What this year in crypto has taught us

At various times in 2022 – especially since the collapse of the terra/luna ecosystem in May and then the FTX exchange in November – people have suggested that I do some sort of virtual victory lap for calling, on several years, the steaming pile of horse manure that is crypto.

And I guess I feel some sense of vindication seeing the market start to implode, having resisted many crypto-bros telling me to “have fun staying poor”. But I hesitated to write an “I told you so”, because I’m not sure I really did.

In April, I explained why I was still refusing to take crypto seriously despite many supposedly serious people. (The market has more than halved since.) In May, I made the moral case against crypto, arguing that it wasn’t just “harmless fun” for those who couldn’t afford it. (FTX lost some $8 billion, ruining the lives of many customers.) And last year, I supported that NFTs were not the future of art or asset ownership, but just the latest crypto get-rich-quick scheme. (The only person who seems to find them cool these days is Donald Trump.)

But I never called the top of the market – given that it’s all backed by pure belief, it always seemed like a silly ride – and I certainly didn’t foresee exactly how it would start to unravel. In many ways, I myself have been shocked by what has happened in the crypto world over the past year. It turned out to be more brazen, dishonest, interconnected and fantasy-based than even its most vocal critics could have imagined.

So what have we learned from all of this, in particular?

First of all, the entire ecosystem was backed by far more leverage than anyone had imagined – and it was borrowing real money, not just the magic strings of 1s and 0s that make up the cryptographic tokens. This meant that when interest rates started to rise from the near-zero levels that the entire market was born out of, and crypto prices fell, many platforms – such as Celsius and Traveler — were simply wiped out after billion-dollar holes appeared in their balance sheets. Turns out you need real assets to cover real debts (OK yeah, that part we knew).

Second, the idea that the crypto world is decentralized has been abandoned once and for all this year. We already knew that the vast majority of crypto activity takes place on highly centralized exchanges, and that the power and wealth of crypto is even more concentrated than in traditional finance. But 2022 was the year we discovered just how real a thing Big Crypto really is: a cartel of interconnected players from exchanges, stablecoin firms, and cryptonets who work together via group chats — a Signal discussion was reportedly called “exchange co-ordination” and included executives from FTX, Binance and Tether.

Third, the crypto market economy can be pyramid or Ponzi-like, but it is also circular. Not only have crypto companies counted their own worthless tokens like cash, but also those of others. As Martin Walker of the Center for Evidence-Based Management and longtime crypto critic tells me, “their books are filled with absurd tokens for themselves and their friends,” and when one of them implodes, “whole sections of the industry can disappear very quickly”.

Fourth, the collapse of so many crypto exchanges and platforms has allowed us to see up close for the first time the utter anarchy that powers crypto. Freed from the heavy yoke of regulation that the non-crypto world faces, the likes of FTX have been free to do whatever they want, allegedly embezzle billions of dollars in customer funds and commit large-scale fraud. “My big lesson this year is that we were able to see inside black boxes, and it was even scarier . . . than expected,” software engineer and cryptography critic Stephen Diehl tells me.

During an interview for an FT event last month, I asked Charles Hoskinson, founder of the crypto token Cardano, if it was possible for the crypto to crash to zero. No, he said – not surprisingly, but his sanity stunned me: “It’s basically a religion at this point.” He, a crypto-prophet, seemed to be say the quiet part out loud.

It’s the last thing I learned crypto this year: he has a strange resilience. The market and many of the biggest platforms could have crashed, and the prophets and fundamentals of this quasi-religion could have been proven wrong. But many people are still willing to suspend their disbelief, clinging to the hope that one day their miraculous internet money might resume its trajectory to the moon.

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