The collapse of FTX has left many people with the impression that “cryptocurrency is a scam”. People who have dug into this matter now have reason to feel vindicated. Here is a witty little poem posted in response to FTX is crypto cancer (so is Coinbase):
Disclaimer: Sam Bankmen-Fried has not been formally charged with a crime at this time. There is no indication that FTX ‘didn’t like the SEC rules’ as stated in the poem. I do not endorse the views of this poem, which is included in this article for satirical purposes only. (Paul T. Lambert, via Seeking Alpha)
It’s worthy of a laugh, but the nuance is more complex. Having helped pioneer institutional cryptocurrency investing, and having lived through the “crypto winter” of 2018 and 2019, I’d like to share my thoughts on where the industry is headed.
Update on FTX
It’s important to know that FTX’s Sam Bankman-Fried was special not a Bitcoin maximalist, claiming that Bitcoin ‘has no future as a payment network’. Bitcoin is decentralized, meaning that no single person or entity controls it. FTX’s FTT (FTT-USD) cryptocurrency is centralized, controlled by FTX. FTX used FTT to prop up Alameda, who allegedly traded against FTX customers, allegedly using their accounts as collateral.
FTX was also the hype man for other ‘centralized crypto’ projects, such as Solana (SOL-USD). Solana is incredibly impressive in many ways, but as it turns out, so centralized that you can pause it. (I sold all of Solana earlier this year.)
FTX’s disdain for Bitcoin clearly went beyond the conflicting philosophies of decentralized finance vs ‘centralized crypto’. FTX has been accused of having a short position of $1.4 billion in Bitcoin, with zero Bitcoin reserves.
This suggests that when clients “purchased” Bitcoin through FTX, they actually received a Bitcoin IOU from FTX. This would effectively mean that FTX suppressed the price of Bitcoin to $1.4 billion, and the only reason we know that is because FTX is now bankrupt.
NEW
In addition to this alleged Bitcoin short, Sam Bankmen-Fried also sold $300 million worth of FTX stock during a private funding round. He has not been arrested and is expected to speak at a conference in New York this week, along with Ukrainian President Volodymyr Zelensky, US Treasury Secretary Janet Yellen, Blackrock CEO Larry Fink and Facebook founder Mark Zuckerberg.
The crypto cycle
Back in early 2017, this type of question was asked quite often: Why Bitcoin? Why not Litecoin (LTC-USD)? Why not Monero (XMR-USD)? What about Ripple (XRP-USD)? What about DASH (DASH-USD)? What about Ethereum (ETH-USD)? Would you rather own Bitcoin or Bitcoin SV (BSV-USD)?
A Snapshot of the Top Ten Cryptocurrencies in May 2017 (CoinDesk)
Each of these had their own distinct advantages over Bitcoin. Litecoin could do more transactions per second, as could DASH. Monero was more private Bitcoin (and still is), same for ZCash (ZEC-USD). Ripple/XRP had institutional support (before it was cool). NEM (XEM-USD) added new features to the blockchain, as did Ethereum.
In the long run, the distinct advantages of these different cryptocurrencies have proven to be marginal. Today, they are largely irrelevant, with the exception of Ethereum. Bitcoin is able to process twice as many transactions as Visa at 1/13 the cost using the Lightning Network. This system enabled El Salvador to roll out Bitcoin as legal tender.
Today, cryptocurrencies like ZCash and DASH are largely forgotten memories, buried under the flood of newer smart contract-enabled offerings. Cryptocurrencies such as Solana, Avalanche, Algorand, Cardano, Polkadot, Luna, Hedera and Theta dazzled both investors and VCs with innovative blockchain protocols and consensus mechanisms.
By 2021, the excitement of smart contracts, DAOs, decentralized exchanges, stablecoins and NFTs drove the cryptocurrency market to nearly $3T in capitalization. Once again, the question of Bitcoin’s role and future became central to cryptocurrency. For the VC hype machine, the future was FTT. For the Bitcoin community, “Rome wasn’t built in a day.”
So yeah… …I think some of the other platforms in the larger crypto space have tokens. And so they are more focused on advertising the token. And then they tend to be very heavy on marketing.
Bitcoin has no market department. It just has a lot of different individuals owning it, and really, no one is really marketing it to the world, right? It’s only marketed by organic adoption, so it tends to be kind of a low-key message, I guess. Right?
And the ones that build on that are more interested in building lasting value because they don’t have a sign that they’re trying to like rush to market or sell or anything.
-Adam Back, Blockstream CEO and Bitcoin pioneer
My thesis is that the future will look somewhat like the past, that the benefits of today’s pioneering projects will prove to be marginal in the long run. Therefore, the hot air flowing out of the crypto ecosystem will result in a renewed focus on Bitcoin; Bitcoin will be able to reap the benefits of billions in VC-funded R&D, slowly accumulating open source innovation.
This future is already emerging. A decentralized exchange for Bitcoin is being worked on. There are several projects to bring more smart contract support to Bitcoin. There are Bitcoin sidechains. There are even Bitcoin-related NFTs.
It begs the question, What new innovations will unleash the next wave in the cycle?
Conclusions
With the hot money making an exit, the industry is about to go through a massive realignment of priorities and initiatives. I don’t know where the price will eventually bottom, but this development is favorable for Bitcoin in the long run. It opens the door for Bitcoin to develop beyond being “digital gold”. It is a blow to centralized exchanges, which have become obstacles to progress.
Similarly, there is a very strong case for Ethereum. Perhaps the next era will be characterized as a strategic competition between the two.
