The chill winds of the crypto winter

Temporary turbulence or the end of the road?

Does the carnage in the crypto markets indicate the implosion of a black tulip bubble which will shortly become as much a historical curiosity as its floral predecessor? Or are we in the midst of a Schumpeterian process of creative destruction which will cull the lame and release resources to fuel a more rational and essential industry?

For the naysayers, it is not difficult to assemble evidence that the emperor has finally been seen naked and that cryptocoins, virtual assets, non-fungible tokens and all the infrastructure that accompanies them are being rumbled for the delusions that they are. The total capitalisation of the crypto market is down by around $2tn from November 2021 levels and may have further to fall. Standard bearer bitcoin has fallen below $20,000 from its not so distant high of $69,000.

Algorithmic stablecoins – essentially self-referential bets – are disappearing down their own digital plugholes. There is widespread carnage throughout the industry from New York to Singapore via Vienna encompassing coin issuers, crypto lenders, exchanges, hedge funds, asset managers and other financial institutions who are busy laying off staff, rethinking investments and rapidly adjusting business models. Not to mention a multitude of middling retail investors whose furlough cheques have vanished painfully into cyberspace.

Yet although many investors, financiers and speculators have suffered consequential losses, and there have been some negative cascade effects within the crypto ecosystem itself, we have not witnessed the severe blowback into the conventional financial system that accompanied the collapse of hedge fund LTCM or collateralised mortgage derivatives, for example. The regulators’ nightmare that severe problems in loosely regulated cryptoland could translate into systemic crisis within the financial system and the real economy has not come to pass.

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