by David Auerbach
Friday, 10
June 2022
Idea
18:48

Why the crash is good news for Crypto

Sceptics are wrong to think that these currencies are dead
by David Auerbach
An employee inspects a crypto mine. Credit: Getty

After several flash points and a broader sell-off wiped out $1 trillion from the cryptocurrency’s overall market cap, sceptics are crowing at being proved right about the uselessness of the cryptocurrency and NFT ecosphere. They are wrong to gloat.

The total crash of the “stablecoin” [sic] Terra, meant to be pegged to the dollar at $1 but now trading at literally a penny on the dollar, was the most vivid indicator of a general loss of faith in the future of cryptocurrency and blockchain-backed assets more generally — everything listed under the rubric of Decentralised Finance (DeFi). But while most NFTs — virtual “objects” with a blockchain-based proof of ownership designed to verify authenticity and enforce scarcity — may be nothing more than white elephants, the underlying technology and philosophy behind DeFi has not gone into remission, and the crash ironically sets the stage for it to advance.

What the crash provides, however, is the next step toward the centralisation of DeFi. After prolonged scepticism, the last few years have seen financial titans finally engage with cryptocurrency, with Citi and Morgan Stanley both taking cautiously optimistic stances toward the ongoing importance of DeFi assets. Microsoft and Facebook have also signalled their plans to use cryptocurrency as one of the building blocks of their efforts to build the nebulous “metaverse.” The recent crash, if anything, strengthens their position. By obliterating minor, sketchier players, it clears the territory for larger, institutional players to step in and set the overall direction of the cryptocurrency ecosystem.

But why? Here a 2021 report from Citi GPS. Contrary to Bitcoin’s foundations in an anarcho-libertarian mindset, Citi GPS repositions cryptocurrency as fundamentally a neoliberal tool, and a powerful one. Citi GPS wrote:

Bitcoin may be optimally positioned to become the preferred currency for global trade. It is immune from both fiscal and monetary policy, avoids the need for cross-border foreign exchange (FX) transactions, enables near instantaneous payments, and eliminates concerns about defaults or cancellations as the coins must be in the payer’s wallet before the transaction is initiated.

In simple terms, cryptocurrency’s appeal does not lie in speculation, trading, or NFTs, but as an algorithmic means to circumvent governmental regulations and local costs of doing business. For investment banks and other titans of finance, this is a tremendous boon. If inefficient and or corrupt local banks and pint-sized governments could be cut out of the picture by losing sovereign control of their national currency, international business stands to gain from their loss–as well as, perhaps, the citizens and businesses of those countries, though that remains to be seen.

To that end, the cryptocurrency crash is actually a blessing in disguise, thinning the ranks of small and sometimes disreputable competitors and investors while leaving the underlying infrastructure in place to be increasingly taken up by larger, institutionalised players. The wear and tear on the financial system is significant, but those celebrating the bursting of the bubble haven’t noticed that a bigger game is afoot.

Join the discussion


To join the discussion, get the free daily email and read more articles like this, sign up.

It's simple, quick and free.

Sign me up
Subscribe
Notify of
guest
9 Comments
Most Voted
Newest Oldest
Inline Feedbacks
View all comments
Jon Hawksley
Jon Hawksley
2 months ago

I am surprised that this author wrote this. The coding of a blockchain allows a computer to hold a record of valid tokens. The tokens give bearer ownership. It is a number that can be copied but the first to present it is taken as the owner and when it is verified it is replaced by a new number. If you own the token you have to keep the number secret. A blockchain could be kept on a single computer but for security reasons is generally held in a community of computers.  You have to trust that community to not turn their computers off or change the rules. To buy or sell your token you have to trust someone to handle the change to or from fiat money and to give you a valid token. If there is no regulation you place that trust at your peril. If the attraction is that there is no record of who owns the token there are plenty of alternatives – bearer bonds, diamonds, gold.

Jonathan Keats
Jonathan Keats
2 months ago
Reply to  Jon Hawksley

Agree – Governments should either create a universal credit linked to key currencies in terms of value like the IMF SDRs which is centrally controlled and trackable or just forget it as a from of currency
As blockchain software it is useful for tracking ticket sales and ensuring no fraud

Last edited 2 months ago by Mark Cole
Bernard Hill
Bernard Hill
1 month ago
Reply to  Jonathan Keats

….no no no !! Central control by unaccountable international institutions!! Are you mad?

Jim R
Jim R
2 months ago

Even if I agree with many of the justifications for cryptocurrencies – and I do – we still have the fundamental problem of ‘what’s a unit worth?’ As long as the value of a bitcoin goes up and down wildly with the subjective sentiments of markets (i.e. greed and fear) and has no firm linkage back to reality, its never going to be an ‘investment’ as opposed to gambling. I suspect many crypto ‘investors’ resist attempts to create more meaningful valuation metrics because that would effectively end the Ponzi scheme that might make them rich. Once crypto becomes stable and boring, then it will become really useful.

N T
N T
2 months ago

How does the sentiment go? You need a wipeout to cull the herd before you can advance, again?
The insane bubble from the last two years had to go so support could get it’s breath.
You’re absolutely right, I think. The power of crypto is that it is going to disrupt currency exchange. It is far more efficient, and cheaper, and ultimately the US is going to be the party that causes it to come to power, by overplaying its welding of the USD as a weapon.

David U
David U
2 months ago

Crypto doesn’t have any purpose beyond money laundering and speculation. It’s kept alive by the poor souls who have bought the narrative. Like any Ponzi scheme at some point it will run out of steam and collapse.

Rob Greene
Rob Greene
2 months ago

Crypto-coin is a lovely, but fictitious idea. We still live in world and will live in a world for generations subservient to bulletcoin.

Slopmop McTeash
Slopmop McTeash
1 month ago

Blockchain is one of the most important and revolutionary technologies in recent decades and has almost limitless applications. I think Etherium is definitely the place to invest. Although, I do also own some Bitcoin. I own it as a curiosity more than an investment-as I understand and sympathize with so many of the arguments against it.

Justin Clark
Justin Clark
1 month ago

Bitcoin (only) for me….Be very careful of Ethereum…Here’s a channel worth following https://www.youtube.com/watch?v=YDmwyyhpqTE

Last edited 1 month ago by Justin Clark