If 2022 was crypto’s annus horribilis, then 2023 isn’t shaping up to be much better. After a record-high $3trn market cap in November 2021, this figure now lies at around $1.17trn. BlackRock’s plans to launch a Bitcoin-backed fund have, in the past week, helped push the world’s largest cryptocurrency to its highest price in a year, exceeding $30,000, but that value remains less than half its all-time high of $68,789. This brief rally, moreover, threatens to be stunted by rising interest rates, enduring inflation, and a widespread regulatory crackdown.
This process has been accelerated, in part, by the crumbling authority of crypto’s biggest exchanges. Last November saw the spectacular collapse of FTX, with founder Sam Bankman-Fried eventually charged with enough felonies to potentially consign him to prison for the rest of his life. The world’s largest crypto exchange, Binance, continues to stave off long-standing rumours of its imminent collapse after the US Securities and Exchange Commission accused it of mishandling customer funds and lying to investors about its operations. The company has fervently denied the allegations, calling itself an “easy target now caught in the middle of a US regulatory tug-of-war.”
Does this all mean that crypto has finally entered its eternal winter? David Gerard, an author and long-time crypto sceptic, is far from mealy-mouthed on the subject. “I think crypto is largely screwed,” he says. “Regulators hate it. Banks hate it. People who have interest in economic stability hate it.”
Others, however, are still holding onto hope. “I do not subscribe to the view that the crypto industry is dead – we’ve heard that many, many times over the last decade,” says Sandra Ro, CEO of the Global Blockchain Business Council, an industry association for the blockchain technology and digital assets community. “All markets are pretty much having difficulties these days. But the reality is that the culture of innovation and collaboration continues.”
Crypto is facing tougher regulation
For government financial institutions like the SEC, FTX’s collapse might have finally underscored the need for comprehensive restrictions, but Gerard believes that regulation was always destined to catch up with crypto. “If you touch real money, you’re eventually going to have to follow the rules of real money,” he says. “But the crypto industry never got that, because it was founded in despising the concept of regulation and laws, so they tend to be scofflaws by nature.” Gerard, plainly, regards this outlook as an inherent flaw in the system. “Some regulations are dumb and bad, but mostly they’re there for good reasons.”
Indeed, comprehensive regulation might undercut crypto’s fundamental appeal. “The primary drivers of cryptocurrencies, such as decentralisation and the absence of concentrated regulatory authority, are incompatible with the idea of centralised regulation,” says crypto entrepreneur and author Evgen Verzun.
Others, however, are more optimistic. “Although there may be some initial ‘birthing pains’ from any new regulatory regime, the overall outcome is likely to be positive for the industry,” says Daniel Seely, a financial services lawyer at Freeths. Clear regulations, he says, might ease consumers’ doubts about cryptocurrency, thus luring more investors into the market.
Ro, too, agrees that licensing and regulation could be a positive for crypto. The challenge, however, is that blockchain entrepreneurs are facing a regulatory patchwork — with local variations applied to a tool that’s intended to be global. At one extreme, some countries, including China and Saudi Arabia, have outright banned the issuance or holding of crypto assets, or the ability to transact in them. Others, like El Salvador and Malta, have been openly welcoming — even seeking to woo blockchain entrepreneurs. “I hope that we will build towards more common standards and common regulatory understanding,” says Ro, “but I think we live in a world where there will be differences, and businesses will just have to adapt to those.
The past year’s turmoil hasn’t done wonders for crypto’s reputation. According to a poll by the Pew Research Centre, conducted in March, 75% of Americans who had heard of cryptocurrencies weren’t confident in their safety and reliability.
Nevertheless, a resilient community of investors keeps hanging on against the odds. As a financial planner, Valerie Rivera says she still gets inquiries about investing in cryptocurrency. Whenever that happens, Rivera, the founder of Illinois-based firm FirstGen Wealth, is always keen to figure out why. “A lot of times, the answers that I hear tend to be the same,” she says. “There is a feeling of: ‘What if this is the next big thing that I’m missing out on?’ So, basically, a little bit of FOMO.”
“The other point I always hear from people is that it almost feels like a shortcut,” says Rivera. “Building slowly and consistently over time is not sexy.” Crypto, meanwhile, can seem like a way to beat the system. “It’s like the ultimate dopamine rush,” she says.
Is crypto really dead?
There are, moreover, some fresh green shoots for the industry. Ethereum’s upgrade — branded ‘The Merge’ — seems to be the main source of hope for crypto’s enduring fans. The switch from a ‘proof of work’ mechanism, which asks users to solve a cryptographic puzzle to validate new blocks, to a ‘proof of stake’ system, which assigns the same privilege to individuals selected randomly from a group in possession of tokens in the chain, promises to cut Ethereum’s energy consumption by 99.95%. It was finally accomplished, after much chatter and speculation, last September, and promises to alleviate some of the environmental criticisms that have long faced crypto-mining.
There’s also, perhaps, reason to believe that crypto could find its future home outside the US, beyond the fearsome clutches of the FCA and SEC. That, at least, is what Kgothatso Ngako, a software developer from South Africa, thinks. Countries like El Salvador, Nigeria, Argentina, Turkey, and South Africa could offer a bright future for Bitcoin, says Ngako. Crypto’s fans, he suggests, will just keep popping up in the countries that embrace the technology.
“Nigeria is a very interesting place because the government outright put a ban on Bitcoin. But you will have a hard time finding any country that has adopted Bitcoin as much as Nigeria — despite the ban,” says Ngako. “Nigeria will be a stencil to look at or follow as to how Bitcoin adoption will happen across the world.”
Does crypto’s fundamental appeal lie in its facility for skirting around regulations? “I’d call it economic freedom,” replies Ngako. It’s easy for comfortable citizens of democratic nations to sit back and say that doesn’t matter, he says, but people living under dictatorial regimes, which might inhibit their access to traditional finance in an attempt to control their movement, could have a markedly different perspective.
But what about the West? For his part, Verzun is convinced the crypto market will bounce back – perhaps not tomorrow, or next week, but eventually “There are no eternal trends on the crypto market,” he says. “The industry is cyclical, much like Wall Street, so sooner or later the crypto winter will be replaced by a growth phase.”
Gerard, too, isn’t certain we’ve quite seen the last of cryptocurrency — at least not yet. “It’s possible it’ll come back,” he says. “Maybe it’ll bubble again, because some people just really want to look for a get-rich-quick scheme, and they’ll look to crypto again in a few years.” Nevertheless, he doesn’t see a sustainable path forward in the long term. “The actual interest from people with dollars isn’t there,” says Gerard
Rivera is equally cautious. “I definitely have seen a major pullback in people discussing it, because of the fact that it’s down, [but that] doesn’t mean that it can’t reverse back immediately because crypto is incredibly volatile,” she says. “It could be a winner again a week from now for all we know.”