By: Hemish Naidoo
In recent years, digital, decentralized currency has surged in popularity, with overall investments around the world exploding. Cryptocurrency, a new form of payment and transaction only possible in a technologically interconnected world, seemed full of promise. There were countless success stories about those that invested in Bitcoin or Dogecoin years ago when crypto was still obscure, only for its value to skyrocket into the millions and blessing those early investors with millions of dollars. Now, crypto exchanges have become tremendous in their size and number of investors, evolving out of their more obscure success in the past. Crypto.com, Binance, Velas have flourished, all without a central banking or government system to head it. It seemed too good to be true, and indeed, as cryptocurrency thrived, its cracks began to show, until eventually, it started to crumble completely.
On Nov. 11, 2022, one of the largest crypto exchange giants, FTX, suddenly filed for bankruptcy, seemingly having collapsed overnight. According to Reuters, the decision to file for bankruptcy by CEO Sam Bankman-Fried came about due to an incredible, yet confusing, sequence of events. First, fellow crypto exchange giant Binance announced the previous Sunday that they would sell their $580 million stake in FTX’s digital token (a digital asset built off an existing blockchain, or system for managing cryptocurrency transactions) for certain undisclosed reasons. Mass customer withdrawals expectedly ensued that FTX could not keep up with. Prior to bankruptcy, Bankman-Fried used what FTX legal and finance teams told Reuters was a “backdoor” that he himself implemented into the FTX’s bookkeeping system. This allowed him to discreetly transfer $10 billion in customer funds from FTX to Alameda Research, his personal trading company, without notifying investors. Interestingly, Reuters reports that $1-$2 billion of these customer funds have gone completely missing. The entire FTX debacle, from the unknown reasons for Binance selling their stake, to where the missing funds went, is indicative not just of corporate mismanagement, but a much larger problem with cryptocurrency altogether.
Erik Riedlinger, a graduate student at Adelphi studying professional accounting, explained how certain aspects of crypto contributed to such a spectacular collapse. “Cryptocurrency in its current state acts as more of a speculative investment as opposed to a form of currency, in that most people who invest are only doing so in hopes of receiving more money later on, not because they believe in the technology as the future. As a result of this, crypto exchanges largely imitate stock exchanges except they are held to a much lower standard and provide less protection for the average investors due to the lack of regulation.”
While the relatively libertarian nature of cryptocurrency may make it appear enticing to ambitious entrepreneurs like Bankman-Fried, its sparse regulation truly has much more potential to harm customers and investors rather than benefit them with secure, fruitful returns. Riedlinger provides a prime example of this. “This leaves all of [the investor’s] funds exposed to the risk that their exchange will crash, such as FTX, and the investor will lose most, if not all, of their investment. A critical difference in this case is whether or not the investor's money is insured. Money held in a bank is likely insured by the FDIC, and therefore presents little risk. Cryptocurrency on an exchange, however, is not insured. This means that unless your funds are held in a wallet, they could disappear at any given moment.”
Beyond the lack of insurance in cryptocurrency is the fact that the value behind it is largely ambiguous at best, unlike how stocks represent a share of value in a corporation. Robert Goldberg, a clinical professor of finance at Adelphi, remarked that cryptocurrency is “an overly financialized system built on speculation, information arbitrage, and leverage.” Riedlinger seconds this notion, stating “this results in the value often being based on hype or a ‘fear of missing out’ rather than the success of the company.”
Without being directly tied to a corporation or even a crypto exchange, the value of cryptocurrency wildly fluctuates beyond reasonable prediction, making any investment a risky gamble.
Riedlinger emphasizes how crucial it is for a currency as sensitive as crypto to be dealt with responsibly: “A select group of individuals can absolutely not be trusted with the management of these crypto exchanges. Due to the tech based nature of cryptocurrency, many of the leaders behind these exchanges come from the tech world rather than the financial world and therefore are not knowledgeable on how to run this type of organization. If you compare FTX's management to a financial institution such as Bank of America, you will find that many of the board members and executives at BofA come from a business or law education and often have experience in financial management, whereas at a financial institution such as Bank of America [has experienced management], much of [FTX’s] leadership comes from tech companies such as Google. It is clear that the people most attracted to the crypto world are often inexperienced in finance.”
A CEO who’s forte is in technology, not finance, cannot possibly be a leader of revolutionizing cryptocurrency without major setbacks; it’s a recipe for disaster. When those running a conglomerate like FTX know hardly anything about business or money because they lack the credentials, a recipe for disaster is the only feasible outcome.
At the end of day, for the average Adelphi college student, whose bank account may look less than desirable, the tumultuous story of FTX rising into a cryptocurrency star only to fall into bankruptcy the next day, is a cautionary tale for possible investors: what the world of cryptocurrency is truly like, a hot mess with no guarantee for returns at any given moment. As bluntly put by Goldberg, “This crypto financial system provides no value to society and the economy, other than for some interesting pieces of digital art, and introduces significant instability, creating some winners and many losers.”
With other crypto exchanges like BlockFi having to also file for bankruptcy given their close relationship with FTX, it is painfully evident that cryptocurrency has a vast and rocky road ahead for it to ever be considered stable and legitimate.