Crypto investors are set to eat a lot of humble pie at this year’s Thanksgiving table. This time last year, as bitcoin and ether were setting new all-time highs, you probably looked like a genius for being able to explain what a “decentralized autonomous organization” or non-fungible token is. Well, times have changed.
The crypto economy has collapsed but you could still come out looking smart this holiday. And what better way to ease tense conversations than by explaining your way through them. This is CoinDesk’s definitive guide to explaining what broke in crypto this year and why it was in no way your fault. No way, no how!
This article is excerpted from The Node, CoinDesk's daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.
First, the economic context! Crypto is a risk asset that benefited greatly after governments turned on the money spigots to keep their economies floating amid the early days of the coronavirus pandemic. This was after about a decade of “cheap money,” where the U.S. Federal Reserve deliberately kept interest rates low to encourage people to spend and invest rather than save.
Investors – from thrill-seeking venture capitalists to pension funds – were indirectly encouraged to seek out ever-riskier bets. And there sat crypto, looking pretty on the far end of the risk curve, ready to soak up excess liquidity. Well, once inflation started to rear its ugly head, and Jerome Powell decided to cool a “temporarily” hot economy, of course crypto would take a hit.
Who could’ve predicted that? Certainly not anyone who thought a 20% savings rate on Terra's Anchor protocol looked SAFU.
Celebrities and FOMO
OK, so maybe you did say last year that the upcoming Ethereum Merge would be a great buying opportunity. But are you any more responsible for getting your family and friends to invest than someone like Tom Brady? This fella, an American Treasure, staked his entire reputation on FTX, the now-defunct crypto exchange.
Crypto hype cycles tend to be self-reinforcing – as soon as the number goes up, there’s a natural tendency for it to keep going as more and more people remember that they opened a Coinbase account in 2017. (This is Bitcoin’s patented “number go up” technology, which works until it doesn’t.)
Many people, however, won’t be convinced to buy crypto by rising prices alone. Instead, they need a little encouragement. Enter the “celebrity influencer.” Crypto didn’t invent the idea of selling products to fans, or the odd psychological trait where people form parasocial relationships and begin trusting people they don’t even know. But it is a natural fit.
Kim Kardashian boosted “ethereumMax.” Larry David made FTX seem lovable even to curmudgeons. Matt Damon told us investing in crypto was an act of courage. Should anyone have taken investment advice from these people? Well, they had to get rich and/or beautiful (maybe not Larry) somehow …
Real crypto has never been tried
Sam Bankman-Fried, the founder of FTX and the hedge fund Alameda Research, built a celebrity reputation of his own. The supposedly ethical billionaire, who donated to and founded nonprofits and ate vegan, spent as much money on charity as on advertisements. Just as people trust people like Tom Brady, we learned to believe in Sam.
But even if the vision Bankman-Fried was selling wasn’t a scam, it still wasn’t “crypto,” you could say. As many have pointed out since the collapse of the once $32 billion dollar crypto exchange, the type of mismanagement of customer funds that happened at FTX could have only happened on a custodial platform.
See also: Who's Who in the FTX Inner Circle
DeFi, or decentralized finance, never takes ownership of users’ funds, and so cannot abuse them. Further, throughout the bear market, many DeFi platforms have functioned exactly as they should have by following prewritten rules set in code – liquidating anyone that should have been liquidated.
It’s a fairer system. And I for one am thankful for it.