November 29, 2022
It seems that the market has been hit by some kind of cryptocurrency crisis. Crypto exchange FTX recently filed for Chapter 11 bankruptcy, a colossal sin for a company once valued at $32 billion. The fortunes of thousands of clients were instantly wiped out and FTX founder Sam Bankman-Fried is now facing federal charges. Moreover, the industry has just been hit by another major loss as one of crypto’s leading lending companies, BlockFi, has also filed for bankruptcy. The companies were preceded by two other companies, Celsius and Voyager, in similar bankruptcies last summer.
With all these happenings, is it still a good idea to invest in cryptocurrency? Or is it a market on the way out whose demise is in the works?
Cryptocurrency has long been a bad option
Volatility in the crypto market is hardly a new concept, writes Taimur Hyat, COO of Prudential’s wealth management division, for CNBC. “The biggest risks to cryptocurrency investing may still be in the future and not in the rearview mirror,” he says, adding that investors looking to invest in cryptocurrency for the long term “should remain cautious.”
Hyat adds, “Despite all the hype that they are digital gold, cryptocurrencies have not demonstrated ‘safe haven’ nor anti-inflationary characteristics in the face of actual market volatility or the first real bout of serious inflation in developed markets.” that between 2010 and 2022, Bitcoin “had 29 episodes of drawdowns of 25% or more. In comparison, stocks and commodities each recorded just one.”
Hyat adds: “Cryptocurrencies remain extremely problematic from an environmental, social and governance perspective. Most troubling are the governance issues highlighted by the FTX implosion.”
Investing in cryptocurrency could have lasting negative effects
Allison Schrager, a Manhattan Institute fellow and Bloomberg economic opinion columnist, writes that she “longed for a collapse and demise of the crypto market. Not because I’ve never invested in it … but because I don’t understand what value it serves or what problem it solves.”
Schrager also writes that “it does not appear that FTX.com, or even the crypto market as a whole, poses any systematic risk – crypto is meant to be outside of traditional financial markets by design.” Despite this, she believes that “there are still reasons to be concerned about what the FTX situation means for investors.” Schrager believes the whole market is in trouble and people are losing money, adding: “It’s never good. It is of particular concern that many of the recent crypto investors who have been buying high and watching the decline have tended to be lower – worthy investors, some of whom are new to the financial markets.”
This opinion was shared by prominent economist Paul Krugman, who wrote in an op-ed for The New York Times: “Recent events have highlighted the need for crypto regulation… but it also seems likely that the industry may not survive regulation .” However, Krugman notes that falling prices don’t necessarily mean the cryptocurrency is doomed, as assets are constantly fluctuating. However, he adds: “Even if the value of bitcoin doesn’t go to zero (which it still does could be), there are strong arguments that the crypto industry, which was on the horizon just a few short months ago, is on its way to oblivion.”
A similar warning was issued in 2021 by economist Eswar Prasad, who told CNBC in an interview: “Cryptocurrencies can contribute to monetary and financial instability, especially if they would create a large and unregulated financial system that lacks investor protection.” Prasad adds: “[Cryptocurrency] could lead to worsening inequality because people have a poor grasp of financial literacy, and that “any financial risks stemming from investing in cryptocurrencies and related products could end up being particularly hard hit by naïve retail investors”.
Even with market volatility, investing in cryptocurrency is still a good option
Despite the current state of the cryptocurrency market, USA Today columnist and investor Alex Kellogg writes that “the current turmoil represents a right dimensioning of space that will look more like a bump over the long run.” Despite the industry’s volatility, Kellogg adds that the actual promise of cryptocurrency “feels more real today than it did a few years ago, and with some institutional investors coming on board, it seems unlikely that the entire ecosystem will collapse, even if one.” Right there – dimensioning was overdue.”
In Kellogg’s column, he also reaches out to Ariel Zetlin-Jones, director of the blockchain initiative at Carnegie Mellon University’s Tepper School of Business. Zetlin-Jones compares the cryptocurrency market to the early days of the digital age, saying it is “very reminiscent of the internet in the late 1990s. Many individual stocks and companies were overvalued and collapsed, but Amazon and Google are still there.”
The crypto currency is down, but not out
Even amid signs that the cryptocurrency is nearing its end, some people still believe it may have a heart attack. Maria Bustilla, a journalist, blockchain expert and founder of Popula, writes for the New York Times: “The crypto market is extremely volatile, not because of the underlying technology of cryptocurrency, but because of the uneasy and often dangerously unstable connection between new technologies and regular money”, something she says is not new.
However, Bustilla adds that even if the cryptocurrency potentially crashes, the blockchain itself seems poised to live on. “Responsible players in the crypto market have been calling for sensible regulatory framework conditions for many years and are helping to develop them,” she says. “There is already a bedrock of crypto regulations.”
Using the example of the dawn of the internet age as a precursor to blockchain, Bustilla writes: “Today’s internet is deeply intertwined with the economy, media, politics, industry and social life of the world, for better and for worse. [and] a similar development is in the works for crypto.” She adds, “Blockchain, the technology that makes cryptocurrency possible, has the potential to be just as transformative as the internet innovations we rely on every day.”
In the post-FTX world, staff at Forbes investment brand Q.ai write that some cryptos could be “more of a black swan event than the beginning of an era.” However, like most other experts, Q.ai notes that investing is always risky. “The key takeaway remains the same – if an investment seems too good to be true, it is,” adds Q.ai. “Investors who are bullish on crypto should still be cautious about investing too much of their savings in these volatile assets… Diversification is still the best strategy.”
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