 The conviction of Sam Bankman-Fried, founder of the crypto exchange FTX, for fraud and money laundering in early November appears to have drawn a line under what has been a torrid year-and-a-half for digital currencies. Â
Aside from the collapse of FTX a year ago, the market has had to contend with the failure of Terra, then the world’s third largest cryptocurrency, in May last year, a near-constant question mark and government investigations over the stability of Binance, the world’s largest crypto exchange, and the meltdown of cryptocurrency lending platform Celsius in June. Â
After hitting a low of a little over $13,300 in December 2022, Bitcoin, the oldest and most popular digital currency, was trading back up to just over $29,000 by the following November. Â
A bellwether for the industry (which has followed suit), the currency has recovered all of its losses made since Terra’s downfall. Â
With one chapter closing, a new one is opening. Here are four thoughts on what this means for the market and how it will now evolve.
The price of Bitcoin has been rising steadily since the summer. The highs that have been seen over the past week are not a dead cat bounce; instead, it has made the outlook for the future of crypto and digital currencies much clearer. Â
A year ago, I suggested that one of the effects of the FTX scandal would be that the market would be forced to clean itself up and this is exactly what has been happening.Â
At the same time, the market has long been plagued by so-called “irrational investors” – sentiment-driven speculators driven by fear, greed, or herd mentality – and although I wouldn’t say that the market has been cleared of all of them, their influence is much smaller than it used to be.
Bitcoin, Solana, Ethereum 2.0 and other cryptocurrencies have begun to evolve into real investment opportunities. Â
This is why asset managers like BlackRock and Franklin Templeton are currently in talks to launch Bitcoin exchange-traded funds (ETF) and the US regulator, the Securities and Exchange Commission, is expected to approve crypto-currency-backed exchange-traded funds in the new year.Â
For investors, cryptocurrencies have technical characteristics that make them similar to investments like gold acting as a hedge against inflation as well as being a good portfolio diversifier.
Crypto exchanges are going to vanish and are losing their credibility. Â
It is important to differentiate crypto and digital currencies from the exchanges. The status of the former has been jeopardized because of the scandals that have surrounded the latter. Â
“For investors, cryptocurrencies have technical characteristics that make them similar to investments like gold acting as a hedge against inflation as well as being a good portfolio diversifier.”
Companies like FTX and Binance have not operated within the blockchain itself. They are exchanges that simply use blockchain to trade currencies. Â
What happens is that if someone wants to trade, they need to transfer the ownership of their Bitcoin to the exchange. Conventionally that doesn’t happen with financial assets where ownership is maintained and someone trades on their behalf.Â
The issue that brought FTX down was that it was trading with its own cryptocurrency. That is why, when the company went bankrupt, it owed billions to its millions of creditors. Â
On the other hand, if Bank of America Asset Management were to go bankrupt, for example, people would not lose their investments.Â
The way the crypto exchanges have worked should not be confused with the blockchain technology itself which is extremely well proven. The asset managers that plan to launch cryptocurrency ETFs next year will invest directly in cryptocurrencies themselves.Â
Five years ago, cryptocurrencies like Ethereum 2.0 or Bitcoin were seen as potential replacements for currencies like the dollar or the euro. This kind of reaction to the traditional monetary system is not going to happen because central banks themselves have been developing their own digital currencies – commonly called central bank digital currencies (CBDC). Â
Different countries are at different stages of development. The People’s Bank of China, for example, has been trialing the digital yuan in Chinese cities since 2020; in September last year, the central banks of Sweden and Norway teamed up with the Bank for International Settlements (BIS) to explore how CBDCs could be used for international retail and remittance payments; and over the past few weeks, the European Central Bank has said that it will move onto the preparation phase of the digital euro project while the Swiss National Bank has indicated that it will start a pilot project for its digital currency with financial institutions in December. Â
This is a clear direction of travel. Over the next few years, we might not see digital currencies used by individuals, but they will certainly be used by banks.Â
27 November 2023 • by Michael Skapinker in Finance
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