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After their near-death experience in 2022, cryptocurrencies are back in business. Bitcoin, whose market cap of $587.57 billion at the start of the week accounts for nearly 50 percent of the total market cap of all cryptocurrencies, was trading at $30,304 on April 17, 2023, up 70 percent over its price in November 2022. Ethereum, meanwhile, is up over 90 percent in the same period. Of the 20,000-odd cryptocurrencies, nearly 8,000 are active with 10 of them, including Elon Musk’s favourite, Dogecoin, now having a market cap above $10 billion each.
It’s a far cry from the end of crypto that was predicted not too long back when repeated blows left most digital currencies battered and bruised.
The first signs of trouble came in May last year when the stablecoin TerraUSD, or UST, then ranked among the 10 most valuable cryptocurrencies, tanked precipitously. It was a huge shock to the crypto universe since Terra had peaked at almost $120 the previous month. Simultaneously, TerraUSD’s sister token Luna collapsed to nearly $0. In the ensuing panic nearly $40 billion of investor wealth was wiped out as many ordinary people lost savings of a lifetime.
The crypto market went into limbo over the next few months and by the end of November 2022, had declined by more than 70 percent from its previous peak in November 2021. Any hopes of a recovery were cut short by the sensational disclosures at the end of the year about how Sam Bankman-Fried, once the poster boy of the crypto world, had been perpetrating a scam involving his hedge fund Alameda Research and the crypto exchange, FTX, he had set up. With US investigators calling it “one of the biggest financial frauds in American history,” the end seemed near.
Instead, the start of this year brought glad tidings for the crypto industry and since then prices of most of the large coins have been up and away.
There are several factors driving this bull run. Experts say that the bursting of the scams and the collapse of some currencies has actually worked to crypto’s advantage by eliminating the excesses that had inevitably built up following the irrationality of 2021-22. At the same time, increasing levels of security and decentralization of the Bitcoin network have led to its mainstreaming with many more companies accepting it, leading to rising demand, credibility, and adoption.
In addition, the implosion of SVB Financial and Credit Suisse (CS), all within a period of a month, cast a shadow of doubt over the stability of the traditional banking system. It proved that the traditional banking system, 15 years after the chastening crisis of 2008, continued to be fragile and vulnerable. A contagion was avoided only through government intervention, exactly the fault line crypto faithfuls have been pointing out for the last many years. A pause in the US Fed’s rate hike cycle is also fuelling the move into cryptocurrencies.
But to conclude from all this that crypto’s existential problems are over would be an oversimplification. US regulators are continuing their crackdown on institutions and individuals involved with cryptocurrencies.
In March, the US Commodity Futures Trading Commission (CTFC) filed a lawsuit against crypto exchange Binance, on allegations of “numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations.” Coinbase, another huge US exchange, is also under the lens. Meanwhile, the SEC has been cracking down on celebrities like Lindsay Lohan, Kim Kardashian, DJ Khaled and Steven Seagal, for illegally promoting digital assets. Meanwhile, the vulnerabilities of the crypto system were once again exposed last week when US authorities handed out a one-year sentence to James Zhong, an inhabitant of Georgia, for stealing $3.4 billion worth of Bitcoin.
Speaking on the sidelines of the annual Spring Meetings of the International Monetary Fund (IMF) and the World Bank, India’s Finance Minister Nirmala Sitharaman spoke about the G20’s discussion on crypto regulation warning that “Today, we are in the position to see how countries are now recognizing that it is not just a crypto asset regulatory issue, where countries will have to come together, but … There can be issues of macroeconomic stability itself.”
As the example of SVB and Credit Suisse proves once again, traditional finance has become just too big to fail. The same may be the case with digital finance soon.
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