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“Fortune favors the brave.”
With those four words, crypto mania peaked when Matt Damon granted his A-list status to a promotional video for Singapore’s Crypto.com exchange.
Just over a year ago, cryptocurrencies seemed to be flying into the stratosphere – except maybe not.
Following Damon’s wise words, cryptocurrencies have plummeted in value. Bitcoin, the common name of the cryptocurrency, has fallen in price by 70 percent.
This means that if Matt Damon had convinced you to buy $1,000 worth of Bitcoin last November for $60,000 each, it would be worth less than $300 now.
Is the end game near for a mysterious industry that seemingly grew from nothing into a $3 trillion market at its peak?
Back in 2018, Nobel Prize-winning economist Paul Krugman made the following prediction:
The value of cryptocurrencies depends entirely on self-fulfilling expectations, which means that a complete collapse is quite possible. If speculators had a collective moment of doubt, they would suddenly be scared that bitcoins are worthless, well, bitcoins would be worthless.
— Paul Krugman
Oddly enough, Elon Musk actually caused Dogecoin’s value to drop after he joked about it on a TV show.
Since then, the clash of macroeconomic issues and poor risk management in the crypto ecosystem has resulted in massive losses and billions of dollars trapped in a defunct exchange.
In retrospect, the crash of Terra Moon was a warning; very similar to one in a series of unrelated events depicted in a Hollywood movie that turned out to be a sign of an impending disaster.
Since crypto companies rely so heavily on loans to each other, the collapse of the Terra blockchain had several side effects. Notably, this led to the bankruptcy of Three Arrows Capital (3AC), at one point the largest hedge fund in cryptocurrencies.
But amid the bailout and liquidity crunch, there was still a general sense of speculative optimism in the crypto community.
That was before the collapse of FTX. When the Binance rescue deal fell through, the third-largest cryptocurrency exchange became the latest victim of the crypto contagion.
This is sensational news even for people who are not interested in cryptocurrency. Mostly, how did $32 billion disappear overnight as our Temasek sovereign wealth fund went from investor to lender?
But for crypto enthusiasts, the fall of FTX was a disastrous blow, raising fears that the cryptocurrency sell-off could lead to more firms closing.
2022 has been a terrible year for crypto. And Sam Bankman-Fried – once the golden boy of cryptography – turns out to be nothing more than a financial charlatan. And, unfortunately, his personal failures threaten the collapse of an entire industry that is still trying to get back on its feet.
Crypto wild west regulation
Given that cryptocurrencies were conceived as a peer-to-peer digital payment system that eliminated the need for financial intermediaries, regulating an industry rooted in decentralization will be difficult.
However, with failing firms threatening the local economy, governments around the world are scrambling to develop a regulatory framework to tame this cowboy industry.
Krugman agrees that recent events have made clear the need for cryptocurrency regulation, but he also warns that cryptocurrency exchanges could become obsolete if regulators crack down on the industry.
The industry has failed regulation because they [crypto exchanges] it will not be allowed to offer pie in the sky returns to attract customers.
— Paul Krugman
Following the events of 2022, the Monetary Authority of Singapore (MAS) has proposed measures to mitigate risks for consumers from cryptocurrency trading.
It’s too early to tell if the proposals will work. After all, blockchain and cryptography are relatively new and there are no precedents for governments to cite.
But one thing is for sure – without a robust regulatory process for cryptocurrencies, it is unlikely that cryptocurrencies will be able to realize their full potential to democratize finance. Worse, it will become a predatory dumping ground for criminals who will prey on the vulnerable with get-rich-quick Ponzi schemes.
Not Quite the End
The crypto industry has a long history of failure, scandal and crime. But 2022, as the year of the watershed, has further perpetuated this image.
At the moment, cryptocurrencies are trapped in an information vacuum.
“The market is on standby and watching to see if there are any other entities that could fall as a result of the exposure to FTX,” Vijay Aiyar, vice president of corporate and international development at crypto exchange Luno, told CNBC. .
However, market fluctuations are part of every investment journey. And despite the volatility of cryptocurrencies, they are still surrounded by attractiveness.
First, it is the highly speculative nature of cryptography that drives people to it. It’s akin to gambling, and instead of relying on sound investment principles, experts are hoping for a payday without caring about what goes on behind the scenes.
Secondly, non-fungible tokens (NFTs) are a new crypto technology that is gaining huge popularity. From fashion houses to celebrities, unique digital assets are now traded through blockchain services, the future backbone of the internet.
Finally, Singapore aims to support the development of stablecoins as a trusted medium of exchange in the digital asset ecosystem. It has already given stablecoin issuers Circle and Paxos permission to operate in the region, and more are expected to hit our shores in the future.
Cryptocurrency is far from dead, it just evolves. It may be crypto winter, but as we all know, spring is just around the corner.
Featured Image Credit: Bitcoinist