Rick Martin should probably be out of work. The 33-year-old entrepreneur co-founded a crypto start-up called Decaf in early 2022, diving into the industry just before a $3 trillion bubble burst, ushering in bankruptcies across the crypto world.
Today, he is still plugging away, among many others in crypto. At a “hacker house” event in Austin, Texas, Martin mingled with dozens of other enthusiasts, all talking excitedly about their apps. “This technology is superfast, supercheap, and I think it’s ready to replace financial infrastructure,” he said.
On the face of it, crypto should be on life support. Fourteen years since its launch, the technology remains an experimental oddity. Meanwhile, trillions of dollars have evaporated in frauds, bankruptcies, and token losses. And trading platforms, including
Coinbase Global
(ticker: COIN), hang by a regulatory thread as governments try to reel in the crypto casino.
Yet crypto is proving resilient. Led by a 60% rally in Bitcoin this year, the token market is back to where it was before FTX collapsed in November, worth an estimated $1.1 trillion. Shares of Coinbase are ahead 70% this year, while
Bitcoin
“miners” like
Marathon Digital Holdings
(MARA) have surged more than 150%. The
Global X Blockchain
exchange-traded fund (BKCH), a basket of crypto-related stocks, is up 90%.
Venture-capital funding has tightened, but some large investors are staying the course, helping to keep software developers in business. “We don’t in any way feel that the longer-term possibilities of the space are changed by the events of the past year,” says Arianna Simpson, a general partner at venture-capital firm Andreessen Horowitz, which has raised billions to invest in crypto. “We’re open for business.”
Yet there is no equivalent in recent history of a bubble inflating so quickly, bursting, and reviving again, all within a two year span. Junk bonds in the 1980s, tech stocks in the 1990s, subprime mortgages in the early 2000s—all took far longer to revive or fizzled as regulators clamped down.
“The entire market collapsed because of the exact problems the critics said would happen, and yet it’s hardly a blip on the radar,” says Mark Hays, a senior policy analyst for Americans for Financial Reform, a nonprofit that wants tighter financial regulations, including for crypto firms.
A mix of forces is keeping the enterprise alive. Some factors that caused the crash, including a surge in interest rates and high-profile bankruptcies like FTX, have receded. There is still profit in trading tokens, from Bitcoin to new joke coins like
Pepe.
Regulations, while tightening, have yet to shut down major trading operations or networks. And the technology still has fans, including investors, developers, and companies that fear missing out and see ways to make money off crypto in the future.
Chasing the Dream
While Bitcoin—worth roughly half the token market—grabs most of the attention, much of the development in crypto occurs on smaller blockchains. Networks such as
Ethereum
are meant to be a foundation for a new blockchain-based internet that could be used for trading, financial services, or apps. Competition also remains fierce to unseat Ethereum as the top app-based blockchain. (A blockchain is a decentralized ledger for recording transactions.)
The
Solana
network illustrates both the promise and perils of crypto. Solana got its start in 2020, promising faster speeds and cheaper prices than Ethereum. Solana’s developers want it to be a home base for things like “smart contracts” to automate transactions and for nonfungible tokens, or NFTs, which could be used to tokenize art, media, and video. Solana’s token, SOL, surged to a $78 billion market value in 2021, similar to what stocks like
Uber Technologies
(UBER) and
Shopify
(SHOP) are worth today.
Yet Solana, like many tokens, never had the broad investor base of large-cap stocks, making it highly vulnerable to a crash when one of its biggest backers went bust. That person was Sam Bankman-Fried, the founder of FTX, who had invested so much in Solana that SOL and related tokens became known as “Sam Coins.” The broader crypto collapse had already sent the Solana token’s market value down to about $13 billion by early November, but when FTX collapsed later that month, the token crashed to $3.5 billion.
“It was like somebody tripped us when we were running at full speed,” says Solana co-founder Anatoly Yakovenko, 42, who was flying back from a conference in Portugal when his phone blew up with texts and tweets about Bankman-Fried seeking a bailout for FTX.
Today, Solana appears to be revving up again. The San Francisco–based company backing it recently opened an office in Manhattan, where it hosts events and gives a free workspace to coders. A record number of developers attended a virtual Solana “hackathon” in February to create apps and compete for seed funding. At the Austin hacker house in April, held in a converted Quonset hut warehouse, coders gave presentations near a gallery lined with digital art, while members of the Solana team showed off a $1,000 mobile phone designed with crypto in mind.
“I could let my breath out,” Yakovenko says. “We’re still strong.”
The Party Goes On, With Less Punch
Crypto is feeling a hangover from the days when celebrities like Jimmy Fallon and Madonna pitched Bored Ape NFTs. The Super Bowl ads touting crypto have vanished. FTX Arena, home of the Miami Heat basketball team, is now Kaseya Center. Attendance at a recent Bitcoin Miami conference was half that of prior years and it felt “less like a festival,” according to Needham analyst John Todaro.
The mood was sedate at the CoinDesk Consensus conference last month, held on two levels of the Austin Convention Center, down from three in 2022. But major companies still showed up. Executives from firms such as
Alphabet
(GOOGL) and
Mastercard
(MA) announced partnerships or spoke on panels. An executive for
PayPal Holdings
(PYPL) said the company’s Venmo app would let users send crypto to others and discussed uses like payments in online games.
The country’s largest bank,
JPMorgan Chase
(JPM), also showed up, with an executive talking about how companies could use crypto to verify customer identity. JPMorgan CEO Jamie Dimon has derided Bitcoin as a “pet rock,” but that hasn’t stopped the bank from using blockchain technology in a project called Onyx that enables “seamless data sharing between institutions.”
While the crypto crash has slowed projects, “people are not leaving,” says Diogo Mónica, president of Anchorage Digital, a crypto services firm.
Venture capital isn’t giving up, either. One of the biggest investors, Andreessen Horowitz, has raised $7.6 billion across four funds to invest in digital assets. In addition to taking equity stakes in developers, Andreessen and other VC firms often buy tokens from issuers before they’re offered to the broader market.
One reason venture capital likes crypto is that it can pay off quickly when a token goes live on an exchange or surges in market value. The financing model offers payouts potentially faster than traditional venture capital, which usually has to wait for a buyout or public stock offering for a fund to fully exit its position, keeping funds locked up for many more years.
Simpson declined to comment on the Andreessen funds’ performance but said the firm still has money to invest. As for the $32 billion collapse and fraud allegations at FTX, she says, “We didn’t cancel the financial industry because Bernie Madoff committed fraud.”
The potential for crypto to be a disruptive force remains alive, and some big companies see potential profits in it. Mastercard in April unveiled a service to make cross-border crypto transactions compliant with anti-money-laundering rules.
T. Rowe Price Group
(TROW), Wellington Management,
WisdomTree
(WT), and trading firm Cumberland are testing a blockchain that could eventually be used as an alternative platform for currencies and other financial products.
Fidelity Investments also sees revenue opportunities in crypto. The brokerage firm is pitching digital-asset accounts to 401(k) plan sponsors, offering Bitcoin for retirement savers, and pushing into token trading by building a retail brokerage for crypto that could compete against Coinbase.
Some firms are trying to tokenize the safest type of mutual fund: the money-market fund. The Franklin OnChain U.S. Government Money Fund (FOBXX) looks like a standard money-market fund with $275 million in assets, a $1 net asset value, and a 4.8% yield. The twist: A tokenized version exists on blockchains called Stellar and Polygon, and investors can trade it 24/7 using “BENJI” tokens.
Blockchains “are almost like a new set of emerging markets, like digital frontier markets,” says Sandy Kaul, senior vice president at
Franklin Resources
(BEN). Maintaining records on the blockchain costs a fraction of the traditional method, and investors can see the daily accrual of interest on the blockchain, providing a level of transparency that Kaul says is unavailable in a traditional fund.
Operating in Legal Gray Zones
Unlike most industries, crypto operates like a tribe of global nomads. The technology is designed to thwart government oversight, and it’s often backed by loose “foundations” of coders operating across borders. Binance, the world’s largest exchange, says it doesn’t have a headquarters; a spokesperson says it’s taking a “multi-HQ approach like many global companies” and has regional hubs in Paris and Dubai. Tether, the firm backing the largest “stablecoin,” worth $83 billion, is based in the British Virgin Islands, but has at least one corporate entity in Hong Kong.
Pinning down the industry is tough, which is one reason why regulators have been flummoxed over how to police it on a global or national basis. The European Union recently passed some crypto rules. But in Washington, a mix of lobbying, agency turf wars, and paralysis in Congress has prevented comprehensive rules from taking shape.
Federal agencies like the Securities and Exchange Commission are trying to bring order; the SEC has filed more than 110 enforcement actions since 2017 and levied billions in fines. The enforcement threat has driven some crypto services, like the high-yield lending products offered by companies such as Celsius Network, almost completely out of the U.S.
The industry has long said it needs clarity from Congress, which made headway on bipartisan legislation in 2022. But the market crash, frauds, and high-profile bankruptcies hardened opposition to the industry. Some Democrats, concerned about the lack of consumer protections, are now urging Securities and Exchange Commission Chairman Gary Gensler to push harder. Both parties are working on their own legislation, though it appears unlikely that anything significant will advance near term.
Regulatory actions could still reshape the industry. Coinbase, for example, received a warning this year from the SEC that it may be sued for securities violations; the platform denies it has broken any laws. A case in federal court regarding the token Ripple could settle a longstanding debate over what types of tokens are securities; the answer may determine what tokens, aside from Bitcoin, can continue to be offered on Coinbase and other exchanges.
Regulators are also warning banks against taking on crypto-related business. Crypto executives say that finding even basic banking services is now a challenge, though
Bank of New York Mellon
(BK), Cross River Bank, and others still provide services to some firms.
Opaque Practices and Fake Trading
The crash hasn’t changed one of the most confounding aspects of crypto: It remains opaque. While most blockchains are public, recording every transaction for anyone to see, much trading happens “off chain” in centralized exchanges, which are relied upon to report accurate data. Price manipulation and fake trading, analysts say, are rampant.
Consider the apparent size of the market, worth $1.1 trillion, according to CoinMarketCap. The figure includes self-reported data from exchanges and token projects, says Doug Schwenk, CEO of Digital Asset Research, which sells its own data about crypto to institutional investors. It may include billions of dollars worth of tokens that don’t circulate—including Bitcoin, with estimates that between a fifth and a third of supply is sitting off the market in so-called stranded wallets.
“Most crypto exchanges have little incentive not to fudge the numbers,” Schwenk says. “It’s not a believable figure at all,” he adds, referring to the $1.1 trillion.
A spokesman for CoinMarketCap, which shares ownership with Binance, says the company has “long been aware that self-reported data can be problematic” but that there’s no other viable way to get the information. The spokesman says the company has processes and algorithms to verify the data and detect outliers.
Another problem: wash trades, where a trader buys and sells a token to create the illusion of volume. A National Bureau of Economic Research paper recently found that 70% of crypto transactions in unregulated exchanges are wash trades. Most of those types of trades were found on smaller platforms, while exchanges including Coinbase, with a license from New York’s financial regulator, had the fewest problems.
“There are exchanges that represent that they have billions of dollars in trading when really they have very little,” says Rich Rosenblum, president of market maker GSR.
Is Crypto Really the Future?
Underlying the tension between token boosters and critics is the industry’s ongoing search for a killer app that touches the lives of ordinary people. Bitcoin was supposed to play that role. But it is far too volatile for everyday transactions, and remains aspirational as a store of value compared with classics like gold or Treasuries.
Crypto backers say they need time and resources to develop apps and services on blockchains. Skeptics say the software is inherently flawed, partly because its decentralized nature exposes it to more security and compliance risks than traditional networks.
The criticism isn’t stopping the industry from powering on. A project called Helium aims to develop a wireless network based on hot spots that people run out of their homes. Another project, called Hivemapper, wants to create a crowdsourced version of Google Maps. Both projects run on the Solana network and reward people in tokens.
Some governments are still courting crypto. Prime Minister Philip Davis of the Bahamas—the home base of FTX—still crisscrosses the world pitching the island nation as a haven for digital-asset firms. He has said the country would even welcome back FTX, should it revive under a bankruptcy reorganization.
“In all environments of regulated activity, you have significant failures,” Bahamian Attorney General Ryan Pinder says, comparing the FTX bankruptcy to the more recent U.S. bank crashes. “It’s unfortunate, but it isn’t an indictment on what we believe is to the betterment of the country.”
Former FTX US President Brett Harrison, who quit the firm weeks before it failed, recently raised funds for his own trading platform called Architect. Customers liked FTX’s interface, he says, though he thinks the brand is tarnished. If FTX manages a revival, he adds, “it would probably help to rename it.”
Like any new technology, crypto is likely to continue attracting investors, entrepreneurs, and dreamers. Bitcoin may not be useful for much beyond trading, but it’s proving that it can survive a crash and recover. Ethereum has bounced back on bets that it will ultimately be an improvement over today’s internet and financial networks—a dream that is keeping other blockchains afloat with cash and development.
“There are vested interests in keeping this narrative of the utility of crypto alive,” says American University law professor Hilary Allen, an industry critic. “Keeping the demand story up is the only play left.”
Write to Joe Light at [email protected]
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