Crypto is collapsing – but don’t write off Bitcoin just yet

A bunch of twenty-somethings holed up in a penthouse in the Bahamas swapping partners and playing board games while they traded in billions of dollars. A brutal termination of the exchange with more than a million people suffering huge losses.

Contagion rippling through the system, with reports of traders such as Genesis going down as well, and plenty of hedge funds about to be sunk amid the carnage. For all the people who reckoned that Bitcoin and all the rest of the crypto currencies were never anything more than a gigantic scam, the moment of vindication has surely arrived.

The collapse of FTX has shown they were right all along.

Amid so much turmoil, it would be easy to imagine that the price of Bitcoin had collapsed. $10,000 a coin, perhaps? Or $5,000? Or, heck, maybe they will soon be giving them away free with a McDonald’s Happy Meal since only the under-fives will still be gullible enough to think they are worth anything.

And yet, while the Bitcoin price has fallen, it has not dropped dramatically. So far the greatest mystery of the FTX debacle, apart from where has all the money gone, is why Bitcoin has fallen so little. Perhaps, just perhaps, it is a real asset after all. And if it can survive this crisis it can survive anything.

It has, to put it politely, proved a turbulent couple of weeks for the crypto industry. The rise and fall of Sam Bankman-Fried has turned into one of the most spectacular flame outs in financial history.

A maths whizz, he founded the cryptocurrency exchange FTX in 2019, was worth an estimated $26bn only last month, donated more than $40m to the American Democratic Party, and led the “effective altruism” movement, before the whole house of cards came tumbling down over the last couple of weeks, wiping out Bankman-Fried’s entire fortune, taking out backers who included leading names such as Sequoia and Softbank, and potentially wiping out the savings of the hundreds of thousands of people who traded with the company.

In its wake, the digital asset brokerage Genesis and the crypto exchange Gemini halted redemptions and restricted trading, not usually a sign of a firm in robust health, as the crisis started to spread to other parts of the crypto industry. Regulators, lawyers, and judges will no doubt spend years trying to clear up the mess.

Against that backdrop, you might imagine that prices of Bitcoin, and the other main digital currencies, had dropped to more or less nothing. After all, who wants to own a string of digits that you can’t trade any more, and which you probably won’t ever get paid for even if you do manage to sell them?

Here is the interesting point, however. It has moved, but not by nearly as much as you might expect. A month ago, when FTX was still completely solid, Bitcoin was trading at $20,000 a unit. And now? It has fallen to $16,500 a unit. It is a fall of 15pc.

Meta, the owner of Facebook, has fallen by 15pc over the last month as well, and it is hardly the end of the world. Likewise, Ethereum is down by 10pc over the last month. Litecoin is actually up by 13pc over the last four weeks, and Dogecoin by more than 40pc. A wipeout for cryptos? Not exactly.

True, it is perfectly possible to argue that the collapse has already happened. Bitcoin is down from more than $60,000 a unit a year ago, so on that measure it has lost three quarters of its value, and so have the other main cryptos. Or, of course, it is also perfectly possible that the real crash is still to come.

As exchanges close down, as the counterparty risks get ruthlessly exposed, and as investors find accounts are frozen, there may still be huge falls in the price to come. All the small investors lured into the market by FTX’s high-profile advertising – which included backing from celebrities such as the fashion model Gisele Bundchen and the American football star Tom Brady – will probably start selling, even if it is precisely the wrong moment, as amateur traders usually do. We will find out over the next few days and weeks as the saga unfolds.

There is, however, an alternative. Perhaps the cryptos can simply trade their way through this crisis. After all, dollars still have value even when banks fail as they did in 2008, and so does any other currency, whether it is the euro during the Greek crisis, or sterling during the Truss crisis, or even the Turkish lira during the multiple panics of the Erdogan era (I mean, the lira is worth less than it was a year ago, but it is still worth something).

Likewise, even when a bank or a brokerage fails, as they do from time to time, a share in Vodafone, or Unilever or Shell, is still worth something, even though it may be hard to trade for a few weeks. Or come to think of it, much like any commodity.

When Enron went bust in 2001, natural gas, which it mainly traded, still had a value (indeed, if you had bought natural gas in the wake of its collapse you would have made big profits). When one trader goes down it doesn’t have to mean the asset is worthless.

So far, Bitcoin, and the other main cryptos, are trading through this crisis, with significant but far from calamitous damage. It is almost as if it was a real asset, much like the dollar, euro, gold, copper or whatever, just as its original enthusiasts always said it would be one day.

Indeed, there is already talk about some form of extra regulation to clean up the market, or even some form of crypto central bank – admittedly a slightly mind-boggling development – that can act as lender of last resort when a trading company runs into trouble.

If that is true, paradoxically, the FTX scandal may one day prove to be the making of Bitcoin – and not its end.