May 13, 2022 - 7:00am

The much anticipated shakeout of the crypto market has finally arrived thanks to the breaking of the buck of two key stablecoins, USD Terra and USD Tether, that have long provided a vital “hard currency” funding pathway to the crypto economy. 

Flagship coins from Bitcoin to Ethereum and XRP are down 30-40% in the week.

But rather than marking the end of crypto, as many are now convinced is the case, it’s better to view current events as an important evolutionary moment that can help the market switch to a more utility-focused phase. That means transforming from a speculative asset that delivers returns only when “number goes up” — i.e. when there are more buyers than sellers — to one more focused on generating cash-flows from the provision of useful services to the economy. 

Such services could include everything from providing privacy to financial transactions to helping track energy savings or copyright claims.

Instead of being the death of the market, this might be more analogous to when internet stocks transitioned from their own speculative phase over the course of the 1990s to the practical deployment period of the 2000s, eventually paving the way for the successes of Amazon and Google.

Even so, the market must acknowledge some uncomfortable truths first. The key one is that some 95% of the market, or more, is probably worthless — largely the product of a ridiculously cheap funding environment driven by excessively loose central bank policy.

With the Fed’s 50 basis point rate rise last week, that era has brutally come to an end. The largely zero yielding world of cryptocurrencies was always going to be rocked by competition from positive-yielding fiat challengers.

But again this emulates what has happened before. It’s no coincidence that the dot-com bubble, which peaked in March 2000, also burst amid a Fed tightening cycle that began in May 1999. 

It’s worth remembering too that the dot-com craze was largely financed by the capacity of entrepreneurs to print their own money in an accommodating market. Rather than issuing cryptocoins, they floated company stock on public exchanges or paid out salaries in equity options. The end effect, however, was largely the same.

What transpired was a mass injection of private sector financing, backed by public good will, into largely experimental concepts. Many of these concepts were not wrong, just ahead of their time.

That’s not to suggest there is definitely some intrinsic value in a Bored Ape. But the NFT craze was very likely representative of the peak of the speculative crypto mania — not least because the legal and regulatory environment was so far behind the market’s capacity to make good on the promises it was making. 

But as with the dot com mania, the mass experimentation that this cheap funding afforded the market has by sheer evolutionary force undoubtedly given rise to important trial and error learnings.

There are, however, all of a sudden many more problems out there for crypto to solve. These include, to name just a few, the de-neutralisation of the dollar because of Russian sanctions, the rise of a multi reserve-currency world, growing authoritarianism, war, de-globalisation and the emergence of “friendly” and “unfriendly” trading counterparts. Many parts of the crypto world are well positioned to take these challenges on.

That means now is the time to assess the market from the perspective of utility. In the current environment, it is possible that any crypto that can help build bridges with enemies, protect privacy, better allocate resources to those in need or generate energy savings will prove successful in the long run. But expect a very rough ride in the interim.

Izabella Kaminska is the former editor of FT Alphaville and founder of The Blind Spot.

Izabella Kaminska is the former editor of FT Alphaville and founder of The Blind Spot.