A new crypto winter for cryptocurrencies?
In the last year, negative news has been accumulating in the cryptoasset market. After the bankruptcy of crypto-asset platform FTX and the loss of almost three quarters of the value of bitcoin in a year, the future of cryptocurrencies seems more in doubt than ever.
The Super Bowl is the world’s most expensive advertising showcase. In its last edition, held in February, nearly 7 million dollars were paid for a 30-second advert, something within the reach of very few companies. One of them was FTX, the world’s third-largest crypto asset platform at the time. Its ad compared cryptocurrencies to some of mankind’s greatest inventions, presented the company as “a safe and easy way” to access this market and ridiculed the sceptics.
Just a few months later, FTX filed for bankruptcy and threatens to leave more than a million people around the world without their money. Founder Sam Bankman-Fried’s empire collapsed in just one week.
Following the sudden drop in the price of the FTX token in early November, Bankman-Fried requested a bailout from Binance, the world’s largest digital asset exchange platform. Although Binance initially agreed to help him, a few hours later it backed out, citing mismanagement of funds and other irregularities. On 11 November, FTX had no choice but to announce in a tweet the filing for bankruptcy proceedings and the resignation of Sam Bankman-Fried as CEO.
As with many cryptocurrency companies, FTX’s house of cards was built on expectations of revaluation. When investor confidence crumbles, nothing can stop a catastrophic spiral that eventually takes down the company, which in FTX’s case had reached a valuation of $32 billion at the beginning of the year.
Given its size, the aftershocks of FTX’s collapse are expected to be prolonged and devastating. The first victim could be the Crypto.com platform, which in recent months had already made massive layoffs due to the turbulent situation in the crypto-asset market. Its token Cronos has lost more than half of its value in less than a week.
Sources indicate that the platform deposited more than $1 billion in FTX, of which it was only able to recover about $100 million. However, Crypto.com’s CEO has denied this on Twitter, claiming that its exposure to FTX is less than $10 million. The truth is that his message has failed to calm the markets, which continue to fear the collapse of this platform.
The risk of a new “crypto-winter”
The collapse of FTX and the crisis at Crypto.com come against a backdrop of doubts about the future of cryptocurrencies. After reaching a valuation of 58,358 euros in November 2021, the successive falls of what became known as the “crypto-winter” and the uncertainty of the last few days have pushed bitcoin below 16,000 euros, which means it has lost almost three-quarters of its value in a year.
As we explained in the article “Cryptocurrencies, a highly volatile asset”, bitcoin is no exception. Volatility has also affected other cryptocurrencies in recent months. For example, Ether lost two-thirds of its value between April and June, falling from more than €3,000 to less than €1,000, before rising back above €1,900 in mid-August and dropping below €1,200 in recent days.
Terra Luna, the most talked-about case until the FTX debacle, went from being worth more than 80 euros at the beginning of May to being practically worthless in little more than a week. And yet it was a ‘stablecoin’, i.e. a cryptocurrency whose value is linked to that of another currency, commodity or financial instrument, which should provide more stability.
Although crypto-assets continue to have many enthusiasts, more and more portfolio managers assume that the structure of this market is too risky and the losses are too great. The notion of bitcoin as the new digital gold, a safe haven in turbulent times, has faded. As a result, many institutional investors are turning their backs on crypto-assets to increase their participation in theoretically safer markets, such as precious metals.
In any case, the current crisis in the cryptocurrency market reminds us of the importance of having a diversified portfolio to protect us from sharp falls in the valuation of any of our assets.
Session on cryptoeconomics
If you want to learn more about the crypto-assets market, on 22 November at La Plaça we will be hosting Susana Rodríguez Urgel, founder of The Digital Advisory Board, who will be speaking live about cryptoeconomics in the second chapter of “Que no faltin!” series.
This expert in cryptography and one of those responsible for “the commercial and digital transformation of Telefónica” more than a decade ago, as James Sène, president of 11Onze, pointed out, promises a provocative session open to debate. If you are interested in participating live to raise your doubts and questions, you can write to [email protected]
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