The cold cold Crypto Winter ! ????

???? Crypto continues to break the headlines. The Reason - Many are predicting the Lehman Brothers' domino effect is about to hit the crypto world. So for this newsletter, I felt this would be an appropriate topic to discuss and learn more about. I am no crypto expert, but the recent news splashes have sparked curiosity amongst the non-nerdy.

Crypto and it’s Volatility

To understand the relationship, we need to understand the individuals shaping this industry. Bitcoin is a cryptocurrency that uses Blockchain technology. Invented by a technologist, still unidentified, and is worth approximately $48 billion as of Dec 2021. But this mysterious influencer has a large community of followers and copycats. The future of Bitcoin and digital currency as a trajectory is still visionary. A large part of the cryptocurrency valuation is just like stock assets. Its valuation is based on the perception of its worth. That's why the Crypto market remains so volatile. Other stocks base their valuation on the company's vision, strategy, earnings, and investor reports. Cryptocurrency has no such data points except user perception. So to increase the perception of its legitimacy, there is an ecosystem powered by VCs to create and elevate influencers who can build trust in this space. The problem with cryptocurrency is still - you cannot buy anything tangible from it, unlike real currency.

Tumbling DOMINOES!

Cryptocurrency is suffering a series of unfortunate events leading to the Domino effect. So here goes the 10-step massacre:

1. Sam Bankman-Fried(SBF) was considered the white knight in the cryptocurrency ecosystem. People believed he would single-handedly legitimize crypto.?He owned the $32B crypto trading platform FTX.
2. Competitor company, Binance CEO Changpeng Zhao (CZ), initially invested in FTX in 2019 but later?sold his controlling stake in 2021?in exchange for $2.1B FTT (FTX tokens)
3. On Nov 2 the crypto publication CoinDesk leaked a document that Alameda Research, a hedge fund run by SBF, held a large amount of FTT tokens.?The leaked report stated that the two companies have close financial ties.
4. On Nov 6 CZ (Binance CEO) announced that he would sell the FTT tokens “due to recent revelations.” This?plummeted the FTT’s price?as traders rushed to pull money out of FTX. Just like investors of any stock where they have lost confidence in the company.
5. When too many investors started withdrawing their funds, FTX scrambled to process these requests amounting to an estimated?$6 billion over three days.
6. Binance then said it had reached an agreement to?bail out FTX?by buying the company but, with the discretion to pull out from the deal at any time.
7. The very next day Binance?announced it would no longer buy FTX, as a result of corporate due diligence. It also cited regulatory investigations and reports of mishandled funds.
8. On Thursday, FTX reached an agreement with Tron, a blockchain platform, to swap certain tokens from FTX to other crypto wallets.
9. FTX filed for Bankruptcy?last Friday and SBF resigned as CEO.
10. FTT’s price has fallen about 80 percent since this Tuesday. The prices of other cryptocurrencies like Bitcoin, Ether, and some of the most valuable tokens, fluctuated widely last week, at one point?dropping more than 20 percent.

Technology vs Human Nature

This whole concept of a decentralized ledger makes sense but this specific application of blockchain in the cryptocurrency space has attracted criticism from economists and regulators. The lack of regulation in this space and the absence of any government oversight on cross-border currency exchanges make it very disruptive. Its valuation is heavily dependent on the number of people believing that crypto will be the future of currency. Would you bet your life's savings on something whose valuation swings up and down like a pendulum every six months?

It’s only human to err!

What happened here cannot be blamed on technology but on human greed. Bernie Madoff, Elizabeth Holmes, Adam Neuman, and now SBF, highly reputable visionary leaders, who everyone believed had achieved impossible dreams until it all became too good to be true. “Fake it till you make it", is getting extremely debatable. This has nothing to do with blockchain or crypto.

What is unique to this industry is that the regulatory bodies have failed to keep up with the pace of technology. What happened with FTX, while the US government couldn't have done much (FTX HQ in the Bahamas), it has resurfaced the critics around the active role the regulatory bodies need to play in the crypto space to protect the interest of the investors. According to the press release from the White House - Millions of people globally, including 16% of adult Americans have purchased digital assets that reached a market capitalization of $3T globally last November. And at the same time, more than $600B of investor and consumer funds were wiped out during the May crypto crash. Through an Executive order, the White House released a framework in September to address the risks and potential benefits of digital assets and the underlying technology. However, no mandates were set. It would be interesting to see how the FTX incident will shape the future of crypto from a regulatory perspective.

But future of Technology is so much bigger!

Blockchain as a technology saw huge upswings in investor funding in 2020 and 2021. The NFTs accelerated that trend during the pandemic. But just like every technology, things have started to slow down. In Q3, there was a decline of 35% in global blockchain funding. Investors are getting cautious due to the fallacies in cryptocurrency, rising inflation, and federal interest rate hikes. The US continues to lead in blockchain deals for eight quarters consecutively.

Applications of Blockchain today, where the companies are raising funds, include Web 3, NFTs, Gaming & Metaverse, DeFi, Infrastructure development, Crypto exchanges and Wallets, and institutional crypto & custody. Despite the downward trend, companies focused on Blockchain infrastructure and development saw growth, with 74 deals in Q3. The biggest deals in this space went to Web 3 blockchains for building decentralized applications. While these numbers are based on a timeframe before the FTX debacle. But it gives a good indication of reality vs hype in this space. These insights were from the “State of Blockchain” report published by CBS insights.

This winter, the exposed crypto house of cards, has raised questions and discussion across all stakeholders. The FTX massacre will affect not just the company, but the industry in general, including multiple startups and VCs. Technologists, lawmakers, and regulatory bodies need to understand the chain of events and the management failures that led to the collapse to avoid and foresee such occurrences in the future. If you like this, I did a similar writeup last year during the NFT craze - https://medium.com/priyanka-dasgupta/lets-talk-about-cryptocurrency-7511d1950766