Crypto’s big unwind is far from over

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The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Anita Ramaswamy

NEW YORK, Feb 2 (Reuters Breakingviews) -Cryptocurrency’s spotlight darkened this summer, but glimmers of hope are returning. After several major digital currency companies went bankrupt following an implosion of Terra, a coin meant to be tied to the U.S. dollar, investors are coming back. That’s a hopeful sign for the industry that promises to upend the global financial system. But impediments still stand in the way.

Terra kicked off a terrible summer when punts on buying and selling bitcoin and another currency, luna, turned out to be less stable than its promises of tracking the greenback. What started as a decline on May 7 prompted a rush to the exit. Then cracks in other coins followed. An abysmal several months for the industry ended with digital currencies’ poster child, FTX, filing for bankruptcy.

Bitcoin fell almost 70% in the year that culminated with that bankruptcy. But last month investors started to return. Products in digital currencies had $117 million in inflows last week, the biggest increase since last July, according to publicly-traded asset manager CoinShares. Both bitcoin and ether prices rallied more than 30% in January.

But growing pains are as present as ever. Bitcoin is still a speculative bet, and as long as central banks including the U.S. Federal Reserve raise rates, as it did on Wednesday, risky assets will go in and out of favor. Structural problems exist, too. Customers lost funds they deposited on now-bankrupt exchanges, but their money, much of which is tied up in near-worthless tokens, is unlikely to return even after court hearings end. On top of that, holdings may be concentrated. Market intelligence firm Messari says 89% of bitcoin is held by 1% of wallets. It suggests a small group of loyalists may be propping up prices.

Regulatory uncertainty continues, too. U.S. President Joe Biden’s administration urged Congress last month to crack down. Some members have tried, but no proposals have gone to a vote. Uncertainty will keep innovation – and investment – from going forward.

Plus the industry is still primitive. Unlike the stock or bond market, there is no independent research to provide transparency. That mystery is partly the point of the digital asset industry. Still, it also means there are likely gremlins lurking in the shadows. Another big event could wipe out confidence that is returning. It will be longer before the cryptocurrency business earns the validation that it needs to grow.

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Bitcoin and ether prices ended January up over 30% each, regaining the ground the two cryptocurrencies lost following the collapse of crypto exchange FTX in November 2022. The U.S. Commodity Futures Trading Commission estimates that FTX lost over $8 billion in customer funds, according to Reuters. Of those missing funds, FTX claims it has recovered $5 billion in liquid assets during the bankruptcy process.

Several crypto companies declared bankruptcy in the second half of 2022 in addition to FTX. Celsius, Voyager Digital and BlockFi are among the other crypto exchanges and lenders that filed for Chapter 11 bankruptcy late in 2022. Millions of users are currently unable to access their funds on these platforms as legal proceedings continue to unfold.

Editing by Lauren Silva Laughlin and Amanda Gomez


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