FTX showed investors have been buying crypto for the wrong reasons
December 18, 2022 Alex Rustok
When FTX blew up in November, crypto’s biggest, smartest and most experienced devotees were left feeling just as betrayed as the investors who got burned and the outsiders who had just begun warming to the scandal-ridden industry. While some were trying to improve the future of commerce and create new economies — using Bitcoin ‘s revolutionary technology and variations on it — others were taking advantage of the hype, impatiently rushing to make a quick buck. Now the bitcoin believers hope they’ll see the value in laying the ground work. In some ways, disgraced FTX CEO Sam Bankman-Fried helped bring more legitimacy to crypto, pushing it further into the mainstream. But many want to show the wider world in 2023 that crypto is more than online casinos for reckless fun and gamblers – and that their ideals are still worth investing in. “One thing that I’m particularly encouraged by is seeing almost every week there are announcements of utility – this is the key word,” said Noelle Acheson, an economist at the Crypto is Macro Now newsletter, and former head of market insights at Genesis. Bitcoin was initially designed as digital cash, as well as a new financial system, one that would allow censorship-resistant payments quickly and cheaply across borders and give a new kind of bank account to the bankless. Decentralized finance has exploded in popularity, but there are other uses for digital assets that people are excited about. The most obvious is non-fungible tokens, or NFTs – not for their ability to resell at high prices, but for their potential to help artists take ownership of their work. “People will tell you the only utility is speculation,” Acheson added. “But we are seeing evidence that that is not the case anymore, and the wind being knocked out of the market is going to reinforce the focus on the utility.” Financial incentives vs use cases Many investors rushed into crypto in 2021 amid endorsements from titans of capital such as Paul Tudor Jones , and as Tesla said it would accept cryptocurrency payments for its cars. That was the first year bitcoin reached two all-time highs in a single year , adding to the hype. But bitcoin has always required a hefty amount of self-education that many seemed to avoid as they chased profits and hoped for meteoric surges in price, according to Adam Blumberg, cofounder at Interaxis, a crypto education and training company for financial advisors. Now is a good time for investors to gain knowledge, and doing so would help them solidify their crypto investment thesis in 2023, he said. “That will disregard the current price action, which is based on new factors, not on the value of the technology,” he said. What happened with FTX “had nothing to do with the value of the asset, and everything to do with the security of how you hold it.” Specifically, Blumberg added, leaving funds on centralized exchanges is far more dangerous than keeping custody of funds yourself. JPMorgan analysts echoed that in a recent report, noting: “While the news of the collapse of FTX is empowering crypto skeptics, at the moment, all of the recent collapses in the crypto ecosystem have been from centralized players and not from decentralized protocols.” Self-custody is one of the original ideals Bitcoin was designed to address. It’s a use case that may not resonate with people who have access to a formal financial system. In the developing word, however, it’s can be extremely difficult to open a bank account. “There is a large crowd around the world in terms of people not having access to payments,” said Lyn Alden, founder of Lyn Alden Investment Strategy . “Bitcoin is real technology that can help people in that regard.” Outsiders don’t often see that, however, instead reading headlines about potential fraud. “The big problem is not the underlying technology,” Alden said. “Nobody blames researchers, including in the altcoin space for researching different ways to do things. The big problem comes when financial incentives decouple from technical events.” While the industry’s builders continue to launch projects that tackle productive use cases for bitcoin and other cryptocurrencies, the macro backdrop, particularly persistently high inflation, is underlining the need for an asset like bitcoin, according to Acheson, the economist. “We’re seeing the macro need become more apparent and bringing the institutions into the conversation,” she said. “The smart investors are seeing this and remembering that what we have here is a fixed supply and, growing demand.” And for now, despite the many innovations in the market, if there’s a reliable cryptocurrency to invest in, it’s “still just bitcoin,” said Blumberg, the Interaxis co-founder. “There are lots of others. Everything is – I don’t want to say pure speculation, but you really have to understand the tech and you have to have conviction around it,” he added. Pure dumb luck? Blumberg said he doesn’t want to apologize for the goals and work of the industry’s builders, but recognizes the FTX fiasco was a big setback for them, and a bad look. “What it looks like from the outside is when everything’s going up you have all these crypto people saying see, we knew this was coming. And then on the way down, they were all making excuses. In reality, a lot of them are just lucky,” he said. Like the meme stocks that dominated much of the 2021 news cycle, much of the crypto bull run of the same year was “just mania and hype, and not real,” Blumberg added. “Everyone was trying to capitalize on the speculation of a new asset plus technology, and not trying to adopt the technology,” he continued. “It’s the equivalent of 1999 and 2000,” when dot-com companies went public quickly at sky-high valuations “and had nothing under the hood.” However, Blumberg is also optimistic that when enough froth exits crypto, the industry will have similar success. “When [dot com mania] crashed, the Internet got built. They said the technology’s actually cool, we can do cool stuff,” he said. “Apologizing is based on the money people put in speculating, thinking they were going to turn $10,000 into a million. The apology is not based on the actual use of the system, of the technology. Growth of this technology is guaranteed, it’s evolution.”
