There is still no name for the world events that have, in the space of a few months, wiped out an estimated $2 trillion. “Crypto crash” didn’t stick, nor did “crypto winter” – both terms have been used before, and neither captures the scale or significance of the crash. Until mid-2022, cryptocurrency was the most successful investment of its time – by some measures, in any era – and when the end came, it came with terrifying speed. Crypto boosters had imagined leaving traditional finance and its problems behind. Instead, they found themselves faced with new digital versions of old crises: investor panic, institutional bankruptcy and bank panic.
The tremors began on what was supposed to be crypto’s strongest ground, the so-called stablecoins that mimicked or shadowed state-issued fiat currency. In May, they lost $200 billion in less than 24 hours, dragged down by the collapse of twin coins terra and luna. In the chaos, thousands of investors and curious people Googled “could crypto go to zero?” and began withdrawing their investments. Major crypto exchanges have suspended deposits and withdrawals; one of the biggest, Binance, saw $1.6 billion worth of terra luna turn into less than $3,000. Three Arrows Capital, an early crypto-asset hedge fund, went into liquidation and its owners disappeared. Cryptocurrency lender Celsius Network has collapsed into bankruptcy, owing billions. Crypto had had particular appeal for ordinary retail investors, who felt its wealth creation was democratic, and darkness came for the vulnerable and overwhelmed. Online digital investment forums have posted phone numbers for suicide prevention hotlines. In El Salvador, where the president declared bitcoin legal tender and planned entire crypto towns detailed in golden dioramas, the nation faced a possible default. In China, which once incubated cryptocurrency before outright banning it, the Economic Daily said investors would soon bring bitcoin back to its true price: “totally worthless.”
The disaster also caused unmistakable schadenfreude. Atlantic led its cover with an essay titled “The Crypto Crash Feels Amazing”. Frank Muci, policy researcher at the London School of Economics, said WIRED magazine that the collapse was “a race on nothing”. Instead of collateral like stocks or gold, stablecoins like terra and luna were backed by a secret sauce of computer algorithms, which evaporated under pressure. Crypto’s opposition to old ways, its unregulated, speculative and volatile nature, made it too warm to the touch for most traditional banking institutions. This isolated the wider global financial system from much of the risk – and left content to watch it burn.
Regulators also watched. “Until recently, I think crypto, at least from a systemic perspective, was seen more as ‘too small to care’,” says Greg Medcraft, former director of financial affairs and companies at the OECD. “And then recently it probably moved into the too big to ignore category.” The failures were of “extremely topical” relevance “given that it is still falling apart,” but the crypto had never gone far into “too big to fail” territory. Instead, it seemed like just the right size to fail, and fail spectacularly, before anyone could determine for sure what it could be used for, how much it was worth, or even what cryptocurrency really was. .
For crypto advocates, the slowdown was a calculation that could clarify these questions. Although there was pain, the pain was mitigated by transparency. Chris Berg, Principal Investigator at RMIT University’s Blockchain Innovation Hub, believes it would be “wrong to take the concerns emerging from the GFC and apply them to a radically different financial infrastructure with radically different implications.”
“When we have these collapses, we understand very quickly how they are going to unfold,” he says. Everyone knows where the liabilities are, says Berg, and there’s no muck of toxic assets left when the true value of something turns out to be zero.
Perhaps the broader implications of the crypto downturn are more cultural than economic. During its short history, cryptocurrency has not only generated and lost terrifying fortunes, but also created a distinct arena for imagining the future. For The Wall Street Journalthe crash was a moment when an industry fueled by “arrogance, enthusiasm and optimism” suddenly discovered that “all three are in short supply these days, as losses and layoffs mount.”
The “swagger”, and its decrease, were characterized by Do Kwon, the founder of luna. He went from obnoxious to sorry.
Kwon is an archetypal “crypto bro”. Hot-headed and young, he liked to insult online critics by calling them “poor”. Rather than a trickster, Kwon’s deception started with self-deception. He had a near-evangelical belief in his own product – he named his newborn daughter Luna after the stablecoin – and, according to one digital finance commentator, made “a big impression of a man who truly believes in what he sells”. After Luna (the digital incarnation) failed, he described himself as “heartbroken”, reflecting a psychological dimension to the damage that was widespread. It originates from a profound and influential idea that generated its own utopian belief system.
The origin story of bitcoin, the first true cryptocurrency, has now almost entered into legend. In 2008, a nine-page article titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was posted online, with authorship attributed to Satoshi Nakamoto. This pseudonym still hides the identity of a person, or a group of people, who today are among the richest in the world. The central idea of the paper concerned an economic problem called double spending, the risk that a non-physical currency could be used twice at the same time. Satoshi’s solutions were elegant rather than dazzling and built on existing work acknowledged in the footnotes. What gave this dry prose such a seismic reception was the cultural moment it arrived: the immediate aftermath of the global financial crisis.
Satoshi’s most appealing insight was about confidence. Cryptocurrency could abolish it, and that was a good thing. Bitcoin would do away with currencies, central banks, and a corrupt, hierarchical financial sector. In their place, it would operate a kind of permanent register, which would be public but anonymous. Every bitcoin transaction would be verified by other bitcoin users, through a peer verification process. This required expensive and energy-intensive computing power, but this could be compensated by more bitcoins. Inflation would be avoided by having a finite number of bitcoins, forever capped at 21 million. Released slowly, they gradually become more difficult to obtain.
At a time when civic faith, especially trust in the financial system, is at an all-time low, Satoshi offered a tantalizing alternative. Why trust when you can verify? Unlike man-made institutions, the computer code at the heart of bitcoin was incorruptible. In time, that could wipe out the whole rotten edifice of Wall Street and the Federal Reserve, maybe even the White House. There was no need to understand the intricacies of computing – as alternatives to bitcoin became more complex and investors became less cautious, they were almost irrelevant. You just had to feel the vibe. Some invested their money in the dogecoin joke token – it was going “over the moon”.
In addition to raw electrical energy, cryptocurrency relied on cultural energy: memes, forums, and a deep well of popular dissatisfaction. It had a political arm, a technological, market-loving, strongly masculine libertarianism. For decades, classical liberal thinkers have proposed denationalized currencies (Friedrich Hayek, the father of neoliberalism, did so in 1976) as an escape from the clutches of the state, inventions that gelled with the old instincts of right to secession and exit. This sentiment resonated most strongly in the United States, which itself is the product of such instinct. Satoshi wrote that bitcoin would be “very attractive to the libertarian point of view” and the libertarian point of view agreed.
Ironically, it was government and central bank action that fueled bitcoin’s rise. Low interest rates, quantitative easing and stimulus spending created a sea of cheap liquidity that flooded financial markets. Cryptocurrencies were often treated as instruments of pure speculation and their prices reached dizzying heights. Bitcoin surpassed $68,000 in November 2021, a spike that led to what BTC Markets managing director Caroline Bowler calls “FOMO investors” — those who feared they would miss out — sometimes making first-time investments. .
It was a lottery, but one that could actually pay rent, even buy a house, and provide unimaginable opulence in a post-GFC world. Crypto’s continued decline partly reflects the loss of confidence among those retail buyers, says Bowler. “It’s retirement from the market,” he says. “We’ve definitely seen those volumes drop… In crypto, it’s actually more retail because it’s more of a retail-driven market. I think that sentiment risk has spread throughout the trading and investing space.
For now, the price is settled, but the argument is unresolved. Crypto followers and critics are both fanatical and occupy far extremes. It’s either one of the greatest inventions in history or one of the greatest scams in history. If believers are right, crypto could revolutionize finance, government, and human freedom. If they are wrong, it is a destructive illusion that imposes enormous social, financial and environmental costs just when we can least bear them.
This is the first part of a four part series.
Next week: The dark side of crypto.
This article first appeared in the print edition of The Saturday Paper on July 23, 2022 under the headline “Going to the Doges”.
A free press is a paid press. Now is the time to subscribe.