It has been a brutal year for cryptocurrencies.
Even before the dramatic collapse of the FTX trading platform last month, the bitcoin price had fallen substantially by 2022. the product of rising interest rates, their increasing correlation with battered tech stocks, and instability emanating from other corners of the crypto ecosystem.
After reaching an all-time high of $64,400 in November 2021, these swings for this fall had sent the bitcoin price to a low of $20,000.
Then FTX, one of the most high-profile crypto exchanges in the world, tanked in November as allegations of embezzlement of client funds began to surface. 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 he awaits trial.
The bitcoin price fell further as the FTX drama unfolded. But not only has its price not dropped to zero, it has settled at around $17,000 and has been holding steady at that point for over a month now. Even with this year’s roller coaster, if you had bought a bitcoin at the start of the Covid-19 pandemic, in March 2020, you would have made around $11,000.
While it is still very early days into the next chapter for cryptocurrencies, there are many optimists who insist that recent events simply amount to another one of the ecosystem’s periodic blackouts.
«The problems we’ve been seeing in this space have been caused by people and institutions making mistakes or taking too many risks, or worse,» said Daniel Stabile, a partner at the law firm Winston and Strawn and co-chairman of the group. of digital assets and blockchain technology of the company.
Critically, experts say, nothing that has happened in the crypto market in 2022 undermines the inherent value of the blockchain. That is the distributed peer-to-peer network that processes bitcoin transactions. and which technologists see as the core innovation of crypto.
Although they allow users to easily buy and sell cryptocurrency, centralized exchanges like FTX go against the spirit of cryptocurrency by relying on a centralized authority, experts say.
True blockchain-based products, on the other hand, empower end users by giving them control over their transactions. While most consumers will continue to trust conventional 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 does nothing to challenge the power of the technology itself,” Stabile said. “So while this has been a shock to the market, many people in the space remain optimistic about the future of blockchain technology.”
Among ongoing blockchain believers: the CEO of Goldman Sachs. In a recent Wall Street Journal op-edDavid Solomon said he still believes the promise that the encrypted database system can disrupt finances. For example, he said, individual investors could own and trade digital shares, or «tokens,» of real estate. Blockchains also allow for faster settlement of complex financial instruments, he said.
“Blockchain technologies such as peer-to-peer payments and traditional asset tokenization are changing corporations, from how they raise money to how investors trade shares,” 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.
Still, recent events have caused many to pause and reflect that there are few identifiably successful blockchain-based projects left as of yet beyond those that focus exclusively on cryptocurrency trading.
For most people, the concept of blockchain technology is still difficult to grasp, said Avivah Litan, distinguished vice president analyst at technology consultancy Gartner. She compared the evolution of the blockchain to the advent of email, which became more easily a consumer-facing product, much like in the early days when households accessed email through Internet service providers like AOL. .
To that end, some providers now avoid using the term «blockchain» altogether, he said.
In fact, the last two months alone have seen two major blockchain failures. First, the Australian Stock Exchange canceled a project designed to replace your outdated clearinghouse system with a blockchain based system. And another effort, called Tradelens, by global shipping giant Maersk in collaboration with IBM, whose goal was to put its supply chain management system on the blockchain, was sunk.
“The first generation of these projects simply cost too much money and many were too broad in scope,” Litan wrote in a December 2 blog post.
Barley Seed Tracking
Still, Litan said, there are individual cases of crypto and blockchain-related projects springing up around the world. He highlighted the Indian state of Jharkhand using blockchain to track and trace seed distribution, and a project by AB InBev, the beverage maker behind Budweiser and Michelob beers, using blockchain to track and trace barley supplies.
Both projects are spearheaded 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 no system exists or in the developing world, where financial regulations may be weak.
«In the developed world, we have systems that already work,» Van Niekerk said.
But the core ideas that make blockchain appealing, such as the ability to prove ownership of any asset, including a digital one, or verify information without having to trust a third party, should have universal appeal, Van Niekerk said.
It’s simply a matter of creating the right apps that appeal to users. Van Niekerk estimates that almost 1 million farmers have signed up for the seed tracking platform in India, almost none of whom are technologically sophisticated, he said.
Blockchain-based solutions could challenge the big processes of the developed world in the long run, said Gil Luria, director of institutional capital research at financial group DA Davidson. He said that stock trading, real estate buying and selling, and money lending and lending remain ripe for disruption from blockchain technology.
These processes, he said, are full of intermediaries that he may charge fees that he believes are ultimately unnecessary. Real estate transactions, for example, require multiple third parties and can take 30-45 days to settle, if not longer.
“Although we (buyer and seller) agree on the price,” Luria said, “it could be done instantly.”
Luria acknowledged that many attempts to reform these systems remain at the «sandbox» level, but «the promise is there,» he said.
David Abner, a former executive at cryptocurrency group Gemini and now a director at Dabner Capital Partners, said he reserves judgment about bitcoin’s price trajectory. However, he suggested that its price could fall further from current levels as it has so far proven less useful than ethereum.
While the price of that cryptocurrency also declined sharply earlier this year, it has been holding steady at around $1,175 for the past six months.
«The ethereum blockchain could become this important infrastructure layer for the future of technology services,» Abner said. «The investment merit of bitcoin and its use case is not as clear to people as the use cases or potential use cases of ethereum. There has been more development of applications that are on the ethereum network rather than on 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 how a token will be used.
«Bitcoin is a good alternative to gold, and Ethereum is good for programming and building applications,» Litan said, adding, «It’s the best application for blockchain.»
Still, he said, the ability to program or even access ethereum applications remains out of reach.
«Most mortals can’t use it, it’s too complicated,» he said.
Future of regulation
Ryan Hunter, chief executive of Alphaverse Capital, an institutional asset manager focused solely on crypto, said his fund is betting on ethereum’s long-term viability, noting that his network has never gone down since it was created in 2015.
He said potential crypto users should prepare for a steep learning curve going forward, because it ultimately involves trusting only yourself to be in charge of your assets. The philosophy, known as “not your keys, not your coins,” would have spared many the pain of putting assets in the hands of a centralized exchange that ultimately failed, like FTX.
Others, like Davidson’s Luria, believe that the crypto ecosystem will not truly mature until US regulations are clarified. While an initial impetus for the advent of cryptocurrencies may have been to transact outside of any formal legal restrictions, «that’s not the world we live in,» Luria said.
While a debate has erupted over whether existing regulations were adequate to stop the alleged fraud that occurred at FTX, it is in the long-term interest of cryptocurrency developers to accept more regulations, Strawn’s Winston and Stabile said.
The lack of regulatory certainty, such as whether cryptocurrencies should be treated like stocks or commodities, has likely prevented new and innovative applications from being created, he said.
“It’s keeping startups in this space from entering the US market,” Stabile said. “Who knows how many businesses could have been developed here. But the businessmen thought the risk was too great to bear. So that’s a very important thing for regulators and legislators to clarify.»
However, the underlying work to create cryptographic applications continues, Luria said.
«This idea of decentralizing the financial system to put more power in the hands of the users and less power in the middle people and governments? That will continue to be compelling,» he said.
«It doesn’t change because people have lost money.»