The Crash of Crypto and More Reasons to Avoid It
It’s been a cold, cold winter for the cryptocurrency industry. Along with the turmoil of falling prices and rising crime, the crypto industry has become chaotic. The U.S. Securities and Exchange Commission (SEC) is suing two crypto exchanges for unregistered sales.
How did crypto get to this point? Let’s look at the crypto market and what happened in the industry last year.
The Crypto Market
We’ve talked about cryptocurrency before. In short, it is a digital currency created, stored, and distributed on a blockchain, or record-keeping system, which is overseen by a global network of peers. Cryptocurrency exchanges are where people can buy, sell, and store their cryptocurrency in digital wallets.
Cryptocurrency became popular over a decade ago when Bitcoin was introduced in 2008. The idea of a peer-based electronic currency system appealed to those who thought it was the currency of the future. It was not tied to any government, had low or no fees, and was endorsed by celebrity investors.
Some characteristics of crypto:
● The industry has very little regulatory framework surrounding it, so there is no oversight or governing body to protect investors and lenders.
● Prices are volatile, rising and falling dramatically in the span of hours and days. There are many measurable contributing factors to the rise and fall of prices in the stock market and housing industry. The crypto market fluctuations are random and unpredictable.
● Crypto mining consumes a huge amount of energy. Carbon emissions generated from crypto industry transactions can surpass that of entire nations.
● Cryptocurrency is susceptible to fraud because of its anonymity, lack of regulation, and lack of value guaranteed by a tangible asset.
● It does not generate cash flow. Stocks pay dividends and rental properties produce rent, but cryptocurrency does not generate cash flow. To make money, you must sell it to someone willing to pay more for it than you did.
Crypto Industry Issues in 2022
Last year will be remembered as a dumpster fire of a year for the crypto industry. After a bull market in 2021, crypto started its current downward spiral in 2022. Several problems continue to plague the crypto industry.
● Price collapse. At the start of 2022, the crypto industry was a $2 trillion industry. By the end of the year, however, it was down to $800 billion. Bitcoin stock realized $213 billion in losses and is down 76%. Because of the collapse in prices, crypto exchanges like Crypto.com have laid off one-fifth of their employees in the first month of 2023. Twenty percent of their workforce lost their jobs in addition to 2022 layoffs.
● Largest fraud in financial history. Perhaps the biggest story of last year was the demise of FTX, the world’s third-largest centralized cryptocurrency exchange. The CEO Sam Bankman-Fried was arrested and awaits trial on criminal and civil charges related to defrauding customers, investors, and lenders. In order to be released from custody, Bankman-Fried had to post $250 million, the largest bail bond in history. If convicted, he could be sentenced to over 100 years in jail. The investors and companies he defrauded will most likely not get their money back.
● Crypto crime reaches an all-time high. The illicit use of cryptocurrency rose to $20 billion in 2022. The money has been used for drug and human trafficking, ransomware, and scams. Russia and North Korea have been identified as major contributors to crypto illicit activity. Authorities assume $20 billion is the tip of the iceberg as that is what was recorded and identified on the blockchain and doesn’t include off-chain crypto criminal activity. Additionally, $3.7 billion in crypto was stolen in 2022 by hackers. Cybercriminals were able to steal a record-setting number of funds.
● Ongoing energy pollution. In September of last year, the blockchain network Ethereum upgraded its software in an effort to reduce its carbon emissions. It was successful in reducing CO2 emissions by 99%. Called The Merge, it nixed proof of work for validating crypto transactions, which comprises much of the energy consumption. Bitcoin, however, ramped up its consumption, taking over space that was freed up by The Merge. The majority of total crypto-asset electricity usage (60 to 77%) is consumed by Bitcoin versus 20 to 39% by Ethereum. The White House has flagged the implications of crypto-assets on the climate and energy. One of the goals is a power grid that is free from carbon emissions in the U.S. by 2035. To ensure that these goals are reached, the White House has stated that, “Congress might consider legislation, to limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining.”
Crypto in the New Year
No one knows what is on the horizon for the crypto industry. However, in the first month of this new year, a few things have already occurred:
● SEC lawsuit. The U.S. Securities and Exchange Commission (SEC) is the regulatory federal agency that oversees the securities market by helping maintain fair practices and investor protection policies. Currently, the SEC is suing two crypto firms for the alleged sale of securities that were unregistered with the SEC. The crypto firms Genesis and Gemini are both named in the lawsuit. The SEC has filed five other crypto-related actions in the past month.
● Government oversight. The U.S. House of Representatives announced the formation of the Subcommittee on Digital Assets, Financial Technology, and Inclusion that will oversee the crypto and financial tech industries. The Senate is also looking to come up with legislation to enforce regulations.
This past year was a wild ride in many markets, but especially so in the crypto industry. With price collapses, fraud, cybercrime, and ongoing environmental issues, crypto continues to be an option that we will avoid.