Blog: Will the collapse of FTX take the whole cryptocurrency market along with it?
Macroeconomic turbulence has brought almost all markets down this year. The collapse of Terra Luna, a $60 billion ecosystem at its peak. Cryptocurrency hedge funds and loan services going bankrupt. And finally, the reveal of wrongdoings and fraud in one of the largest cryptocurrency exchanges FTX, and the total collapse of that enterprise. Once again many have declared the death of cryptocurrencies on social media and even in some newspapers. So is this finally the end of cryptocurrencies?
What has happened?
The year 2022 in general has been very bearish across the different markets, but in the cryptocurrency market, it has been particularly weak. At the beginning of the year, the cryptocurrency market came downward alongside other markets due to the changed macroeconomic environment. However, in May of 2022, the collapse of Terra Luna triggered a chain of events within the cryptocurrency markets that’s effects are still being unfolded. The collapse pushed cryptocurrency funds and companies that used a lot of leverage into insolvencies and bankruptcies. When these parties went bankrupt, the losses spread not only to the investors but also to other companies that had given loans to them. This created a cycle of credit losses that are familiar from banking crises. Eventually, through the market turmoil, it was revealed that one of the largest cryptocurrency exchanges, FTX, had been misusing its customer funds, causing a bank run from the exchange and thus pushing FTX into bankruptcy. The collapse of FTX caused the already weak cryptocurrency market to fall even lower.
How do cryptocurrencies differ from companies?
So FTX can be declared dead, but will it take the entire cryptocurrency market with it? Even though the FTX was one of the largest crypto exchanges, and with its collapse cryptocurrency market experienced very dark moments in November, Bitcoin has survived relatively worse situations in the past. For example, in 2014 Bitcoin exchange called Mt.Gox crashed and it had represented 70 % of Bitcoin's exchange volume at its peak. Centralized actors such as companies and exchanges can collapse by going bankrupt, but open and globally decentralized blockchains don’t have a single point of failure that could destroy them. Destroying Bitcoin or Ethereum would require tens of thousands of independent parties running these networks would cease their operations at the same time. So the collapse of Mt.Gox or FTX isn’t even close to doing that. And thus, Bitcoin and Ethereum will continue to make new blocks and develop like this far.
Although cryptocurrencies are a relatively new asset class, they have already proven themselves to the point that they are here to stay. Bitcoin is legal tender in two countries, and billions of dollars in transactions are made on Ethereum DeFi ecosystem every week. It is true that some smaller cryptocurrencies die off in every bear market and this has happened also this year. However, the potential of decentralized blockchains and what Web3 technology enables is so revolutionary that it is hard not to think that their future as a whole is anything else but bright.
Despite the bear market Bitcoin’s position as a payment method has progressed this year in several countries. Ethereum successfully implemented the transition from the Proof-of-Work model to the Proof-of-Stake model in the fall of 2022. In addition, several scalability solutions in Ethereum ecosystem have developed steadily forward. The development of stablecoins has progressed through several different projects this year, which will without doubt ease the adaptation of the daily use of cryptocurrencies in the future. During bear markets, developers often successfully innovate new solutions based on the weaknesses discovered from the weak market conditions. These innovations also often go unnoticed at first by the broader audience because their interest in the market has shifted to other things due to the falling price action. These innovations however are in the end some of the main drivers in the next bull market.
It is true that 2022 has been a weak year for the cryptocurrency market, and the several wrongdoings by centralized actors are sure to affect the regulations of the market in the future. However, after deep crises, it has often been the case that the projects that survive are stronger and better able to survive the same kind of crises in the future.
Bitcoin has died in the newspaper headlines and statements of “experts'' hundreds of times already. Once again, reports of the death of Bitcoin are greatly exaggerated. Today Bitcoin has been joined by several other proven cryptocurrencies and projects. Therefore, it is reasonable to assume that the use of cryptocurrencies and the applications enabled by blockchain technology will be a bigger part of people’s lives in the future.
Manu Isto Cryptocurrency specialist