Back in December of 2017, my fellow commuters on the bus to work were glued to their phones, looking at the balance of their crypto portfolios and excitedly texting their friends about how to spend the money. Almost exactly a year later, Bitcoin reached a trough, having dropped more than 80% over the period. Since then, the pattern has repeated, with the latest run up in prices really taking off in the second half of 2020, and now ending again in a crash, with Bitcoin down 66% from the peak to date.
The question now is, are we in a situation similar to 2018, and are crypto markets taking a momentary break before another huge run-up, or is there something more fundamental going on? The problem is that the term “crypto” covers many things, all with differing degrees of emotional investment on behalf of proponents and opponents, and the answers tend to break down along these lines.
First, and most narrowly, crypto refers to the tokens like Bitcoin, Ethereum or Tether that are traded like a commodity. Right from the start in 2008, crypto tokens were extolled as a form of gold, a hedge for inflation, and an asset independent of the vagaries of central banks around the globe. By extension, the tokens are positioned as the foundation for a new model of financial intermediation (or rather, lack thereof) known as Decentralised Finance (DeFi), that could replace our existing financial infrastructure.
Unfortunately, the arrival this year of inflation levels not seen in decades and the war in Ukraine triggered turmoil in financial markets comparable to that of the global financial crisis (GFC) in 2008, and put the new models enabled by crypto to their most severe test yet. So far it seems they have conclusively failed. Most crypto tokens, rather than being a hedge against inflation, moved in exactly the same direction as other risky assets. Investors have lost a lot of money, and high-profile bankruptcies of crypto funds, exchanges, lenders etc. have begun. The dysfunctions of the market have also become apparent, with even the largest exchanges suspending withdrawals of some tokens because of an inability to keep up with trading volumes and a lack of liquidity. Not exactly confidence-enhancing signals.