There is still no name for the global events that have, in the space of a few months, wiped out about $2 trillion. “Crypto crash” hasn’t stuck, and nor has “crypto winter” – both terms have been used before, and neither captures the meltdown’s scale or meaning. Until mid-2022, cryptocurrency was the best-performing investment of its era – by some measures, any era – and when the end came, it came with terrifying speed. Crypto’s boosters had imagined leaving traditional finance and its problems behind. Instead, they found themselves facing fresh digital versions of old crises: investor panic, institutional failure and bank runs.
The tremors started on what was supposed to be crypto’s firmest ground, so-called stablecoins that mimicked or shadowed state-issued fiat currency. In May they shed $US200 billion in less than 24 hours, led by the collapse of twin coins terra and luna. In the chaos, thousands of investors and curious onlookers googled “could crypto go to zero?” and began to pull their investments. Major crypto exchanges suspended deposits and withdrawals; one of the biggest, Binance, watched as $US1.6 billion worth of terra luna turned into less than $3000. Three Arrows Capital, an early crypto-asset hedge fund, went into liquidation and its owners disappeared. The cryptocurrency lender Celsius Network collapsed into bankruptcy, owing billions. Crypto had held a special attraction for ordinary retail investors, who felt its wealth creation was democratic, and the darkness came for the vulnerable and overextended. Online, digital investment forums posted phone numbers for suicide prevention hotlines. In El Salvador, where the president had declared bitcoin a legal tender, and planned whole crypto cities detailed in golden dioramas, the nation faced a possible debt default. In China, which had once incubated cryptocurrency before banning it outright, the Economic Daily declared that investors would soon return bitcoin to its true price: “utterly worthless”.
Bitcoin would do away with mints, central banks, and a corruptible, hierarchical finance sector. In their place, it would operate a kind of permanent ledger, which would be public but anonymous.
The catastrophe also provoked unmistakable schadenfreude. The Atlantic led its coverage with an essay entitled “The Crypto Crash Feels Amazing”. Frank Muci, a policy fellow at the London School of Economics, told WIRED magazine that the collapse was “a run on nothing”. Instead of collateral such as stocks or gold, stablecoins such as terra and luna were backed by a secret sauce of computer algorithms, which evaporated under pressure. Crypto’s opposition to the old ways, its unregulated, speculative and volatile nature, made it too hot to touch for most legacy banking institutions. That insulated the broader global financial system from much of the risk – and left some content to watch it burn.
Regulators looked on as well. “Until recently, I think that crypto, at least from a systemic perspective, was regarded more in the category of ‘too small to care’,” says Greg Medcraft, the former director for financial and enterprise affairs at the OECD. “And then recently, it probably moved into the too-big-to-ignore category.” The failures were of “extremely topical” relevance “given that it’s still collapsing”, but crypto had never moved far into the territory of “too big to fail”. Instead, it seemed to be just the right size to fail, and fail spectacularly, before anyone could work out for certain what it might be used for, how much it was worth, or even what cryptocurrency really was.
For crypto advocates, the downturn was a reckoning that could clarify these questions. Though there was pain, the pain was lessened by transparency. Chris Berg, a senior research fellow at RMIT University’s Blockchain Innovation Hub, believes it would be “wrong to take the concerns that came out of the GFC and apply them to a radically different financial infrastructure with radically different implications”.
“When we have these collapses, we have a very quick understanding of how they’re going to play out,” he says. Everyone knows where the liabilities are, Berg says, and there is no sludge of toxic assets left behind when something’s true value turns out to be zero.
Perhaps the crypto downturn’s wider implications are more cultural than economic. In its short history, cryptocurrency has not only generated and lost terrifying fortunes, but created a distinct arena for imagining the future. For The Wall Street Journal, the crash was a moment where an industry fueled by “swagger, enthusiasm and optimism” suddenly discovered that “all three are in short supply these days, as losses and layoffs mount”.
The “swagger”, and its diminishment, were typified by Do Kwon, luna’s founder. He went from obnoxious to apologetic.
Kwon is an archetypal “crypto bro”. Brash and young, he liked to insult online critics by calling them “poor”. Rather than a scammer, Kwon’s deception began with a self-deception. He had a near-evangelical belief in his own product – he named his newborn daughter Luna after the stablecoin – and, according to one digital finance commentator, did “a great impression of a man who really believes in what he’s selling”. After luna (the digital incarnation) failed, he described himself as “heartbroken”, reflecting a psychological dimension to the damage that was widespread. It originated in a profound and influential idea that has generated its own utopian belief system.
The origin story of bitcoin, the first true cryptocurrency, has by now been repeated almost into legend. In 2008 a nine-page paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” was posted online, its authorship ascribed to Satoshi Nakamoto. This pseudonym still hides the identity of a person, or group of people, who are now among the wealthiest in the world. The thrust of the paper concerned a problem in economics called double spending, the risk that a non-physical currency can be used twice at the same time. Satoshi’s solutions were elegant rather than dazzling and built on existing work that was acknowledged in footnotes. What gave this dry prose such a seismic reception was the cultural moment in which it arrived: the immediate aftermath of the global financial crisis.
Satoshi’s most attractive insight was about trust. Cryptocurrency could abolish it, and that was a good thing. Bitcoin would do away with mints, central banks, and a corruptible, hierarchical finance sector. In their place, it would operate a kind of permanent ledger, which would be public but anonymous. Every bitcoin transaction would be verified by other bitcoin users, through a peer-checking process. This required expensive, energy-intensive computing power to perform, but this could be compensated for by more bitcoin. Inflation would be avoided by having a finite number of bitcoins, capped forever at 21 million. Released slowly, they become progressively harder to obtain.
At a time when civic faith, especially trust in the financial system, hit a historic low, Satoshi offered a tantalizing alternative. Why trust when you could verify? Unlike human-made institutions, the computer code at the heart of bitcoin was incorruptible. In time, it might do away with the whole rotting edifice of Wall Street and the Federal Reserve, perhaps even the White House. It wasn’t necessary to understand the computing intricacies – as bitcoin alternatives became more complex, and investors less cautious, they were almost irrelevant. You only had to feel the vibe. Some ploughed their money into the joke token dogecoin – it was going “to the moon”.
As well as raw electrical power, cryptocurrency drew on cultural energy: memes, forums and a deep well of popular dissatisfaction. It had a political arm, a market-loving, male-heavy, tech libertarianism. For decades, classical liberal thinkers had proposed denationalized currencies (Friedrich Hayek, the father of neoliberalism, did so in 1976) as an escape from the clutches of the state, inventions that gelled with older right-wing instincts towards secession and exit. This sentiment resonated most strongly in the United States, which is itself the product of just such an instinct. Satoshi wrote that bitcoin would be “very attractive to the libertarian viewpoint” and the libertarian viewpoint agreed.
Ironically, it was state action and central banking that fueled bitcoin’s rise. Low interest rates, quantitative easing and stimulus spending created an ocean of cheap liquidity that flooded financial markets. Cryptocurrencies were often treated as instruments of pure speculation, and their prices reached dizzying heights. Bitcoin topped $US68,000 in November 2021, a peak that led to what the chief executive of BTC Markets Caroline Bowler calls “FOMO investors” – those who feared missing out – sometimes making investments for the first time.
It was a lottery, but one that could actually pay the rent, even buy a house, and provide opulence unimaginable in a post-GFC world. Crypto’s continued slide reflects in part the loss of faith among these retail buyers, Bowler says. “This is the retreat back from the market,” he says. “We’ve certainly seen those volumes fall off … In crypto, it’s actually more retail because it’s more of a retail-driven market. I think this risk of sentiment has spread across the entire trading and investing space.”
For now, the price has settled, but the argument is unresolved. Crypto’s adherents and critics are both fanatical and occupy distant extremes. It is either one of the greatest inventions in history, or one of the greatest scams in history. If the believers are right, crypto might revolutionize finance, government and human freedom. If they are wrong, it is a destructive delusion that imposes vast social, financial and environmental costs just when we can least bear them.
This is part one of a four-part series.
Next week: The dark side of crypto.
This article was first published in the print edition of The Saturday Paper on July 23, 2022 as “Going to the doges”.
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