Cryptocurrencies: Tell me Why?!
Market Commentary

Cryptocurrencies: Tell me Why?!


It’s easy to bash cryptocurrencies these days – crypto assets have lost roughly 70% of their value since peaking in November 2021 and the year thus far has seen landmark busts across the ecosystem.

It’s easy to bash cryptocurrencies these days – crypto assets have lost roughly 70% of their value since peaking in November 2021 and the year thus far has seen landmark busts across the ecosystem. The latest debacle was the sudden bankruptcy of FTX, the third largest cryptocurrency exchange in the world which was valued at $32 billion as recently as January. Founded by Sam Bankman-Fried (aka SBF), a revered figure in crypto land, FTX crumbled within days following allegations that it was using client capital for trades gone bad at another SBF company, Alameda Research. As of this writing, FTX’s woes have triggered a run-on-the-bank of sorts on other crypto-focused entities, potentially leading to further turmoil in the space.

Bitcoin, the best-known digital asset, captivated many when it was created in 2008. Functionally, its underlying blockchain network offered a way to own and transfer assets across borders free of government intervention. Bitcoin’s mathematically-defined supply was also alluring in the midst of governments printing money worldwide, earning it the moniker of “digital gold”, or an inflation hedge and a store of value – a thesis that has not played out even though inflation is currently elevated.

Despite their decade-long existence, digital assets remain nebulous to most, however. While there are now over 21,000+ cryptocurrencies (why?!) worth a combined $835 billion, they comprise only a fraction of the world’s managed financial assets of over $125 trillion. Fairly so, given the still debated need for the asset class, its relative newness, a lack of government regulation, security breaches at custodians, bankruptcies, and opacity of firms in the space. Add to these issues the near limitless supply of many cryptocurrencies and the skepticism becomes easier to understand. Regardless, many investors piled into digital-assets either in the hopes of making a quick buck, or truly believing in the underlying technology and its potential to uproot current-day systems and processes. 

At its core, the blockchain is a record keeping system wherein virtually anything of value can be tracked and transferred. The encrypted, often decentralized, usually open, duplicated, and verifiable recording of transactions makes it unalterable and immutable. By definition, the technology can provide trusted information without the need of an intermediary. Many industries have intermediaries performing this function today, adding cost and friction to transactions. Real estate title companies or the multiple intermediaries in a payment transaction are good examples. Entrepreneurs are also leveraging the technology in other ways like creating smart contracts and the operation of hotspots, incentivized by issuance of the underlying cryptocurrency. Even governments are experimenting with blockchain via the issuance of central bank digital currencies (CBDCs).1 China’s “digital Yuan”, or eCNY, which was launched in 2021 is a prime example of the use of the blockchain. Simply said, there remains significant potential for the technology to fundamentally alter transaction flows as we know them today.

While the technology may be credible, many parts of the ecosystem are not. Oddly, government oversight may now be cryptos’ best hope. Increased regulation could put safeguards in place that ensure transparency, accountability, and stability, helping minimize future turmoil. Such supervision could legitimize the crypto-ecosystem and drive renewed interest in the space, which has felt like the wild-west of financial markets in the last year. Under the right circumstances, the value of the network – driven by a flourishing developer ecosystem creating real-world applications – could eventually dictate the value of underlying cryptocurrencies, unlike greed, hype, and speculation seen over the last few years. The path to realizing such value, however, is yet unclear.

1 Not all CBDCs are blockchain-based