Investment was fueled by “numbers go up” momentum rather than real use cases |
December 16, 2022
Exploring transformation of value in the digital age
By Michael J. Casey, Chief Content Officer
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As we close 2022, it should be a time of reflection, which suggests that, after the past year, the crypto industry should be preparing for a very long time on the couch. But even as we try to slow down and ponder what lessons to take from this tumultuous year, the news – this week, of former FTX CEO Sam Bankman-Fried’s (SBF) arrest on criminal and civil charges – keeps distracting us.
In this week’s column, I have a higher-level take on what went wrong, pondering how the collapse of once-high-flying exchanges demonstrates a failure of the crypto market’s price signals.
And for our “Money Reimagined” podcast, my co-host Sheila Warren and I interview two highly influential economists – Simon Johnson of MIT and Tyler Cowen of George Mason University – both of whom have a deep understanding of past financial crises, to find the lessons that crypto should have learned from the crisis of 2008 and others that preceded it. Have a listen after reading the newsletter.
Launched in September 2017, KuCoin is a global cryptocurrency exchange with its operational headquarters in Seychelles. As a user-oriented platform with focus on inclusiveness and community action reach, it offers over 700 digital assets, and currently provides spot trading, margin trading, P2P fiat trading, futures trading, staking, and lending to its 20 million users in 207 countries and regions.
In 2022, KuCoin raised over $150 million in investments through a pre-Series B round, bringing total investments to $170 million with Round A combined, at a total valuation of $10 billion. KuCoin is currently one of the top 5 crypto exchanges according to CoinMarketCap. Forbes also named KuCoin one of the Best Crypto Exchanges in 2021. In 2022, The Ascent named KuCoin the Best Crypto App for enthusiasts.
FTX and Crypto Bust Show Capitalism’s Limits
(Rachel Sun/CoinDesk)
Capitalism doesn’t always deliver desired results. For the reliable, constantly adjusting price signals that economic actors need to form well-reasoned investment decisions, there must be sufficient information about the factors behind the demand and supply conditions determining those prices.
Until 2022 and, most importantly, until the collapse of FTX exposed a gaping difference between image and reality, such transparency did not exist, not at the level required for the crypto industry to enjoy trustworthy price signals.
I’m not just talking about FTX’s mind-boggling accounting practices (or lack thereof). I’m referring to what we knew, or didn’t, about the conditions driving the soaring token prices that attracted millions of retail customers into multiple crypto exchanges and lending platforms, inflows that spun up billions of dollars in fees and, by extension, attracted great gobs of venture funding to those companies.
We’re all astounded that FTX, now essentially worth nothing, was valued at $32 billion a few months ago, and that lending service Celsius Network clocked in at $3.5 billion before it went under. But the problem goes deeper than these rogue actors: it’s about how the entire industry of crypto and trading was valued and funded, essentially based on “number go up” momentum trading.
For there to have been enough base-level utility to sustain the trading prices higher up the chain, there needed to be a lot more investment in underlying real-world use cases for tokenized value exchange, such as in decentralized energy. But the market wasn’t signaling that that’s where the money should go. It was saying “go all in” on FTX, Celsius and every other exchange or lender, well managed or otherwise.
How do we fix this? What we need is more reliable information about crypto businesses and industries, not just data on the short-term profitability of exchanges and lenders but in-depth details on the underlying foundation of those returns and their long-term sustainability.
Perhaps with that information, venture investors will ignore short-term opportunities associated with speculation and instead invest in real, longer-term projects.
Tougher regulations will help, but could easily go too far and curtail innovation. So, this is where industry needs to come to its own rescue. Leaders in this space who truly want the technology to foster a growing, sustainable economy of real-world value should join forces to align on standards to increase transparency.
Whether it’s a universally accepted approach to proof of reserves, ratings agencies that use on-chain and other records to assess the risks of different assets or protocols, or common standards for software audits and bug bounties, there is much that the members of this community can do to incentivize mutually beneficial disclosure requirements on each other.
One less-than-perfect but easy measure of mainstream interest in the crypto industry is that of Google search trends for relevant keywords.
This chart, produced by my colleague Sage D. Young, shows the pattern we typically see over time: Google Search interest in crypto terms – in this case, literally the word “crypto “ – tends to move in tandem with the price of bitcoin. But last month, we saw a bit of an anomaly: There was a sizable jump in searches on that word even as prices fell.
(Sage Young/CoinDesk)
It’s not the first time we’ve seen that. There were similar spikes earlier this year as crypto winter started to set in. But it should be obvious why this one is interesting: It comes at a time when this industry has been front-page news like never before. Two other Google queries I made showed huge record-setting surges for the terms “FTX” and “Sam Bankman-Fried.”
For the record, CoinDesk experienced something similar. We saw record traffic last month, a phenomenon that is usually paired with a period of rising prices.
We’re under no illusion that this will be sustained. Let’s see where the interest lies after the news cycle dies down.
The crypto market is at a critical juncture – we need strong players to act and lead.
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One nice thing about a downturn is how it makes people get back to basics, to express what matters about this technology.
This tweet was not one that got a lot of traction. But I’m including it because I thought Andrew Bailey, associate professor of humanities and social sciences at Yale-NUS College in Singapore, offered up an interesting alternative vision of the future.
What if large-scale exchanges and industrial bitcoin mining were regulated out of existence yet bitcoin itself continued to be used at local levels and mined with low-scale, off-grid renewable energy community-based projects?
Not such a bad world, huh? And if the backlash against crypto gets heavy, it’s one that’s quite imaginable.
Relevant Reads: Sam Goes to Washington, Sort of
(Stephanie Keith/Getty Images)
OK, so in the end he didn’t actually appear before Congress. But thanks to two scheduled hearings into the FTX collapse – both unexpectedly preceded by former CEO Sam Bankman-Fried’s arrest the evening beforehand – this ongoing saga once again dominated the headlines this week. Here’s a sampling of CoinDesk’s coverage:
Here’s the big news, as reported by Nikhilesh De, of SBF’s arrest in the Bahamas, whose government said it would extradite him to the U.S. to face charges brought by the U.S. Attorney’s Office for the Southern District of New York.
Within days, the Securities Exchange Commission, the Commodity Futures Trading Commission and the Department of Justice had all filed a series of civil and criminal charges against Bankman-Fried. Here, David Z. Morris breaks down what they all mean. TLDR: a very, very heavy book has been thrown at SBF.
Meanwhile, U.S. lawmakers in both the House of Representatives and the Senate press forward with hearings into the FTX’s collapse. Rather than the now-jailed SBF, the star of the show at the House hearing was John J. Ray III, the wise wind-down man brought in as new CEO of FTX to liquidate it. As Jesse Hamilton reported, Ray laid out just how bad the accounting mess was at the company, and said that it embezzled consumers’ cash.
