A new house. A better car. Travel to all train. Early retirement from work. There are vital aspirations that only money pays. And cryptocurrencies have been converted for many years into the fastest passport to those dreams. A safe conduct that promises wealth without days from nine to five or long traffic jams on the way to the office. Just buying and selling at the right time.

For this reason, the 2022 crisis, plagued by bankruptcies, collapses and bad news that have taken TerraLuna, Three Arrows Capital, Celsius, Voyager or FTX among others, and have left the bitcoin price shivering, has been a flash. of painful realism after the profitable 2021. An abrupt awakening of the year where everything seemed possible.

Speculation has not been invented with cryptocurrencies. It has long been possible to buy Japanese yen, Turkish lira, wheat, iron or steel in the markets without touching a physical note or knowing much about agriculture or metallurgy. Just waiting for its next revaluation on the back of the correct trend.

Nor are they the only ones with dizzying volatility. Large companies like Facebook or Tesla have suffered collapses similar to that of bitcoin. But investing in digital currencies has taken the risky art of gambling for big returns to a new dimension. The money does not go to a company with profits and dividends, nor to a house that can be rented, nor to tangible merchandise whose prices oscillate with supply and demand following the expansive and contractive cycles of the economy. They are digital assets that survive thanks to an act of faith. Because one day, you don’t know when, everything will be paid for with them. Or because its limited number will make it as reliable a store of value as gold. Supposedly.

To understand the delicate moment they are going through, it is worth going back to November 10, 2021. That day, bitcoin was exchanged for almost $69,000, an all-time high to which it has not returned. The atmosphere was euphoric. The most daring gurus predicted new frontiers beyond $100,000. Institutional investors, previously reticent, were showing increasing interest in riding the wave. The stimulus policies of central banks and governments —checks included, in the case of the US— flooded the markets with liquidity. Crypto received the unconditional support of billionaires such as Tesla founder Elon Musk, who for a few months even allowed his electric vehicles to be purchased with bitcoins in the US before regretting it and backing down. 

In those days of wine and roses, few predicted that an earthquake was coming that a year later would lead to bitcoin trading for less than $16,000. And all the cryptocurrencies to see their joint value reduced from three trillion dollars to the current 800,000 million, the equivalent of the disappearance of the capitalization of Apple, the most valuable firm in the world.

The first signs of weakness came when the Federal Reserve began raising interest rates aggressively to combat inflation. The era of cheap money was coming to an end, and with it, the perception towards risky assets changed abruptly. The technological ones, more innovative but with more uncertain profit projections, were the hardest hit on the stock market. And cryptocurrencies, considered by some to be a kind of start-ups, fell into a spiral that they would soon name: crypto winter.

That setback then had the excuse of the external trigger: monetary policy. The new slogan was making its way among its defenders that it would be necessary to hibernate in the lean days, taking advantage, whoever could, to accumulate more with price reductions. That philosophy would blow up in three days of May. The time it took for the Luna cryptocurrency, created by the South Korean Do Kwon, to go from being worth 100 dollars to one cent. Outsiders could no longer be blamed for the problem. The fuse was lit at the very heart of the crypto system.

For tens of thousands of investors, the collapse of Luna meant the disappearance of their savings. Reddit forums and Telegram groups were filled with horror stories. Some ran out of funds to continue paying their mortgage, others claimed to have lost the will to live. Perhaps to console themselves for not being the only ones beaten, perhaps to let off steam, many shared the figures that evaporated from their accounts: $20,000, $60,000, $200,000. Inheritances, years of saving a part of the salary, family money. All lost.

South Korean Do Kwon, co-founder of TerraLuna, whose whereabouts are a mystery.Woohae Cho (Bloomberg)

The coup was a humbling experience for an industry where self-criticism and doubt are foreign bodies. In which the success of cryptocurrencies is as inevitable as sunrise. And from which experts, including Nobel laureates, who show skepticism about their future, are ignored or attacked.

Suddenly, a feeling of vulnerability covered everything. How many more would fall down the crack opened by TerraLuna? Was it an isolated event or was a massive contagion brewing? The answer would not be long in coming. In July, the Voyager Digital platform declared bankruptcy, and a few days later Celsius Network imitated it after previously stopping the withdrawal of funds from its clients. Following the domino effect, Singapore-based fund Three Arrows Capital, hard hit by the TerraLuna collapse, also fell that summer.

As the list of wronged men grew steadily, and the price of bitcoin receded with the same discipline, a 30-year-old Californian named Sam Bankman-Fried seemed to be swimming against the current. His firm, FTX, resisted the growing distrust, and the young man at the controls stood as an example of management and savior of the industry. The son of two professors from Stanford University and a Physics graduate from MIT, he founded the FTX cryptocurrency buying and selling platform in 2019. And it grew in size until it became one of the largest in the world.

His promotion was forged from the Bahamas, where he established the company’s headquarters, and where he lived in a luxurious penthouse with a dozen executives from his business. His public profile stood out. His early landing in the rankings of the richest on the planet, thanks to an estimated fortune of 26.5 billion dollars at his peak, was joined by his political side as one of the largest donors to the Joe Biden campaign to the White House.

The praise was flying. Fortune magazine compared him to the legendary investor Warren Buffett in its August-September issue. Other media saw him as a new JP Morgan for his efforts to rescue crypto firms on the verge of bankruptcy, as the renowned American banker did at the beginning of the last century with financial institutions in trouble. However, in just a few months, camouflaged with an industry capable of ascending to heaven and descending to hell at full speed, the name of Sam Bankman-Fried would fall from the top to join the cast of Wall Street villains, whose president Honorary Bernard Madoff, the financier who ran the biggest Ponzi scheme in history, has died in prison.

Many things happened in that transition. Doubts about the collateral on which the foundations of FTX were based revealed by the CoinDesk publication —later confirmed when it was learned that their main asset was the cryptocurrencies that they themselves issued, called FTT—. Binance, his great rival but also his partner, sells his shares upon finding out. Mass withdrawal of client funds. Rescue threat by Binance. And finally, when verifying the scope of the fraud and the lack of control of its books, the collapse of FTX when nobody throws it a lifeline and it cannot comply with the refunds that its clients ask for.

Again, the ghosts of TerraLuna appeared. More messages of regret on social networks. More desperate questions about how to recover what was lost. A devastating audit that exposes bad management and accounting practices, and the culmination of the arrest of Bankman-Fried in his Bahamian paradise, accused of fraud against investors and lenders, conspiracy to launder money, fraud in the securities markets and illicit campaign financing, among other charges.

The hole that it leaves could be around 10,000 million dollars if we add the 1,800 million defrauded to investors who entered the capital of FTX and the more than 8,000 million in which the embezzlement of clients is estimated. The young FTX boss, arrested and extradited to the US, where he is now free on bail, faces a possible prison sentence of up to 115 years for this and other charges. The crypto good guy had, in reality, led a life of excess, drugs and polyamory with the funds of FTX clients.

Creative destruction

Unmotivated and alert after so many setbacks that they did not see coming, divided on social networks, where the managers of rival platforms throw their heads at each other and blame each other for what happened, the most optimistic survivors of the crypto industry speak of a creative destruction that It will serve to cleanse the sector of poorly managed projects.

Raúl Marcos, CEO of the carbono.com platform, supports this thesis. “It is a very innovative ecosystem, in which hundreds of ideas and business models are tested, and many of those companies fail and close. This does not affect the future of the crypto world: bitcoin and ethereum continue to function without problems, and the rate of innovation continues to be very high thanks to the thousands of developers and entrepreneurs who continue to believe, ”he defends.

At Bitpanda, one of FTX’s competitors, they acknowledge that the sector is affected after its fall, but they do not see it as an exclusive phenomenon of the crypto world. “It’s going to cause a lot of confidence issues, both among retail and institutional investors. It’s important to admit that something is happening, but it’s also happened in the traditional financial industry, where you had Bernard Madoff, or cases like Wirecard. It is not the first time nor the last that will happen in the crypto world or in the world of finance”, argues a company spokesperson.

Alicia Pertusa, head of Strategy and Blockchain at BBVA, separates the innovative side from the speculator. “Blockchain technology [on which cryptocurrencies are based] has proven to have relevant uses to make processes more efficient and provide transparency to transactions. Some projects have carried out their activity without a sufficient level of risk control or without sufficient transparency with consumers, but as the regulation becomes more specific and complete, the less robust projects will gradually disappear ”, she predicts.

Interconnection is one of its greatest weaknesses, due to its potential to generate contagion. As happened with the string of victims of TerraLuna, the end of FTX led to the bankruptcy of BlockFi a few days later. And other names like Genesis and Gemini, the latter run by brothers Tyler and Cameron Winklevoss, famous for battling with Mark Zuckerberg over the original idea for Facebook, are having problems.

The big game piece is Binance, the world’s largest platform, led by Canadian Changpeng Zhao. His hypothetical fall would be an almost final blow. In these days of uncertainty and rumors, Zhao multiplies on social networks to deny that they are suffering from a crisis, and distributes accusations of spreading FUD – acronym for fear, uncertainty and doubt: fear, uncertainty and doubt, in Spanish – to push them into the abyss with news false.

Leif Ferreira, founder and CEO of Bit2Me, the largest Spanish platform, mistrusts some of the most important players in the sector, who locate their headquarters in tax havens. “Nobody knows where Binance really is. The main subsidiary is known to be in the Cayman Islands. And no one knows if the Chinese government is behind it, or its sources of financing, or its partners, or its corporate structure, or what use it makes of cryptocurrencies. As with Crypto.com, OKX or Kucoin, they are opaque platforms, with headquarters in jurisdictions that leave the client unprotected. The CNMV is accepting them in its registry and does not prohibit them from providing services, ”he laments. Regarding the crisis, he predicts that the crypto universe will recover. “We have been in the industry for 10 years, we have already gone through three crypto winters, and after them it has grown without rest.”

It is difficult to measure the impact of an eventual total collapse. Fabio Panetta, a member of the powerful executive committee of the European Central Bank, pointed out this week with relief that banks are not very exposed to their risks, so the weight of such a cataclysm would fall mainly on individuals, whom he urged to protect . According to the JPMorgan Chase Institute, 13% of Americans have bought cryptocurrencies. In Spain there is no reliable data on how many there are, but many of them showed up last August at the event organized at the WiZink Center in Madrid by MundoCrypto —an entity that offers training courses on cryptocurrencies—, which brought together 7,000 people.

José Antonio Bravo, head of cryptocurrency taxation at Àgora, believes that events like this do them no favors, as they turn them into a caricature. “People appear who are only interested in getting rich with as little effort as possible. The purpose of bitcoin in its creation was not to turn those who acquired it into casino millionaires, but to create a digital asset that could be used as money without the need for it to be issued by a central authority.

Whether or not its promoters intended it, from the moment they gave birth to new millionaires and destroyed fortunes, cryptocurrencies cannot be understood without their more speculative side. A market open 24 hours a day from Monday to Sunday that moves to the sound of positive or negative news about its adoption.

For Patricia Suárez, from Asufin, “it is a world that powerfully attracts the attention of a very young user, with little aversion to risk and, frequently, little or poorly trained”. Difficulties in demanding responsibility when there is a fiasco are common. “Most of the platforms have their registered offices outside of Spain, they communicate in English and it is not clear where, how and before which body the claims should be filed”.

Rarely has an asset aroused such conflicting visions. Carl Runefelt, one of the most well-known cryptocurrency investors, predicts that bitcoin will make banks as obsolete as email has made traditional mail. But his detractors strip him of that avant-garde aura. And they are as blunt in criticism as his supporters in defense. Investor Charles Munger, Warren Buffett’s right-hand man, believes that cryptocurrencies “are like a venereal disease” and should be banned. Microsoft founder Bill Gates argues that they are based on the “big fool” theory of finance. That is, you only win if you find someone stupid enough to buy at a higher price.

Its defenders usually cite among its virtues the ability to provide financial freedom, decentralization and its status as a refuge against inflation. But reality, for the moment, does not accompany words: a good part of its users are today slaves to losses; they use centralized platforms such as Binance or Coinbase to buy and sell (all of which are susceptible to bankruptcy without the possibility of bailout), and investing in cryptocurrencies has not only not helped them maintain their purchasing power in this period of rising prices, but has it has widened the hole in their checking accounts.

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