After the collapse of a major cryptocurrency exchange, counsumers should excersise extreme caution.
BY GEORGE BERNARD ’23
Last year, Luke Eriksen and I opined on the speculative bubble around NFTs in a piece called Non-Fungible Trash. Although I wish I could be positive in this follow up about crypto as a whole, I am unfortunately going to be the bearer of bad news. To put it nicely; do not touch crypto with a ten foot pole.
Buried under news surrounding the Midterm elections, possibly the greatest scandal in the history of crypto has emerged: the fall of FTX.
For those of you who may not know much about crypto, FTX was a cryptocurrency exchange platform that millions of people used to buy, sell, store and trade crypto. Think of it like a combined bank and stock exchange for cryptocurrencies like bitcoin. They also had their own cryptocurrency called FFT, which at its peak was worth $7 billion. It was backed by billions of dollars and big investors like Kevin O’Leary. FTX had become very visible in the public eye, naming the Miami Heat’s stadium and doing ads with Tom Brady.
Despite being a middleman, allowing them to make money on every transaction, FTX never made a profit during its existence, instead promising investors that profitability was just around the corner.
On Nov. 9, after a few days of building turmoil, FTX announced that it was not processing withdrawals (taking clients money) and on Nov. 11, it filed for Chapter 11 bankruptcy, just hours after the CEO tweeted that the company had plenty of liquidity and was in no immediate danger. In the blink of an eye, a $32 billion company had been reduced to nothing. Keep in mind that deposits made into FTX are not FDIC insured so there is no guarantee that clients will get their money back.
Then the evidence of fraud started pouring in. On Nov. 12, CNBC reported that “between $1 billion and $2 billion of FTX customer funds have disappeared” and then Reuters reported that the CEO, Sam Bankman-Fried, who had been a leading figure in the crypto world and the richest person in the world under 30, had a secret back door that allowed him to transfer customer money out of FTX without notifying anyone else. On December 12, Bankman-Fried was arrested in the Bahamas for securities fraud and illegal political donations.
There are now numerous civil and criminal investigations ongoing, but the outlook for crypto looks bad. Many other crypto companies had money with FTX and it seems likely that as they lose their money, they will also be at risk of bankruptcy too.
While some may interpret the events above as simply a case of one bad apple and still believe that crypto has value, I would beg to differ.
At their peak on Nov. 9, 2021, the two biggest cryptocurrencies, Bitcoin and Ethereum combined were worth $1.85 trillion, almost exactly the same value of Amazon at the same time. Despite this, there are no practical uses for cryptocurrencies for the average person in day to day life.
It hasn’t helped oppressed people escape government surveillance.
It hasn’t provided a way to safely store money outside of a bank.
It hasn’t removed financial middlemen, instead replacing experienced, regulated banks with juvenile, unregulated crypto exchanges that do not have insurance to protect consumers.
It has provided a means for people who were already very wealthy to make hoards of money riding a speculative asset bubble. (Think of Matt Damon doing an ad for crypto.com that essentially called viewers cowards if they didn’t buy crypto, but omitting that he directly benefits from this increase in buying.)
All of this brings me back to the premise of this piece. Cryptocurrencies in their current state are at best an early iteration of a technology that will take decades to become widespread and useful. But now the music has stopped, crypto is down roughly 70% since its peak a little over year ago and the hype is gone. It turns out that most people don’t like losing money.
If you truly believe that crypto is the future, good for you, I respect that but I remain skeptical. Right now, the entire system is riddled with scams and lacks any unifying vision or practical uses. At this point in time, buying a cryptocurrency is like betting on a horse in the Kentucky Derby, except that at any moment, the horse you were betting on can just disappear and you lose your money.