In these difficult times, a little historical perspective is useful. Let’s talk about Mount Gox.
After the February 2014 collapse of the Tokyo-based bitcoin exchange, the conventional wisdom was that its creditors, mostly retail users of the online trading platform, would end up with a pittance. Some 750,000 customer bitcoins were missing, a pool then worth around $473 million and continuing to decline as the bitcoin market contracted.
Fast forward to 2021, when creditors have recovered 90% of bitcoin. The value of these assets was then $9 billion. A gain multiplied by 20.
Now, in the midst of yet another crypto winter, the burning question is whether creditors left in the red by the recent setbacks of Three Arrows Capital, Celsius Network, Voyager Digital and others can expect a straight outcome. so happy.
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Crypto markets have a habit of bouncing back from their most severe drops to reach spectacular new highs a few years later. This was the case after Mt. Gox, and after the first winter in 2011 and the third in 2018. The difference this time is that the general macroeconomic trend of low interest rates and asset inflation that has run rivers loose money towards crypto speculation won don’t be there. There is no guarantee that history will repeat itself.
Yet there is no getting around this: to move from winter to spring, we need at least some price recovery. After all, this is how the broader economy has always emerged from debt crises. The predictability of this event has even given rise to a particular class of investors: buyers of distressed debt, also known as vulture funds, who buy the assets of cash-strapped investors at the bottom of the market, knowing that the prices will eventually bounce back.
In fact, fostering price recovery was the primary, albeit unspoken, goal of central bank policymaking in the aftermath of the massive mortgage crisis of 2008. The Federal Reserve, the European Central Bank, the The Bank of England and the Bank of Japan bought trillions of dollars in financial assets to raise their prices to drive down interest rates and allow markets to recover.
The problem was that this “quantitative easing” (QE) policy contributed to a new financial bubble and ultimately to the inflation problem that has now caused central banks to backtrack. With rising interest rates, investors are pulling back, which in turn is slowing down crypto markets. This, as mentioned, is why a sudden bounce in crypto prices is harder to predict.
Yet if we take a closer look at how QE fueled the decade-long recovery from 2008, there are clues as to how the crypto industry could turn things around without help from central banks. .
The QE pledge became known as the “Bernanke Put”. Named after then-Fed Chairman Ben Bernanke, it was a bet on put options, a form of financial derivative that gives the holder the right to sell an asset at a price predetermined minimum in order to limit future losses. The idea here was that since the Fed’s asset purchases shielded investors’ downside risks, they might as well bet on the gains.
Such blatant market distortion is rarely good policy. But for a while it had the desired effect. What is important is the mechanism by which this happened: the central bank made a statement (“we are committed to buying bonds”) and accompanied it with an action (in effect, buying bonds) to generate a narrative (“Investors have nothing to lose because the Fed gave them a put option.”)
The crypto now needs its own compelling narrative to support a price recovery. And because there’s no central bank to put money into it — with all due respect to FTX CEO Sam Bankman Fried’s efforts to be a lender of last resort — it must be a story backed by real, observable actions and results.
In fact, it has to be a better story than even the Bernanke Put, because this one ultimately turned out to be wrong. The Fed couldn’t sustain investor losses forever. Eventually, something had to give and that something was inflation.
Read more: Why the Fed Will Go Back to Easy Money
Also, unlike those past recoveries, the story cannot simply be one of “increasing numbers” – the pure, speculative-based game of crypto’s supposedly unstoppable bullish momentum, which is often presented without clear fundamental logic. Central bank rate hikes are pouring cold water on this game.
No, the story must be associated with real utility. Now is the time to showcase valuable use cases for humanity – as we discussed last month, energy is one of them, but also crypto’s ability to empower people living under tyranny – and to support these use cases through action, with development.
The exit from winter has always been by higher market prices. It’s just that this time the market action needs to be grounded in the real world.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.