It seems the market has been hit with a bit of a cryptocurrency crisis. Crypto exchange FTX recently filed for Chapter 11 bankruptcy, a towering fall from grace for a company once valued at $32 billion. The assets of thousands of customers were wiped out in an instant, and FTX founder Sam Bankman-Fried is now facing federal charges. Beyond this, the industry was just hit with another major loss, as one of crypto’s top lending companies, BlockFi, has similarly filed for bankruptcy. The companies were preceded in similar bankruptcies this past summer by two other companies, Celsius and Voyager.
Given all of these events, is it still a good idea to invest in cryptocurrency? Or is it a market on the way out, whose demise has been in the works?
Cryptocurrency has been a poor option for a long time
Volatility in the crypto market is hardly a new concept, Taimur Hyat, COO of Prudential’s asset management arm, writes for CNBC. “The most profound risks to cryptocurrency investing may still lie ahead, rather than in the rear-view mirror,” he says, adding that investors looking to invest in cryptocurrency for the long term “should remain wary.”
Hyat adds, “Despite all the hype about their being digital gold, cryptocurrencies have failed to demonstrate either ‘safe haven’ or inflation-fighting properties when faced with actual market volatility or the first real bout of serious inflation in developed markets.” He noted that, between 2010 and 2022, Bitcoin had “29 episodes of drawdowns of 25% or more. By comparison, equities and commodities recorded just one each.”
Hyat adds, “cryptocurrencies remain deeply problematic from an environmental, social, and governance perspective. Most troubling are the governance issues that have been highlighted by the FTX implosion.”
Investing in cryptocurrency could have lasting negative affects
Allison Schrager, a Manhattan Institute fellow and economic opinion columnist for Bloomberg, writes that she’d “been rooting for the crypto market to crash and burn. Not because I never invested in it … but because I don’t understand it, what value it serves or what problem it solves.”
Schrager also writes that “it doesn’t seem that FTX.com or even the entire crypto market poses a systematic risk — by design, crypto is supposed to lie outside the traditional financial markets.” Despite this, she believes “there are still reasons to worry about what the FTX situation portends for investors.” Schrager believes the whole market is in trouble and people are losing money, and adds, “That’s never good. It’s especially worrying that many of the newest investors to crypto, the ones who bought high and watched it fall, tended to be lower-net-worth investors, some new to financial markets.”
This opinion was echoed by noted economist Paul Krugman, who writes in an op-ed for The New York Times, “Recent events have made clear the need to regulate crypto … but it also seems likely that the industry couldn’t survive regulation.” Krugman does note, though, that falling prices don’t necessarily mean cryptocurrency is doomed, as assets fluctuate all the time. However, he adds, “Even if the value of Bitcoin doesn’t go to zero (which it still might), there’s a strong case that the crypto industry, which loomed so large just a few months ago, is headed for oblivion.”
A similar warning was given in 2021 by economist Eswar Prasad, who tells CNBC in an interview, “Cryptocurrencies may contribute to monetary and financial instability, especially if they were to spawn a large and unregulated financial system that lacks investor protection.” Prasad adds, “[Cryptocurrency] could end up worsening inequality” due to people having a poor sense of financial literacy, and that “any financial risks arising from investing in cryptocurrencies and related products might end up falling especially heavily on naïve retail investors.”
Even with market volatility, investing in cryptocurrency is still a good option
However, even with the cryptocurrency market in its current state, USA Today columnist and investor Alex Kellogg writes that “the current turmoil represents a right-sizing of the space that will look more like a bump in the road in the long run.” Despite the volatility of the industry, Kellogg adds that the actual promise of cryptocurrency “feels more real today than even a few years ago, and with some institutional investors getting on board, it seems unlikely that the entire ecosystem will collapse, even if a right-sizing was overdue.”
In Kellogg’s column, he also reaches out to Ariel Zetlin-Jones, the director of the Blockchain Initiative at Carnegie Mellon University’s Tepper School of Business. Zetlin-Jones compares the cryptocurrency market to the early days of the digital age, and says it’s “very reminiscent of the internet in the late 1990s. Lots of individual stocks and companies were over-valued and collapsed, but Amazon and Google are still around.”
Cryptocurrency may be down, but it’s not out
Even amidst evidence that cryptocurrency is nearing its end, some people still believe it may have a heartbeat. Maria Bustilla, a journalist, blockchain expert, and founder of Popula, writes for The New York Times, “The crypto market is wildly volatile not because of cryptocurrency’s underlying technology, but because of the uneasy and often dangerously unstable junction between emerging technologies and regular money,” something that she says is not new.
However, Bustilla adds, even as cryptocurrency may be crashing, blockchain itself looks primed to live on. “Responsible players in the crypto market have been calling for and helping to develop sensible regulatory frameworks for many years,” she says. “A bedrock of crypto regulations already exists.”
Bustilla uses the example of the dawn of the internet age as a precursor to blockchain, writing, “Today’s internet is deeply woven into the world’s economies, media, politics, industry, and social life, in good ways and bad, [and] a similar evolution is in the works for crypto.” She adds, “Blockchain, the technology that makes cryptocurrency possible, has the potential to be just as transformative as the internet innovations on which we depend every day.”
In the post-FTX world, staffers at Forbes’ investment brand Q.ai write that some crypto could be “more of a black swan event rather than the start of an era.” However, Q.ai notes, as most other experts have, that investments are always risky. “The key takeaway remains the same — if an investment seems too good to be true, it is,” Q.ai adds. “Investors who are bullish on crypto should still be cautious about investing too much of their savings into these volatile assets … diversification is still the best strategy.”