The Crypto Winter Is Becoming a Crypto Ice Age

As big players collapse, trust is being eroded

Image: Badly edited by author

When FTX collapsed, the crypto market witnessed “one of history’s greatest-ever destructions of wealth.”

I won’t claim to fully understand the complexities of the saga involving the FTX exchange, Alameda Research and recently dethroned Crypto Golden Boy Sam Bankman-Fried. It’s not for a lack of trying; it’s just hard to make sense of things that don’t make logical sense. They were basically really stupid, really out of their depth, and then got caught in spiral.

But what is important is that it’s left behind a wreckage. Billions of dollars up in smoke — both seasoned and retail investors facing huge losses. Sam Bankman-Fried (who goes by SBF, which tells you everything you need to know about the man and the bro culture of the crypto world) saw his estimated fortune of $15 billion implode 94% in a single day.

As an isolated incident, this car crash could be written off as a costly bump in the journey to realizing crypto’s “destiny.” But it’s far from isolated; we can now add the collapse of FTX to an increasingly large list that includes other failed ventures like Terra/Luna, Three Arrows Capital, Celsius, and Voyager. Just this week, Silvergate, one of the biggest lenders to major crypto firms, announced it was liquidating. There may be more to come, with rumours continually circling around Binance. The exchanges leader, CZ, blames these rumours on a small number of number of people who are jealous, and those who are racist against Chinese-looking Canadians. Hmm. Not exactly a standout defence.

With each collapse, billions are lost. Companies are lost. People lose everything. The ripple effects work through the interconnected chain, bringing everything down like dominos.

As vocal crypto critic Molly White wrote in The Guardian, “The aftershocks of FTX’s collapse will be protracted and devastating. Like a tsunami after an earthquake, the failure of a major player in the cryptocurrency industry reverberates outwards, battering other investors with exposure to FTX and Alameda. Any subsequent failures cause their own tsunamis, and so on.”

But it’s not just monetary damage.

Every collapse eats at the one thing cryptocurrency needs if it is ever going to be truly mass-adopted.

And that is trust.

- Crypto is built on the notion that you can own and control your currency rather than trust the banks or other financial institutions with your money.

- Crypto is built on the trust that it remains decentralized and not affected by the same external factors as our standard currencies. (Except, well, a lot of it runs through centralized exchanges and seems to suffer as much as fiat currency when shit hits the fan. I digress.)

- Crypto is built on the trust that these exchanges are properly backing your money and have the capital to let you withdraw.

- Crypto is built on the trust in the people building the future applications for crypto.

- Crypto is built on the trust in the protocols that it works off.

For widespread public adoption, there needs to be total, unwavering trust that the whole thing isn’t just one big scam designed to enrich a few and harm the rest.

Yet each time one of these big players fails, more trust erodes. More doubts emerge. More people struggle to see past its current flaws, and no amount of “you’re missing out bro” calls from those holding their bags is helping to convince newcomers to join the movement.

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The crypto industry might fight against the notion of regulation, but if this is how the landscape looks without it — a semi-ponzi scheme full of self-serving individuals who make reckless decisions with other people’s money — what choice does the industry have?

In an irony that will be lost on no one, SBF was advising regulators and legislators on potential policy only weeks before his shit hit the fan. His collapsed exchange is now an example of why, without some form of consumer protection and regulation — or at the very least some guardrails — there will never be enough trust in the crypto market for it to live up to its promises.

What happens if trust erodes further? Well, you get a bank run. More people try to pull out their funds, exchanges try to halt withdrawals, the mood turns sour, and it very quickly falls apart. In that moment of chaos, it will be abundantly clear whether the other exchanges should have been trusted.

The answer to that could be grim - and have huge ramifications for the future of the crypto industry.