Cryptocurrencies Digest A Turbulent 2022

The failures of Voyager, FTX, and other cryptocurrency-related businesses have weighed heavily on the asset class. The debate surrounding cryptos continues, with the detractors in the driver’s seat as we head into a New Year. 

As we move into 2023, controversy will continue. Few dispute the utility of blockchain technology, but the tokens are another story. 

The decline of Bitcoin, Ethereum, and the over 22,000 tokens is nothing new. Over the past twelve years, the burgeoning asset class has experienced boom and bust price action. Meanwhile, the challenge to fiat currencies is likely to continue as they depend on the full faith and credit of governments issuing the legal tenders. While Bitcoin at the $16,800 level on December 21 is under one-quarter the price at the high, a $100 investment in 2010 at five cents is still worth a cool $33.6 million. 2023 will be a fascinating year for the cryptos, with lots of volatility on the horizon.

The FTX scandal poses a significant threat

Sam Bankman-Fried was the king of cryptos until November 2022. He founded Alameda, a hedge fund that traded cryptos, and FTX, a leading trading platform. SBF attracted A-List celebrities, including the world’s greatest NFL quarterback and his wife, Seinfeld creator Larry David, Mr. Wonderful Keven O’Leary, and others to promote his exchange. He bought naming rights at sports and entertainment arenas and purchased Super Bowl ads. SBF was second only to George Soros in political contributions during recent U.S. elections and had the ears of many politicians and regulators as they debated and considered the government’s treatment of the asset class. SBF amassed a personal wealth of over $20 billion before it went up in a cloud of smoke.

FTX’s swift failure led to a Grand Jury indictment where the U.S. Justice charged SBF with a laundry list of criminal charges that could lead to decades in prison. This week, he is waiving extradition from his current home in Fox Hill prison in Nassau, the Bahamas, and returning to face federal charges in the Southern District of New York. 

The dust has not settled from FTX’s failure, and prosecutors are sifting through evidence and interviewing former employees and associates. The systemic impact of FTX’s failure may continue for months, if not longer. 

In 2014, another crypto exchange, Mount Gox in Japan, collapsed, leading to a significant percentage decline in Bitcoin and other cryptocurrencies. FTX’s failure is far more substantial as the values and number of new cryptos are much higher in 2022. While some politicians have FTX eggs on their faces for taking contributions, the hot lights in legislative and regulatory arenas are on the asset class as we move into 2023. When it comes to crypto prices, uncertainty means many would-be investors and innovators will avoid the asset class until the dust settles. 

The detractors have not been shy

In 2018, when frenzied buying was lifting Bitcoin to incredible new highs, value investor Warren Buffett said the leading crypto was “probably rat poison squared.” His partner, the never-shy Charlie Munger, went even further over the years. In April 2022, he said, “In my life, I try to avoid things that are stupid, evil, and make me look bad in comparison to some else, and Bitcoin does all three. In the first place, it’s stupid because it is very likely to go to zero, and it’s evil because it undermines the Federal Reserve System and national currency system, which we desperately need to maintain integrity and government control and so on.”

JP Morgan Chase’s CEO, Jamie Dimon, called cryptocurrency a “decentralized Ponzi scheme” than is not “good for anybody.” 

The supporters continue to argue a rebound will occur

Dimon, Buffett, and Munger are established financial gurus with long and successful resumes. While Tom Brady and his wife, Larry David, Kevin O’Leary, and others are celebrities, FTX paid them for promotion. Meanwhile, there is a list of other successful investors and innovators who continue to support the asset class. Elon Musk, Jack Dorsey, Mark Cuban, Cathie Wood, and others continue to support the burgeoning asset class. As SBF and FTX were going down the tubes in late November, Cathie Wood’s Ark Invest bought $60 million in Bitcoin and crypto stocks. While most have turned against SBF, cryptos are another story as supporters continue to embrace the asset class’s innovative libertarian ideology that transcends borders and challenges central banks, monetary authorities, and the government’s control of the worldwide money supply. Crypto values come from bids and offers in what they believe is a “transparent” marketplace without any government manipulation. 

Supporters point to Bitcoin’s bust and boom history, comparing the FTX debacle to Mount Gox’s 2014 bankruptcy. When the Mount Gox dust settled, Bitcoin’s dizzying rise continued, and many new cryptocurrencies burst on the scene. 

The only consistent bull market in the asset class

The number of new cryptos coming to market has only experienced a boom. According to CoinMarketCap, new assets come to the market daily in a trend that has not experienced any retreat. As of December 21, there were 22,099 cryptos in circulation. The asset class’s expansion has been dramatic:

• At the end of Q1 2019, 2,136 cryptos were trading.
• At the end of 2019, the number rose to 4,986.
• At the end of 2020, it increased to 8,153.
• At the end of 2021, the number stood at 16,238.
• On December 21, 2023, there were 22,099 cryptocurrencies.

Whether the prices rise or fall, the number of new tokens increased over the past years, and significant value declines in 2022 did nothing to inhibit new issues. 

Only invest capital you can afford to lose

In markets, history tends to repeat. However, crypto history may need to be longer to draw concrete conclusions. The market risks significant regulatory and legislative changes over the coming months as FTX has put a bright spotlight on the asset class. As of late December 2022, the events have validated some of the detractor’s concerns. FTX has shown that there are few if any, audits, no reserve or capital requirements, no insurance or investor protection, and an ongoing debate if cryptos are commodities, securities, or something else. The bottom line is these highly volatile assets are under a dark cloud as we head into 2023. 

Many crypto investors and traders have repeatedly learned that the potential for incredible rewards comes with commensurate risks. Wrongdoing, incompetence, and criminal fraud add to the equation’s risk. Anyone considering a crypto or crypto-related investment must realize that 100% of the capital is at risk. Only invest money you can afford to lose. For traders, recognize that in a game of financial musical chairs, account for 100% potential losses and ensure that the potential for rewards is at least at the same level. 

The cryptocurrency asset class is digesting a very turbulent 2022, and the volatility will continue in 2023 as the market sorts out the systemic impact of FTX’s failure. The only sure thing is that Michael Lewis’s upcoming work on SBF, FTX, and cryptos will be his most profitable venture. Timing is everything!

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