It came to light on Nov 8, 2022, that FTX, the second-largest global cryptocurrency exchange, faced an intense liquidity crisis because of shady deals with the related firm Alameda Research.
This year hasn’t been great for the crypto industry as it suffered a series of meltdowns, impacting the financial markets and investor confidence in the gradually maturing industry. Since May 2022, prominent projects such as Celsius, Three Arrows Capital, Voyager, Vauld, and Terra have collapsed within months.
BNB Chain-based DeFi protocol Ankr recently confirmed it was hit by an exploit amounting to multi-million dollars on Dec 1, 2022. Even before this particular exploit, hackers had been responsible for stealing over $2.98 billion in digital assets in 2022.
However, FTX’s fallout has been significantly damaging for the industry, evident in how the major crypto coins fell in value immediately after the news surfaced and haven’t since recovered.
Related: FTX Collapse and What it Means for Web3
After a record-breaking VC year in 2021, with over $30 billion invested in the next iteration of the internet, investors are taking a pause in 2022, according to Crunchbase. Funding to VC-backed Web3 startups and the number of VC deals dropped to their lowest point since the end of 2020. In Q3 2022, only $3.3 billion went into Web3 startups, a nearly 50% decline from the previous quarter. It’s the lowest total funding to crypto startups since Q4 2020, when only $1 billion went to startups. However, it’s a steep fall from the $9.3 billion invested in Q4 2021.
Deal flow also went down in the third quarter with only 408 announcements, 200 fewer deals as opposed to Q4 2021 and Q1 2022. Until October 2022, investors had poured in $17.7 billion in the crypto startup space, too short of last year’s $30 billion.
Against the backdrop of poor investor sentiment after the FTX fallout and other meltdowns in the Web3 space, poor VC numbers don’t build up any confidence. However, Vitalik Buterin suggests an “exhausted from scammers and fraudsters” tweeter to move away from trading and investing circles and closer to the technology and application ecosystem of the crypto industry.
According to John Kenneth Galbraith, author of the Great Crash, 1929, at any given time, there’s an inventory of undiscovered embezzlement in a country’s banks and businesses. This must be called the bezzle. History tells us that the greatest frauds aren’t discovered until very late in the cycle. “The Bezzle” isn’t uncovered until long after the interest rates hike, as fraudsters are able to hide a lot for a long time.
And frauds are only revealed when they can’t be held in any longer. The same happened with the Internet bubble and Enron, the scam that defined the era. It’s interesting to note that Enron came about in 2001, when the bubble was already on its way down, proving that the biggest fraudsters are skilled at keeping the show running until the very end.
However, the same history lesson gives hope to the crypto industry as it tells us we might be closer to the bust, promising things will be better again sooner.
Related: How DeFi and Web3 Could Shape the Future of Finance
Kevin O’Leary said, “I’m still a huge advocate for the potential of blockchain and cryptocurrencies. I’m disappointed, like many other shareholders. I try and find out what is the outcome of something like this. It’s not the first or the last time I’ve made a bad investment. But luckily, I make more good than bad ones and learn from my mistakes. There won’t be another situation like this for institutional investors ever again. We’re simply not going to put capital to work until this stuff gets regulated.”
FTX operates offshore, as a lot of crypto businesses do, for the freedom the lack of regulation gives them. However, it’s clear that doing so creates risks for customers and investors. A parallel can be drawn between the biggest frauds in the history of humankind and the FTX fallout in that the businesses appear as legitimate as they do.
FTX was invariably a giant in the crypto space, which, if not anything else, appeared real. Investors believe it would be critical to regulate the crypto industry if it is to become mainstream and even worthy of institutional investors.
Related: What You Should Know About Regulations in a Web 3.0 World
Centralized exchanges will face the brunt of the recent turbulence in the crypto industry. In an interview, Dennis Jarvis, CEO of Bitcoin.com, said that centralized intermediaries could not be trusted much, and while there will always be a space for them, their role in the ecosystem will hopefully shrink.
This might mean that the interest in decentralized exchanges might increase, and trading ecosystems might see consolidation with regulatory grip tightening. FTX’s fallout might compel exchanges to operate with even more transparency and professionalism.
However, there’s no denying that centralized exchanges may face the heat from DeFi protocols, which will proliferate and lead to huge development opportunities. Today, DeFi platforms are too tricky to use for retail investors, and CeFi (Centralized Finance) platforms are too difficult to trust. Crypto might come around if the trust from DeFi and the user experience from CeFi can be brought together.
Another repercussion of the FTX collapse can be an extended crypto winter stretching till the end of 2023. This might result from the FTX downfall, besides other ripple effects yet to surface from the event.
In summary, is the crypto industry doomed? We don’t think so. Crypto may be down but not out, as per this Techcrunch analysis, which states that things in Q4 2022 could’ve been worse, but there have been 219 deals worth $1.86 billion as per Crunchbase and 225 deals worth $2.15 billion as per PitchBook.
Since declines in crypto ventures are slowing down, things may start to look up soon.
Reach out to KiwiTech’s Blockchain Consultants to learn about our Web3 Center of Excellence and the exciting projects we are helping startups with.