purpose. The purpose of Bitcoin (apart from those who see it merely as a get-rich-quick scheme) is to provide a home for those who don’t want to be part of a financial system which in 2007/2008 demonstrated little regard for trust or public welfare.
There is no point in getting angry about the likes of FTX or GTX; the technology which makes cryptocurrencies possible cannot be disinvented, and the fundamental prompt for people shifting to cryptocurrencies – distrust of government control over money – is perfectly understandable. More alarming for society however is not the occasional fraud/incompetence wrought by private cryptocurrencies, but the relentless march of governments to co-opt the cryptocurrency technology, and roll out Central Bank Digital Currencies (CBDCs).
Gold provides the kind of defence against government control over money that cryptocurrencies attempt – plus the advantage (with Glint) that gold can now be used as money. Gold has its own ‘whales’ – buyers and sellers who take huge positions, mostly the central banks – but, unlike the majority of cryptocurrencies the international gold market is so big and so liquid that it is difficult to have a price-distorting effect, and large-scale positions generally cannot be kept a secret; the information leaks out. The workings of the gold market are often difficult to interpret – but they are not completely opaque, like those of crypto. Gold is security; Glint its key. And investors in gold are unlikely to see their holding disappear overnight.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
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