It’s been a rough year for crypto.
Even before last month’s dramatic collapse of trading platform FTX, the price of bitcoin had fallen significantly in 2022, the result of rising interest rates, its increasing correlation with failing tech stocks, and volatility emanating from other corners of the crypto ecosystem. .
After hitting an all-time high of $64,400 in November 2021, these swings pushed bitcoin’s price to $20,000 by this fall.
Then FTX, one of the world’s highest-profile crypto exchanges, melted down in November as allegations of misappropriation of client funds began to fly. Last week, a federal judge in New York ordered FTX founder Sam Bankman-Fried released on $250 million bond. He will be under house arrest at his parents’ home in Palo Alto, Calif., while he awaits trial.
The price of Bitcoin fell further as the FTX drama unfolded. But not only did its price not go to zero, it reached around $17,000 and remained stable around that point for over a month. Even with this year’s traffic, if you had bought one bitcoin at the start of the Covid-19 pandemic, in March 2020, you would still have made about $11,000.
Although it is still very early in the next chapter of crypto, there are many optimists who argue that the recent events are just one of the periodic shocks in the ecosystem.
“The problems we’re seeing in this space are caused by individuals and institutions making mistakes or taking too many risks, or worse,” said Daniel Stabile, partner at law firm Winston and Strawn and co-chairman of the organization. the firm’s digital assets and blockchain technology group.
Critically, nothing that happens in the crypto market in 2022 will undermine the inherent value of blockchain, experts say. It is the distributed, peer-to-peer network that processes Bitcoin transactions and which technologists see as a major innovation in crypto.
While they allow users to easily buy and sell cryptocurrencies, centralized exchanges like FTX go against the crypto spirit by relying on centralized power, experts say.
A true blockchain-based product, on the other hand, empowers end users by giving them control over their transactions. While most consumers will continue to rely on mainstream financial products, a growing number of users believe that such solutions are inherently less secure and more expensive than solutions based on blockchain technology.
It does nothing to challenge the power of the technology itself,” says Stabile. “So while this was a shock to the market, many people in the space remain indifferent about the future of blockchain technology.”
Continued blockchain believers include the CEO of Goldman Sachs. In a recent Wall Street Journal article, David Solomon said he still believes in the promise that an encrypted database system can disrupt finance. For example, he said, individual investors will be able to own and trade digital real estate shares, or “tokens.” Blockchains also allow for faster settlement of complex financial instruments, he said.
“Blockchain technologies like peer-to-peer payments and tokenization of traditional assets are changing corporations, from how they raise money to how investors trade shares,” Solomon wrote. “This has far-reaching implications for the global economy.”
In other words, the same technology that allows people to buy and sell bitcoin could one day change how people buy and sell everything else.
Flares
However, recent events have caused many to pause and reflect that there are some successful blockchain-based projects so far, other than those solely focused on cryptocurrency trading.
For most people, the concept of blockchain technology is still difficult to grasp, said Aviva Litan, vice president emeritus at technology consultancy Gartner. He contrasted the evolution of blockchain with the emergence of email, which became more readily a consumer-facing product, similar to the early days when households accessed email through Internet service providers such as AOL.
To that end, some vendors now avoid using the term “blockchain” altogether, he said.
“Everything else needs to be dramatically improved in terms of user experience, controls, security, customer service,” Litan said. “A ton of things have to change.”
Indeed, there have been two major blockchain outbreaks in the past two months alone. First, the Australian Stock Exchange canceled a project to replace its outdated clearing system with a blockchain-based system. And another effort, called Tradelens, by global shipping giant Maersk in partnership with IBM, which aimed to put its supply chain management system on the blockchain, was scrapped.
“The first generation of these designs simply cost too much money and many were too broad,” Litan wrote in a Dec. 2 blog post.
Behind the barley seeds
However, Litan said there are isolated cases of crypto- and blockchain-related projects sprouting up around the world. He highlighted the Indian state of Jharkhand, which is using blockchain to track and trace seed distribution, and a project by AB InBev, the beverage maker behind Budweiser and Michelob beers, which is using blockchain to track and trace barley supplies.
Both projects are led by Belgian technology group Settlemint. Its CEO Matthew Van Niekerk acknowledged that it would be easier to implement blockchain-based use cases in areas where no existing system exists, or in the developing world, where financial regulations may be lax.
“In the developed world, we have systems that are already working,” Van Niekerk said.
But the core ideas that make blockchain attractive, such as the ability to prove ownership of any asset, including a digital one, or a piece of information without trusting a third party, should have universal appeal, Van Niekerk said.
It’s just a matter of creating the right apps that engage users. Van Niekerk estimates that about 1 million farmers are now on a seed tracking platform in India, almost none of which are technologically sophisticated, he said.
Blockchain-based solutions could challenge large, developed global processes in the long term, says Gil Luria, director of institutional equity research at financial group DA Davidson. He said stock trading, real estate buying and selling and lending and borrowing continue to be ripe for disruption from blockchain technology.
Those processes, he said, are full of mediators which may charge fees that it believes are ultimately unnecessary. Real estate transactions, for example, require multiple third parties and can take 30 to 45 days, if not longer.
“Even if we (buyer and seller) both agree on the price,” Luria said, “it can be done immediately.”
Luria acknowledged that many attempts to reform these systems remain at the “sandbox” level, but “the promise is there,” he said.
Ethereum potential
David Abner, a former executive at crypto group Gemini and now a principal at Dabner Capital Partners, said he is reserving judgment on bitcoin’s price trajectory. However, he suggested that its price could fall further from current levels, given that it has so far shown to be less practical than Ethereum.
Although the price of this cryptocurrency also fell significantly earlier this year, it has remained stable at around $1,175 for the past six months.
“The Ethereum blockchain can become this key infrastructure layer for the future of technology services,” Abner said. “Bitcoin’s investment merits and use cases are not as clear to people as Ethereum’s use cases or potential use cases. There have been bigger programs hosted on the ethereum network as opposed to bitcoin.”
Gartner’s Litan says the main difference between bitcoin and ethereum is that the ethereum blockchain enables smart contracts that allow users to program the terms of how the token should be used.
“Bitcoin is good for an alternative to gold, and ethereum is good for programming and building apps,” Litan said, adding: “It’s the killer app for blockchain.”
However, he said, the ability to program or even access ethereum applications remains elusive.
“Most mortals can’t use it, it’s too complicated,” he said.
The future of regulation
Ryan Hunter, CEO of Alphaverse Capital, an institutional asset manager focused exclusively on crypto, said his fund is betting on ethereum’s long-term viability, noting that its network has never crashed since its inception in 2015.
He said potential crypto users should prepare for a steep learning curve going forward, as it ultimately involves trusting only yourself to be responsible for your assets. The philosophy known as “neither your keys nor your coins” would have saved many the grief of putting assets in the hands of a centralized exchange that ultimately failed like FTX.
Others, like Davidson’s Luria, believe the crypto ecosystem won’t truly mature until US regulations are clarified. While the initial impetus for the emergence of crypto may have been to transact outside any formal legal restrictions, “that’s not the world we live in,” Luria said.
While a debate has erupted over whether existing regulations are adequate to stop the alleged fraud at FTX, it is in the long-term interest of crypto builders to adopt further regulations, Winston and Strawn said.
The lack of regulatory certainty, such as whether crypto should be treated as stocks or commodities, has likely hindered the creation of new, disruptive applications, he said.
“It’s keeping emerging businesses in this area from entering the U.S. market,” Stabile said. “Who knows how many businesses could have developed here?” But the entrepreneurs thought the risk was too great to bear. So that’s a very important thing for regulators and lawmakers to figure out.”
The work behind building crypto apps, however, continues, Luria said.
“This idea of decentralizing the financial system to put more power in the hands of users and less in the hands of middle people and governments. It will continue to be influential,” he said.
“It doesn’t change because people lost money.”
