Is the cryptocurrency boom over? Speculation from analysts, investors and speculators alike points to yes. The recent downfall of FTX, one of the largest cryptocurrency exchanges until a week ago, sent shockwaves through the trillion-dollar crypto universe as the $32 billion company seemed to vaporize overnight. Financial instability concerns triggered a wave of customer withdrawals totaling billions of dollars. But FTX lacked sufficient funds to pay sellers, instead imposing a halt on withdrawals altogether.
Over the last several years, cryptocurrencies benefited from huge injections of money during the pandemic due to a combination of the Federal Reserve’s easy money policy (low interest rates, high bond purchases) and elevated levels of personal disposable income as a result of stimulus checks. The influx of money into crypto assets led to funding for, and the subsequent expansion of, an array of businesses that capitalized on the underlying decentralized technology.
More recently, digital assets like crypto have felt the pain of a worsening economy: in recent months, inflation has soared, interest rates have risen and cash has decreased. This is detrimental for all asset classes but particularly digital assets, which are considered to be sponges for excess money. Less money also means more risk-averse investors, who are increasingly stepping out of crypto investments and turning towards safer options.
FTX isn’t alone in experiencing the effects of a cooling market. The value of bitcoin, a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network, has also plummeted. According to CoinDesk, the currency currently accounts for $319 billion of the entire crypto market, down from its peak of $1 trillion about a year ago. Government leaders are seizing the moment to call for more, or better, regulation of crypto overall, with US Treasury Secretary Janet Yellen commenting that the collapse of FTX was evidence that crypto platforms need better protections for customers.
Not everyone is down on crypto. Brian Armstrong, the founder of Coinbase, a platform for buying, selling and storing digital assets, told the Financial Times that he is “‘just as bullish on crypto as ever,” mentioning the solution to the current crisis is continued crypto investments in decentralized markets. Despite his outlook, Coinbase has similarly felt the effects of a crypto slowdown, laying off nearly a fifth of its workforce and shrinking from a market capitalization of $76 billion to $11 billion in the span of a year, according to the Financial Times article. While the future of crypto is uncertain, there is likely to be further fallout from the collapse of one of the industry’s largest exchanges.