Table of Contents: Is Crypto Dead?
There is no sugarcoating it; crypto had a terrible 2022. Much like stocks, which hit all-time highs in 2021 and 2022, cryptos were flying high as the year began. After a string of implosions, like FTX and the LUNA debacle, many people are asking: is crypto dead?
The idea that the entire cryptocurrency sector will implode is absurd.
Yes, many projects struggle, but part of what made 2022 so rough was the involvement of institutional investors. When Bitcoin was born in 2008-9, no one knew about it, and even fewer would have considered it an investment. Now, that has changed.
Cryptos aren’t dead, and there are many reasons why. Just because cryptos have a bright future doesn’t mean now is the time to load up. Let’s look at why the blockchain and crypto space will continue to develop and why now is a good time to be cautiously optimistic about the sector.
Bitcoin is Global
No one thought that price level would hold when Bitcoin rose to the $20,000 handle in 2017. After a nearly 20x rise in less than 12 months, that view was tenable. Now, Bitcoin is trading within 30% of that peak, and people are asking if crypto will crumble into dust.
Of course not. There is incredible value in the crypto sector, and cryptos’ value isn’t linked to a specific price level. For example, Bitcoin is used for cross-border trade, has been added to the approved list of reserve assets by the BIS, and is accepted globally for retail payments.
When Bitcoin hit the markets almost 15 years ago, very few people had the foresight to see Bitcoin as a future reserve asset. Bitcoin also circumvents the SWIFT system; an advantage Argentine banks use at times. The price of Bitcoin doesn’t impact this ability, so Bitcoin at $5,000 provides just as much utility as Bitcoin at $50,000.
What can be said about Bitcoin is true for any major cryptos, as using a token for a transaction doesn’t mean it has to be held as a reserve asset. That ability makes cryptos superior to fiat currency, at least for transactions.
Crypto Bears Love Winter
There is still a lot of hate for cryptos in the mainstream investment community. Many ask Is Crypto Dead? Crypto is not dead.
Legendary investor Charlie Munger stated,
“Of course I hate the bitcoin success. I don’t welcome a currency that’s so useful to kidnappers and extortionists and so forth, nor do I like just shuffling out of your extra billions of billions of dollars to somebody who just invented a new financial product out of thin air.”
To be fair to Munger, he clearly doesn’t understand that every single onchain Bitcoin transaction can be viewed by the public. The same can’t be said about the $1.7 billion in cash US President Obama sent to Iran, for a variety of reasons, one of which appears to be the release of four US prisoners.
If President Obama had used Bitcoin, the subsequent transactions could have been traced, but with fiat currency, the same thing isn’t true. Many people who hate cryptos and want them to ‘die’ don’t understand the technology.
When prices crater and projects fail, the crypto bears roar – whether or not they have valid points or even understand how decentralized blockchain platforms work.
It’s important to see that there is value in decentralized blockchains, regardless of big names bashing Bitcoin or hating the fact that the masses don’t have to deal with entrenched banking interests if they want to use digital money systems.
The Institutional Angle
Big money is flowing into cryptos and blockchains.
The failure of FTX may live on in history as the biggest event in the crypto market this year. The collapse provides some interesting examples of why crypto will continue to grow as both a market sector and an asset class.
Ever heard of BlackRock, the Ontario Pension Fund, Sequoia, or Tiger Global?
How about SoftBank, VanEck, and Temasek?
All of these entities are massive institutional investors, and they all put big money into FTX. Cryptos and blockchains aren’t fringe investment classes. The most sophisticated investment minds in the world are looking to cryptos as a growth sector and backing that view with serious investment capital.
FTX is just one example of this trend. PayPal offers another. In late 2020, PayPal began allowing some of its clients to hold and use cryptos in a limited way. Bitcoin was one of the supported tokens. At the time, Bitcoin was trading around the $10,000 level.
Within six months of PayPal allowing the use of cryptos, Bitcoin was trading above $50,000. Of course, other factors led to that 5x increase over 180 days, but it illustrates the impact an institutional blessing can have on a market.
Institutional investors aren’t backing off cryptos, and that has serious implications.
FTX is making headlines while institutional money looks for distressed assets in the crypto sector. For retail investors, a bear market creates fear and doubt; institutional traders see things differently. Who do you think was buying shares at the 666 bottoms in the S&P 500 in 2008?
If we had to guess, some of the institutional names that lost money in FTX were on the list…
CBDCs Can’t be Stopped
China, India, the USA, the UK, and the EU have all launched or are researching Central Bank Digital Currencies (CBDCs). At a technical level, these CBDCs may use blockchain technology or not.
From the perspective of a retail user, they are basically the same as Bitcoin or Ethereum. In the next decade, people will use these CBDCs as currency, and the implications are profound.
Unlike cryptos, which are not well-liked by the established financial elite, CBDCs are almost universally supported at the highest levels of global finance.
Ex-FED head and current US Treasury Secretary Janet Yellen said this about the future of a US CBDC,
“We need to consider these important questions in the context of the central role the dollar plays in the world economy,” and “(it) asks us to consider whether and how the issuance of a public CBDC would support this role.”
The idea that the US and the West would generally let India and China take the lead in CBDC issuance and use is highly unlikely. While Yellen’s speech is guarded, the Executive Order (EO) issued by US President Joe Biden in early 2022 is far more telling.
The ideas contained in the EO include this:
“We must reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.”
This reads a lot like ‘we need to catch up in the CBDC game’ when read in the context of statements like this one from the same EO:
“The United States derives significant economic and national security benefits from the central role that the United States dollar and United States financial institutions and markets play in the global financial system. Continued United States leadership in the global financial system will sustain United States financial power and promote United States economic interests.”
Don’t fool yourself; CBDCs are the next big thing.
Every major nation can say the same things that Biden signed off on in the above-quoted EO, and there will likely be a ‘CBDC race’ to popularize the use of national CBDCs offshore. It makes sense in so many ways and would push the non-US Dollar reserve currencies agenda along in a big way.
Now it looks like more nations want an exorbitant privilege!
Today’s Crypto Market Anatomy
Cryptos are still a very new asset class to the masses, and most people don’t understand the nature of decentralized digital tokens. In fact, most of the people adopting cryptos today are in the developing world, with the USA ranking as the only developed economy in the top 10 nations adopting cryptos in 2022.
While the scandals and implosions of 2022 clearly impacted trust in cryptos, investment bank JP Morgan points out that no major blockchain failed, despite tough market conditions. Specifically, the bank points out that it was centralized players that failed in the FTX debacle, not the underlying decentralized protocols.
The base of cryptocurrencies’ value isn’t the fact that there are centralized service providers – although this is a good thing for people who want to use them. The value of cryptocurrency is that it operates without any need for centralized authorities, and this remains true regardless of a tough year.
During the last crypto boom (2017), the adoption and use of cryptos were far more limited than today. Going forward, more development money will be poured into projects and more options for anyone who wants to invest in the space.
To give an example, in 2017, JP Morgan CEO Jamie Dimon was extremely critical of Bitcoin and the cryptocurrency space. Now, the bank is introducing its own crypto wallet. Talk about a change in heart!
Cryptos: A Long-Term Winner
So – is crypto dead?
No. Not by a long shot.
There are boom and bust cycles in any market, and 2022 was a bust for cryptos. We all know that spring follows winter, which is the likely direction for cryptos over the next few years.
As the DeFi and NFT manias demonstrate, it pays to be careful with cryptos. Don’t get caught up in the hype, and look for long-term value in a market that will move up in the coming years.