It’s been a brutal year for crypto.
Even before the dramatic collapse of trading platform FTX last month, bitcoin’s price had fallen significantly in 2022. Due to rising interest rates, its growing association with take-down tech stocks. And volatility stemming from other corners of the crypto ecosystem. .
After hitting an all-time high of $64,400 in November 2021, these gyrations sent bitcoin prices as low as $20,000 this fall.
Then FTX, among the world’s highest-profile crypto exchanges, melted down in November. As allegations of misappropriation of customer funds began to surface. Last week, a federal judge in New York ordered FTX founder Sam Bankman-Fried released on $250 million bond. He will remain under house arrest at his parents’ home in Palo Alto, California while awaiting trial.
As the FTX drama unfolded, Bitcoin prices fell further. But not only did its price go to zero, it settled at around $17,000 and has remained near that point for more than a month. Even with this year’s roller-coaster ride, if you had bought a bitcoin at the start of the Covid-19 pandemic, in March 2020. You would still have made around $11,000.
While it’s still early in crypto’s next chapter, there are plenty of optimists. Who claim recent events merely amount to one of the ecosystem’s periodic malaise.
“The problems we see in this space are caused by individuals and organizations making mistakes or taking too many risks.” Said Daniel Stabile, partner and co-chair of the Winston & Strawn law firm. The firm’s digital assets and blockchain technology group.
Critically, experts say, what happens to the crypto market in 2022 does not diminish the inherent value of blockchain. It’s the distributed, peer-to-peer network that processes Bitcoin transactions. And what technologists see as crypto’s key innovation.
Although they allow users to easily buy and sell cryptocurrencies. Centralized exchanges like FTX run against the spirit of crypto by relying on a centralized authority, experts say.
True blockchain-based products, but, empower 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 those based on blockchain technology.
It does nothing to undermine the power of the technology,” Stabile said. “So while this was a shock to the market, a lot of people in the space remain uneasy about the future of blockchain technology.”
Among the current blockchain believers: the CEO of Goldman Sachs. In a recent Wall Street Journal op-ed, David Solomon said he still believes in the promise. That encrypted database systems can disrupt the financial system. For example, he said, individual investors will be able to own and trade digital shares — or “tokens” — of real estate. Blockchains allow for faster settlement of complex financial instruments, he said.
“Blockchain technologies such as peer-to-peer payments and the tokenization of traditional. Assets are changing corporations, how they raise money, how investors trade stocks,” Solomon wrote. “It has far-reaching implications for the global economy.”
In other words: the same technology that allows people to buy and sell bitcoins may one day . Change how people buy and sell everything else.
Still, recent events have given many pause and reflected that, so far. There have been few identifiably successful blockchain-based projects. Outside of projects focused entirely on cryptocurrency trading.
For most people, the concept of blockchain technology is still hard to grasp, said Aviva Litan. Senior vice president analyst at technology consultancy Gartner. He compared the evolution of blockchain to the advent of email. Which evolved into a more easily consumer-facing product, like in the early days. When families accessed email through Internet service providers like AOL.
To that end, some vendors now avoid using the term “blockchain” altogether, he said.
“User experience, controls, security, customer service. Everything else needs to improve dramatically,” Litan said. “A ton of things have to change.”
In fact, the past two months alone have seen two major blockchain flameouts. First, the Australian Securities Exchange canceled a project designed to replace. Its old clearinghouse system with a blockchain-based system. And another attempt by global shipping giant Maersk in collaboration with IBM called Tradelens. Which aimed to deploy its supply chain management system on blockchain, failed.
“The first generation of these projects cost too much money. and many were too broad in scope,” Litan wrote in a Dec. 2 blog post.
Tracking barley seeds
Still, Litan said, there are isolated cases of crypto and blockchain-related projects around the world. He highlighted the Indian state of Jharkhand using blockchain to track and distribute seeds. and a project by AB InBev. The beverage maker behind Budweiser and Michelob beer. Using blockchain to track and trace barley supplies.
Both these projects are being managed by Belgium-based technology group Settlemint. Its CEO, Matthew van Niekerk, acknowledged that blockchain-based use cases would be easier to install in areas. Where existing systems do not exist. Or in the developing world, where financial regulations may be lax.
“In the developed world, we have systems that already work,” Van Niekerk said.
But the core concepts that make blockchain attractive, such as the ability to prove ownership of an asset. Including a digital one — or verify 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 app that attracts users. Van Niekerk estimates about 1 million farmers are now. Enrolled in seed-tracking platforms in India. Almost none of whom are technologically sophisticated, he said.
Blockchain-based solutions could challenge large, developed global processes in the long run. Said Gil Luria, director of institutional equity research at financial group DA. Davidson. He says stock trading, real estate buying and selling. And borrowing and lending money are all set to be disrupted by blockchain technology.
He said these processes are crowded with intermediaries. Who can charge fees that he believes are ultimately unnecessary. For example, real estate transactions must many third parties and can take 30 to 45 days, if not longer, to settle.
"Even if we (buyer and seller) both agree on the price," Luria said, "it can be done instantly."
Luria acknowledged that many efforts to reform these systems remain at the “sandbox” level — but “there is promise,” he said.
David Abner, a former executive at crypto group Gemini and now head of Dubon Capital Partners. said he is reserving judgment on bitcoin’s price trajectory. But, he suggested that its price could fall further from current levels as it has so far shown less practical use than Ethereum.
While the price of that cryptocurrency also fell sharply earlier this year. it has remained stable at around $1,175 for the past six months.
“The Ethereum blockchain could be this key infrastructure layer for the future. of technological services,” Abner said. “Bitcoin’s investment merit and use cases are not as obvious to people as Ethereum’s use cases or potential use cases. Unlike Bitcoin, applications sitting on the Ethereum network have had greater development.”
Gartner’s Litan says the key difference between Bitcoin. And Ethereum is that the Ethereum blockchain enables smart contracts. which allow users to program the terms of how a token will be used.
“Bitcoin is good for gold alternatives. and Ethereum is good for programming and building apps,” Litan said: “It’s the killer app for blockchain.”
Still, he said, the ability to program or even access Ethereum’s applications remains out of reach.
“Most people can’t use it – it’s too complicated,” he said.
Ryan Hunter, CEO of Alphaverse Capital, an institutional asset manager focused only on crypto. said his fund is betting on Ethereum’s long-term viability, noting that its network has never slowed down since it was created in 2015.
Future of regulation
Potential crypto users must be prepared for a steep learning curve. He said, as it ultimately involves trusting only yourself to be in charge of your assets. The philosophy, known as “not your keys, not your currency,” will spare many the misery of holding 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 primary motivation behind the emergence of crypto may have been to perform transactions outside of any formal legal barriers. “that’s not the world we live in,” Luria said.
While debate has arisen over whether existing regulations were enough to stop the alleged fraud taking place in FTX. Winston and Strons Stabile said it is in the long-term interest of crypto creators to adopt more regulations.
A lack of regulatory certainty — such as whether crypto should be treated as a stock or a commodity. — Likely prevented new, breakthrough applications from being developed, he said.
“This is causing emerging businesses in this space to not enter the U.S. market,” Stabile said. “Who knows how many businesses can develop here. But entrepreneurs thought the risk was too much to bear. So this is a very important issue that regulators and lawmakers need to get straight.”
The underlying work of creating crypto applications continues, but, Luria said.
“This idea of decentralizing the financial system with more power in the hands of the users. And less in the hands of middlemen and governments? It will continue to be compelling,” he said.
“It doesn’t change because people lose money.”