Is Crypto Dead?
Crypto Is Dead?
Crypto is dead or alive? To answer this question , let us consider a few points. Our life consists of records in databases, which means that it requires a lot of trust in their keepers. Our money, shares in a brokerage account, even the ownership of the apartment we live in, are just records in databases stored somewhere. Once upon a time, individuals in human society had to rely on the physical assertion of their rights (“my bag of gold is stored in my basement, and if you come to take it away, I will meet you with a club”), but now this function is largely delegated to those who manages the relevant databases – for example, governments and banks. This is much more convenient, but in return, the inhabitants of a particular country are forced to trust all these institutions (which is not always an undeniably good idea).
Cryptocurrencies were originally built on a lack of trust. The industry has come full circle and returned to this idea. When we send a bank payment to a stranger, we have little choice but to trust the intermediary in the form of a banking sector figure – and both sides of the transaction must trust him. The revolution of Bitcoin, invented by an unknown genius under the pseudonym Satoshi Nakamoto in 2008 (it took him only nine pages of text to make this revolution), eliminated the need for trust.
Bitcoin transfers allow direct settlements without any intermediaries and between complete strangers. And no one should trust anyone. The absence of fraud in such transactions is ensured not by the bank or the government, but by the encryption algorithms and the very structure of the reward system in the community using Bitcoin.
Passionate enthusiasts still repeat the mantra “Not your keys, not your coins” and trust no one. But as cryptocurrencies become deeper and deeper into the lives of the masses, more and more people treat the industry as an extension of the financial system they are used to.
An example is the collapse of the cryptolending platform Celsius, which positioned itself as a replacement for banks, offering cryptocurrency deposits and loans. “Oh, decent looking guys are offering a cryptocurrency deposit with the opportunity to earn 18% per annum? Probably, it is as reliable as my bank, only a little more profitable”. More than one and a half million customers who entrusted their savings to Celsius thought like this.
The company went bankrupt in June 2022 – by that time, the amount of deposits accepted by it was, according to the Financial Times, about $12 billion. The head of Celsius, Alex Mashinsky, at the end of 2021, argued that banks actually also earn huge interest on deposits, and they simply do not pay them to customers, but take them for themselves. “Someone here is definitely lying: either banks or Celsius!”, he said. This statement turned out to be surprisingly correct, and crypto holders were taught an important lesson: sometimes traditional banks are more trustworthy than blockchain entrepreneurs.
Now the crypto industry is in a hurry to reinvent the financial mechanisms that led to the global crisis in 2008.This conclusion is rather ironic, since the cryptocurrency appeared in 2008 as a response to public disillusionment with the traditional banking system, which turned out to be not as reliable as many assumed.
Ten years have passed since the global financial crisis. We still feel it. But as soon as the money flowed into the blockchain like a river (the total capitalization of cryptocurrencies in 2021 exceeded three trillion dollars), the beautiful ideals were forgotten. Former investment bankers entered the crypto industry, building structures with multiple remortgaging assets and giant leverage, similar to those that led to the collapse in 2008. It is not surprising that in 2022 the cryptocurrency market became a victim of a systematic crisis.
Why Crypto Is Not Dead?
Is crypto dead nowadays? Events in the crypto world are similar to the crisis of 2008, but the crypto winter that began in 2022 did not spread to the traditional financial system. In 2008, the global financial system came close to a possible collapse. The reason for this was that assets that were considered extremely reliable by almost everyone
Attempts to censor the crypto industry may be more successful than expected.
Bitcoin was born in the wake of the cypherpunk movement. Its participants believed that cryptographic algorithms could allow them to achieve greater protection of individual rights from government interference than by trusting traditional institutions, including financial ones.
However, over the years, the cryptocurrency ecosystem has not become a full-fledged thing in itself: in order to use the accumulated wealth, it almost always requires its conversion into traditional financial assets. It is at this stage that the government’s attempts to impose tight control over blockchain finance may be more successful than ever. You can recall the story of Ilya Lichtenstein and Heather Morgan, who are accused of stealing bitcoins from the Bitfinex exchange worth several billion dollars – they allegedly were never able to successfully “launder” them and use the money. In early 2022, the FBI arrested them and confiscated most of their coins.
In 2016, 120K BTC were stolen from Bitfinex (then they were worth $65 million, now they are more than five billion). Five and a half years later, suspects were detained in the United States.
Stablecoins are a kind of bridge from cryptocurrencies to the traditional financial system. However, not all of them are equally reliable. For many people, stablecoins are the first step to immersing themselves in the world of cryptocurrencies.
Stablecoins are divided into backed by traditional financial assets (for example, backed by USDT and USDC), algorithmic (backed by another cryptocurrency, such as DAI) and backed, in fact, by nothing, like TerraUSD tokens. Perhaps, sooner or later, holders of backed stablecoins will be automatically paid interest yields. After all, the most popular stablecoins originated in the era of near-zero interest rates, when the absence of profitability on current accounts was the norm. And in November 2022, the US Federal Reserve aggressively raised the discount rate to 4% per annum – and this is not the limit. So the fact that the issuers of such stablecoins (Tether, Circle and Binance) use the funds entrusted to them by token holders for free may already raise questions.
Different cryptocurrencies represent different values: Bitcoin is built on the idea of privacy, while Ethereum is its complete opposite. Although the Bitcoin transaction base is completely public and open, one of the cornerstone ideas for Bitcoin maximalists is the value of anonymity and privacy. Nakamoto himself wrote that each transfer of this cryptocurrency should ideally occur to a freshly created wallet address – so that no one could easily link disparate transactions with a single owner.
The philosophy of the Ethereum blockchain is on the other end of the privacy spectrum: it is more like an open-source project, in which personal reputation is valued first. It is there that the possibility of buying a personal ENS domain is implemented, which allows you to bind a crypto wallet to a name. This idea was further developed in the concept of "soul-bound tokens", designed to store a set of cryptographically confirmed life achievements – for example, educational diplomas, as well as a history of professional success or failure.
The idea that Bitcoin protects against inflation has failed. Many crypto enthusiasts have been spreading the idea that Bitcoin as a financial asset is superior to traditional assets – stocks and bonds – for two reasons.
Firstly, the total number of Bitcoins is strictly limited from above: they will never be mined more than 21 million, and most of them have already been mined by the current moment. This means that unlimited issuance of BTC is impossible (unlike traditional currencies) and it should not be subject to inflation.
Secondly, the price of Bitcoin is not fundamentally tied to traditional markets in any way – therefore, adding it to an investment portfolio should reduce the risk: Bitcoin that is not correlated with stocks, for example, can grow when traditional markets fall.
Both of these theses have been refuted in practice. Despite a record jump in inflation in the United States, which rose from 1.4% per annum at the beginning of 2021 to the current 8.2% per annum, Bitcoin has fallen in price by almost 30% over these 22 months. At the same time, the cryptocurrency has not proved its independence from the stock price: Bitcoin reacted to the fall of the American market from the beginning of 2022 to the end of October by almost 20% with a drawdown of more than two times.
In the world of cryptocurrencies, a “ponder scheme” is not always name-calling. Sometimes this is the official business model. In 2021, the concept of the decentralized Internet of the future Web3 gained immense popularity – it is based on the idea that users of almost any project can simultaneously be its own investors, receiving tokens growing in price for various actions.
Such a model carries great risks: it is often impossible to reliably determine whether the number of users is growing due to the fact that they are provided with some valuable product, or simply because everyone is rushing to buy rising tokens at the same time in the hope of getting rich. In a sense every Web3 or an NFT project is also a Ponzi scheme.
After all, according to the “greater fool theory”, tokens will rise in price only as long as the influx of users who want to purchase them grows. And the customer base of a product cannot grow forever. The pyramid principle has taken an even more graphic form in DeFi projects aimed at “yield farming”: when tokens are repeatedly re-mortgaged on special profitable crypto-deposits to maximize the interest received.
One of the brightest crypto pyramids was the Olympus DAO project, which at some point offered a return of as much as 7000% per annum. No one specifically denied that such interest could be the result of building a speculative pyramid, but it was argued that if everyone continued to invest in the project at the same time, then it would inexplicably allow everyone to get rich at the same time. As a result, Olympus tokens depreciated by 99%.
Conclusion
Is crypto dead? Well, the crypto does not have a connection to the real world. It is understandable to many – but this does not mean that it cannot eventually capture it. After all, the same traditional financial system has also reached a certain level of absolute abstraction – when it is often completely incomprehensible how it is interconnected with the real world. Every day, traders enter into multi-billion dollar transactions in complex derivatives that ultimately do not result in any physical deliveries in the real world; and stocks of some companies like GameStop are hopelessly outperformed by any reasonable fundamentals. Probably, the non-obvious connection with assets in the real world is not such a problem for the world of cryptocurrencies.
After all, blockchain is great for trading assets in video games. And if virtual reality and metaverses eventually become an integral part of our lives, then maybe cryptocurrency as a phenomenon will acquire a much more impressive and tangible value for society?
