Breaking: Crypto Winter Getting Colder
A year ago last month, Bitcoin hit its peak price of $68,000. Coinbase, a cryptocurrency exchange was also at its high water mark. Meanwhile, another cryptocurrency exchange FTX had just concluded another successful round of funding from investors valued at $25 billion. In addition, the crypto industry was valued at over $3 Trillion.
Oh, What a Difference a Year Makes
Bitcoin was trading below $17,000 Friday. Coinbase has dropped from a 52-week high of 281.99 to around $36 Friday. FTX is decimated and the crypto industry is valued at around $806 million today.
It was already a rough year for crypto. However, the rapid demise of FTX last month unnerved many investors creating a ripple effect.
FTX
Sam Bankman-Fried woke up Monday, Nov. 11 as the head of FTX which was then valued at $32 billion. He went to bed that Friday with his business in bankruptcy.
By Dec. 12, Bankman-Fried had been arrested and jailed in the Bahamas. (In an unrelated case OneCoin c0-founder Karl Greenwood plead guilty Friday to federal charges in a $4 billion crypto pyramid scheme.)
Bankman-Fried faces charges in the United States that include wire fraud, conspiracy to commit wire fraud, securities fraud, conspiracy to commit securities fraud, conspiracy to defraud the United States government, campaign finance violations, and money laundering. If convicted, the 30-year-old could remain in prison for the rest of his life.
There has been speculation on social media that Bankman-Fried’s arrest is an attempt to prevent him from delivering scheduled testimony to Congress. The conspiracy theory goes that Bankman-Fried, who contributed to several campaign funds, has dirt on some members of Congress.
However, Forbes obtained a copy of Bankman-Fried’s planned testimony. There were no political fireworks in it. It is more likely that Bankman-Fried was arrested on fears he might be a flight risk.
The main criminal focus in the FTX case is its relationship with sister company Alameda Research. It is alleged that FTX used clients’ deposits to cover losses incurred by Alameda, which functioned as a crypto trading firm.
Bankman-Fried had become the poster boy for the success of crypto. He gave interviews freely, appeared on the cover of prominent business magazines, spoke at conferences, and lobbied for crypto regulation.
However, he may have built the most compelling case for regulation in the inept or criminal way he ran his business.
Crypto Winter
Even before the fall of FTX, crypto analysts were calling 2022 the “crypto winter”.
The year started calmly enough. However, by May, stablecoins began to destabilize.
Stablecoins are cryptocurrencies whose value is tied to another currency or financial instrument.
TerraUSD (UST) and its related token luna were tied to the U. S. dollar 1:1. By the second week in May, UST had dropped to 26 cents and luna had lost 96 percent of its value.
One company with extreme exposure to UST risk was the hedge fund Three Arrows Capital (3AC).
After suffering huge losses in the UST/luna collapse, 3AC defaulted on a $660 million loan from Voyager Digital. The hedge fund then filed for bankruptcy. Subsequently, Voyager was forced to file for bankruptcy.
In Voyager’s bankruptcy filing, it disclosed that it owed Alameda Research $75 million. However, that filing also revealed that Alameda owed Voyager $377 million.
Weakened Confidence
The collapse of UST/luna shook the confidence of many individuals and institutions that had entered the crypto market in recent years. In addition, the demise of FTX has amplified the fear of some crypto investors.
One company that has appeared ready to step into the breach and represent stability in crypto is Binance. That firm has been at times a supporter of and competitor with FTX.
In the first day or two of FTX’s demise, Binance’s CEO Changpeng Zhao planned to acquire the crumbling firm. However, after a closer look, he pulled out of the deal.
Binance’s Problems
Binance has had its own challenges of late.
Nansen, an analytics firm, issued a report this week that Binance customers withdrew about $3.6 billion in assets over a seven-day period. However, the increase in withdrawals may not be directly connected with FTX.
A report surfaced Monday that a faction in the justice department wants to file criminal charges against Binance and Zhao for sanctions violations and money laundering.
Binance and Zhao deny any wrongdoing. Zhao has also actively sought to calm fears over Binance’s financial stability.
“Things seem to have stabilized,” Zhao tweeted Wednesday. “Yesterday was not the highest withdrawals we processed, not even top 5. We processed more during LUNA or FTX crashes. Now deposits are coming back in.”
Analysis from Nansen and CryptoQuant backs Zhao’s claim. Nansen reported Thursday that the average outflow versus income had dropped from $272 million the previous week to $239 million. That does not include Bitcoin.
About 3,279 Bitcoin were withdrawn Wednesday, according to CryptoQuant. That is down from the record high of 40,353 Monday.
“People can withdraw 100% of the assets they have on Binance, we will not have an issue in any given day,” Zhao said during an interview on CNBC. Crypto businesses should “hold user assets 1-to-1 and that is what we do.”
BNB, the token created by Binance declined 15 percent over the past week. However, the cryptocurrency began to rebound late Friday. It was up 2.7 percent Saturday morning.
Binance has about $60 billion in on-chain reserves, according to Nansen.
Proof Goes Poof
One of the criticisms of the crypto industry is a lack of transparency. To answer that concern, some firms have commissioned outside audits.
French auditor Mazars provided proof of reserves for several crypto firms, including Binance. It published a proof of reserve report earlier this month that Binance was over-collateralized. However, that report has since been pulled from its website.
Mazars said it is pausing all work with crypto clients relating to proof of reserves reports, “due to concerns regarding the way these reports are understood by the public.”
Conclusion
In its short history, crypto has had more than its share of crooks and charlatans. These financial flim-flam artists have engaged in every criminal enterprise from laundering money to grabbing the loot and running (Dr. Ruja where are you?).
However, it has also produced true believers who are crusading for a more balanced and fair world.
In the end, money is about faith. That entails a belief that the entity producing the currency can back it up. Even the United States dollar is backed by no more than that.
The King James version of the Bible says, “Now faith is the substance of things hoped for, the evidence of things not seen.”
Crypto offers things hoped for. However, it will not achieve universal success until it provides evidence of things unseen.
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