In these tough times, a bit of historical perspective is useful. Let’s talk about Mt. Gox.
After the February 2014 collapse of the Tokyo-based bitcoin exchange, the conventional wisdom was that its creditors, most of them retail users of the online trading platform, would be left with a pittance. Some 750,000 of customers’ bitcoins were missing, a pool that was then worth around $473 million and continuing to fall as the bitcoin market was contracting.
Fast forward to 2021, when creditors recouped 90% of the bitcoin. The value of those assets then was $9 billion. A 20-times gain.
Now, in the midst of a new crypto winter, the burning question is whether the creditors left in the red by the recent travails of Three Arrows Capital, Celsius Network, Voyager Digital and others can expect a similarly happy result.
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Crypto markets have a history of rebounding from their most severe slumps to hit spectacular new highs a couple of years later. That was the case after Mt. Gox, and following the first winter in 2011 and the third one in 2018. The difference this time is that the broad macro trend of low interest rates and asset inflation that steered rivers of loose money into crypto speculation won’t be there. There is no guarantee that history will repeat.
Yet there’s no way around it: To go from winter to spring, we need at least some recovery in prices. After all, that’s how the wider economy has always gotten itself out of debt crises. The predictability of this occurrence has even given rise to a particular brand of investor: distressed debt buyers, otherwise known as vulture funds, which buy the assets of liquidity-desperate investors at the bottom of the market in the knowledge that prices will eventually rebound.
In fact, fostering price recovery was the core, if unspoken, intent of central bank policymaking in the aftermath of the massive mortgage crisis of 2008. The Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan bought trillions of dollars in financial assets to boost their prices to drive down interest rates and allow markets to recover.
The problem was this “quantitative easing” (QE) policy contributed to another financial bubble and eventually to the inflation problem that has now led central banks to reverse course. With interest rates rising, investors are pulling back, in turn slowing crypto markets. This, as mentioned, is why a sudden rebound in crypto prices is harder to foresee.
Still, if we look more closely at how QE fueled the decade-long recovery from 2008, there are clues about how the crypto industry might turn things around without the central banks’ help.
The QE commitment became known as the “Bernanke Put.” Named for the then Fed Chairman Ben Bernanke, this was a play on put options, a form of financial derivative that gives the holder the right to sell an asset at a predetermined minimum price in order to limit future losses. The idea here was that because the Fed’s asset-buying protected investors’ downside risks, they might as well go all in and bet on gains.
Distorting markets so blatantly is rarely good policy. But for a while, it had its desired effect. What’s important is the mechanism by which that happened: The central bank made a statement (“we commit to buying bonds”) and backed it up with action (actually buying the bonds) to generate a narrative (“investors have nothing to lose because the Fed has given them a put option.”)
Crypto now needs its own compelling narrative to support a price recovery. And because there’s no central bank to put money behind it – with all due respect to FTX CEO Sam Bankman Fried’s efforts to be a lender of last resort – it needs to be a story backed by real, observable actions and outcomes.
In fact, it needs to be a better story than even the Bernanke Put, because that one was ultimately proven false. The Fed couldn’t backstop investors’ losses forever. Eventually, something had to give and that something was inflation.
Also, unlike those past recovery periods, the story cannot simply be “number go up” – the pure, speculation-based play on crypto’s supposedly unstoppable upside momentum, one that’s often presented without clear fundamental logic. Central banks’ rate hikes pour cold water on that play.
No, the story must be associated with real-world utility. Now is the time to lay out valuable use cases for humanity – as we discussed last month, energy is one, but so too is crypto’s capacity to empower people living under tyranny – and to back those use cases with action, with development.
The way out of winter has always been through higher market prices. It’s just that this time the market action needs real-world grounding.
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