LONG VIEW LESSONS FROM THE CRYPTO COLLAPSE While debate rages over whether cryptocurrencies are Ponzi schemes or a legitimate means of exchange, surplus liquidity could still drive up returns C ryptocurrency markets have suffered through several wellpublicised debacles, most recently, the spectacular downfall of their golden goose, the FTX cryptocurrency exchange. Consequently, the market capitalisation of cryptocurrencies has fallen from almost $3tn in late 2021 to less than $1tn now. As dramatic as these changes seem, little has changed in terms of the structure of the crypto market. Consolidation among the smaller coins and exchanges is ongoing, but the market shares of the biggest three Bitcoin, Ethereum, and Tether are almost unchanged. The crypto market is still plagued by the accusation that it is a supersized Ponzi scheme as long as it remains hard to define an economic case for the existence of cryptocurrencies it will be a challenge to defend a price level for any of them. Still, despite the size and scale of the crypto scandals, the overarching impression is how little seems to have changed. This may have implications for other financial sectors. When compared with traditional financial markets, the demise of crypto is not that IT IS RISK PERCEPTIONS THAT HAVE BROUGHT PRICES DOWN RATHER THAN THE LACK OF LIQUIDITY unusual. Fixed-income categories also took a heavy beating, as did the tech sector. True, the valuations of the largest cryptocurrencies seem rich for an asset whose real economic use is yet to be established, but their poor performance this year is not that uncommon. Case to answer The use case for cryptocurrencies from providing an alternative to expensive and entrenched traditional finance to enabling anonymity and an escape from government-held monopolies seems feebler after the many scandals and frauds that have plagued the sector. The idea that cryptocurrencies are an inflation hedge, which is supposed to work thanks to cryptos limited supply, took an especially hard beating. It turns out that not only do cryptos not hedge against inflation, but they act as a typical risk asset, so are extremely cyclical the demise of the sector has been very similar to the wider tech sector pullback. It is perhaps worth pointing out that the economics use case for cryptocurrencies is not to be confused with the use of blockchain technology. Solving an important economic problem that of trust between contractual counterparties blockchain is probably here to stay, especially after improvements in its appalling energy inefficiencies. Its true that commercial blockchain technology applications have also experienced several significant drawbacks lately. But this seems more a part of a wider tech downcycle, which blockchain is likely to survive especially as computing power gets cheaper still. Regulation and policy Feeble economic use case notwithstanding, where cryptocurrencies will go from here, in terms of price and trade, will probably be determined by regulation. Without an outright ban on holding and trading in cryptocurrencies such as that enacted in China the industry is likely to survive and share the destiny of the wider risk-asset class. You could argue that the industry itself (at least the fact that it managed to grow to the extent that it has) is a consequence of policy decisions 20 ISSUE 1 2023 treasurers.org/thetreasurer TT ISSUE 1 23 pp20-21 Crypto.indd 20 23/02/2023 09:11