FTX founder Sam Bankman-Fried leaves federal court in Manhattan after his first appearance in court in New York. Federal prosecutors charged him with criminal fraud.
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FTX founder Sam Bankman-Fried leaves federal court in Manhattan after his first appearance in court in New York. Federal prosecutors charged him with criminal fraud.
Michael M. Santiago/Getty Images
There’s a phrase that crypto enthusiasts use, fingers crossed, in hopes that the value of a particular digital currency will explode: “To the moon!”
Much of the crypto skimmed the stratosphere in early 2022 when the excitement was astronomical, but a few months later it all came back down to earth.
Bitcoin’s value is around a quarter of what it was a year ago, and the industry is just beginning to deal with the fallout from the catastrophic implosion of cryptocurrency exchange FTX.
Looking ahead, 2022 can be seen as a turning point for the world of virtual currencies, when they lost their luster and were dismissed as a fringe product that most people approach with skepticism and caution. Or it can simply be remembered as a time of excruciating growing pains for an industry still in its infancy.
Either way, 2022 was one for the crypto history books.
how it started
Ads were everywhere – on TV, at bus stops and even in fortune cookies. Crypto companies have spent tens of millions of dollars on marketing, flooding the Super Bowl with ads. Currencies and tokens may have been virtual, but crypto became more real for many Americans in the first few months of the year.
The industry seemed to hit a “hype peak” in January and February, says Molly White, a Harvard University fellow who is a cryptoskeptic. She manages the site Web3 is doing great.
“Prices had reached historic highs,” she said. “People were making irrational amounts of money.”
The value of the most famous cryptocurrency – bitcoin – had just set an all-time high, and the industry was trying to “fit in”, as White puts it. This means that crypto companies were doing everything they could to attract more customers.
A statue of Satoshi Nakamoto, an alleged pseudonym used by the inventor of bitcoin, is on display at Graphisoft Park in 2021 in Budapest, Hungary. The statue’s creators, Reka Gergely and Tamas Gilly, used anonymized facial features, as Nakamoto’s true identity remains unconfirmed.
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A statue of Satoshi Nakamoto, an alleged pseudonym used by the inventor of bitcoin, is on display at Graphisoft Park in 2021 in Budapest, Hungary. The statue’s creators, Reka Gergely and Tamas Gilly, used anonymized facial features, as Nakamoto’s true identity remains unconfirmed.
Janos Kummer/Getty Images
A woman better known for setting trends in fashion than in finance, Paris Hilton, appeared on The Tonight Show Starring Jimmy Fallon in January. After talking about her recent marriage and her trip to Burning Man, the former reality TV star went deeper into the NFTs, or non-fungible tokens, she was peddling.
The audience looked a little puzzled when she promised, Oprah-style, to give each of them an NFT — another type of digital asset that’s basically cartoon crypto art. But when Fallon, an NFT enthusiast himself, looked blown away, they cheered.
“Peak hype”, however, quickly peaked.
How are you
Like pretty much everything else in finance, crypto saw its prices plummet as the Federal Reserve began raising interest rates to combat high inflation.
This shocked many of bitcoin’s biggest backers, many of whom believed virtual currency would be a hedge against inflation, like gold. They predicted that the value of bitcoin would rise during a period of high inflation; instead, he was falling.
What’s been called a “crypto winter” – a long-lasting downturn – began before 2022 even hit its midpoint.
“You know, we’ve been living in ‘crypto winter’ for almost a year now,” says Lee Reiners, who teaches cryptocurrency law at Duke University.
Individual investors have been affected, especially people who bought digital assets near the highs. But according to Reiners, the crypto winter also exposed larger systemic issues in the industry.
“It really exposed a number of crypto businesses that were, you know, overstretched, had poor risk management, or were otherwise involved in fraudulent activity,” he says.
A string of failures began in May: a cryptocurrency pair called Terra and Luna, the Voyager trading platform, a crypto hedge fund called Three Arrows Capital, BlockFiCelsius…
The list goes on and on, and according to Reiners, it highlights something inconvenient about crypto.
“These companies are deeply interconnected, and so as soon as you have a problem somewhere in the crypto sector, it spreads very, very quickly,” he says.
Financial regulators have also begun to crack down. They even went after another big name celebrity for the way she touted “EMAX tokens”. Nothing else than Kim Kardashian had to settle with the Securities and Exchange Commission in October for more than a million dollars.
And what’s next
Which brings us to FTX.
At the start of 2022, the crypto company was valued at $32 billion. Now it’s bankrupt, more than a million people fear the money they invested in it is gone, and the company’s founder, Sam Bankman-Fried, was charged with criminal fraud.
New FTX CEO John J. Ray III testifies at the House Financial Services Committee hearing on the company’s collapse.
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New FTX CEO John J. Ray III testifies at the House Financial Services Committee hearing on the company’s collapse.
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Bankman-Fried cultivated an image that made him memorable and seemingly approachable, with wild hair and a penchant for wearing shorts and t-shirts. His goal was to get more Everyday people to buy crypto and more conventional Wall Street companies and funds to invest in it.
The 30-year-old was so successful in bringing crypto to the masses that he was considered the unofficial spokesperson for the industry. He is currently under house arrest at his parents’ home in Palo Alto, California.
Reiners calls FTX’s rapid and total collapse “the greatest event in crypto history” – a story, he adds, that is “filled with numerous failures, scams, cheats and hacks”.
Now, people are wondering what could be the next domino to fall.
Binance is the largest cryptocurrency exchange in the world, and after several large waves of panic-driven withdrawals, it looks like it has the potential to be that domino.
But the company pushes back fears and crypto-skepticism, more generally. You have to, says White.
“If people start questioning the industry as a whole, or crypto as an asset class, that’s devastating for Binance,” she says. So they are doing everything they can to prevent that from happening.
For many, it is disconcerting how quickly the fortunes of crypto have reversed, and they struggle to assess the extent of the damage caused by FTX.
“I think crypto would be lucky if everything was down [was] within a few years,” White said.
True believers expect bitcoin to rebound and this “crypto winter” to eventually thaw.
But for people who weren’t into crypto — who may have seen an advertisement or been driven by fear of missing out on the token purchase – that’s a different story, especially with the daily revelations from former Bankman-Fried colleagues about how the customers’ money would have been transferred from FTX to their own pockets.
“I think people are starting to think of crypto as this big scam that they wouldn’t want anything to do with,” White says.
And that poses an existential problem for crypto, she adds. Because, for it to work, it needs an ever-increasing flow of people to keep buying it.
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