Cryptocurrency bubble deflates, would its regulation save them?

Cryptocurrency bubble deflates, would its regulation save them?

The collapse of the FTX platform, whose founder, Sam Bankman-Friedman, has been arrested and charged with fraud and other crimes, is the latest episode of a black year for cryptocurrencies and its shock wave threatens the future of an industry that calls for regulation as a way of survival. 2021 was a banner year for cryptocurrencies.

(Read: FTX: massive fraud and other charges against its founder).

Bitcoin, the best known, peaked at almost $69,000 and the total value of digital assets reached 3 trillion dollars thanks to the abundant liquidity that existed in the markets with the expansive policies of the central banks during the pandemic.

The crypto bubble is deflating

The panorama, however, could not be more different in 2022: cryptocurrencies have crashed in financial markets and throughout the year there have been cases that have undermined the credibility of these digital assets.

The novelty of the crypto world also helped fuel an upward spiral that began to break with monetary tightening that central banks have applied since the first quarter to combat high inflation. The first collapses came in the spring with the collapse of TerraUSD, a digital asset that maintained its peg to the dollar through a complex algorithm linked to Luna (an unbacked cryptocurrency) and which lost almost all of its value in five days.

The subsidence of it spread and affected exchange platforms like Celsius Network, that in June it suspended all transactions between clients and vetoed the withdrawal of funds and the following month declared bankruptcy. The final straw came in autumn with the bankruptcy of the FTX exchange platform, which came to be valued at 32,000 million dollars, and is a clear example of the lack of controls and supervisors in the sector for the experts consulted by EFE.

Its founder, known in the past as the ‘crypto king’, is in prison in the Bahamas, a tax haven from which the platform operated, and is claimed by the US Justice for fraud and money laundering, among other crimes. The scandal threatens Binance, the largest platform in the sector.

(Also: Pilot with cryptocurrencies in Colombia is about to end).

Regulation, increasingly necessary

The absence of a regulatory framework is an essential factor in explaining these events and its implementation will be key to shaping the sector in the coming years. Julius Baer’s director of studies, Carsten Menke, believes that the crisis will delay the adoption and acceptance of cryptocurrencies as a main investment assetwhile the arrival of a legal framework would instill confidence in digital assets, highly questioned after the FTX scandal.

The Bit2Me spokesman, Javier Pastor, points in the same direction, who is “convinced” that a regulated environment will enable the growth of the industry and the entry of institutional investors who hope to integrate bitcoin and other crypto assets into their portfolios.

The professor of the International University of Valencia (VUI) and industry expert, Alejandro San Nicolás Medina, predicts that, Despite the current situation, bitcoin will recover its pulse and with it the entire crypto ecosystem. Experts agree in establishing an analogy with the dot.com crisis and the irruption of the internet at the beginning of the century: some cryptocurrencies and players will disappear but many others will survive and shape the digital assets of the future.

(Keep reading: Three out of four people who bought bitcoin lost money.)

Crypto assets will survive the crisis

The balance of the year in terms of market value is bleak. After the events of spring, bitcoin plunged 67% from all-time highs and stabilized around $20,000 until the FTX bankruptcy, which plunged the asset to its annual low of $15,485, levels not seen since November 2020.

Ethereum, the second most valuable cryptocurrency, suffered a similar fate and after touching $5,000 in November 2021 it was trading this Friday at $1,200, 73% less. The experts They rule out that cryptocurrencies become a means of payment for now (except in very few exceptions such as El Salvador, where bitcoin is recognized as a monetary element) and its utility will reside as long-term depositories of value.

This explanation acquires more weight, according to Menke, in those institutions and countries without high levels of corruption and inflation and that enjoy great confidence on the part of the citizenry. In these cases, he points out, they must demonstrate utility to society and the economy if they want to establish themselves and be accepted.

Pastor (Bit2Me) assures that bitcoin fulfills a “historical role” and that more and more citizens will understand the importance of hoarding wealth through crypto assets: out of the reach of third parties and with a monetary issue defined by mathematics, without a central authority to support it but sure.

For his part, San Nicolás considers that after the reconfiguration of the industry with more solvent and transparent companies, the NFTs (from English, non-fungible token), bitcoin, ethereum, the second most valuable cryptocurrency on which he places special emphasis, will remain. , and the decentralized community, intrinsic to the ecosystem.

EFE

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