After the FTX scandal, the Cassandras of cryptocurrencies are back in color. But by the way, let’s look at the “exploits” of so-called “traditional” finance in recent years…
There are those, all happy and self-satisfied after the FTX debacle, say, “I told you so! » or who say « how can we be surprised by this failure when cryptocurrencies are nothing but wind » or « the regulators have done nothing! and above all “cryptocurrencies do not finance the economy”, the latter argument considered a shock.
What are we talking about?
First, in terms of market capitalization, losses to date total approximately $2.2 trillion between the peak of digital assets’ capitalization and their market capitalization as of Friday, according to data from Statista; in terms of net losses, it is still too early to have a clear figure but between Terra Luna and FTX, the amount of losses would be 17 billion (some lean more towards an amount of 31 billion, but for this factor in the evaluation of the decline in locked assets based on Total Value Locked) + $8 billion; these figures are probably underestimated but it is difficult to know more at this stage.
The cryptocurrency market was just over $3 trillion at the peak of the market, while at the same time the only global market capitalization of companies (and therefore the stock market, but omitting the debt market, the derivatives market and the Forex market) was worth more than $35 trillion, according to PwC.
What is happening in the digital asset market should be put into perspective
But despite the huge losses of the cryptocurrency market, if we compare them with the crises of the so-called traditional finance, and in particular that of 2008, it is necessary (largely) to reduce the effects of what is currently happening on the digital assets market. .
Reminder of some facts:
- there are financial crises, i.e. stock market crashes every 10-15 years since the end of the 1990s, not to mention all those that occurred from the 19th century to the first half of the 20th century;
- most of the stock market crises are linked to real estate speculation, the heritage of a “good father” by definition;
- Lehmann Brothers and other investment banks did not finance the economy but used their funds to speculate in financial markets like hedge funds;
- the sophistication – and decorrelation – of financial products has been extravagant with CDOs, leading to the subprime crisis;
- the failures of “traditional” hedge funds are frequent and potentially systemic for the stability of the global financial system: we remember the defeat of the Archegos fund in 2021, but who remembers the LTCM fund which, in 1999, almost put the world of finance to harm , and Amaranth in 2006? While, according to the Financial Stability Board, the cryptocurrency market is not systemic; and the contagion effect of this crash on traditional equity markets has so far not materialized.
- the 2007 financial crisis led to stock losses in US markets alone of more than $8 trillion and asset value losses of more than $9.8 trillion (Washington Post, September 10, 2018);
- during the 2008 crisis, states and governments helped the banking and financial sector massively: total EU aid to banks and the financial system during the 2008 crisis was 1,459 billion euros in capital and 3,659 billion euros in cash, according to the European Court of Auditors. According to MIT research, the total direct cost of crisis-related bailouts, on a fair value basis, to the United States was about $498 billion, or 3.5 percent of gross domestic product in 2009. In total , the IMF estimates that total public support amounts to about $3.5 trillion, widely distributed in the banking system and helping more than a thousand banks (this support consists of $1.6 trillion in gross direct interventions and $1.9 trillion in guarantees), while the cryptocurrency market crisis did not cost states and governments, and therefore taxpayers, a euro or a dollar;
- the consequences of the 2008 crisis on jobs in the financial sector were disastrous: several tens of thousands of jobs were destroyed. We are only talking about a few hundred jobs lost in the cryptocurrency market crisis;
- the 2008 crisis paved the way for an explosion of unemployment and precariousness for millions of individuals;
- during this 2008 crisis, many voices, including political ones, were raised to put an end to speculation in banks and movements to stop speculation (remember Occupy Walt Street): re-read the reports Vickers, Volcker and others bring Liikaneen back to Europe at the end of the so-called speculative activities in the banks with the “implementation success” that we know, especially under the Trump administration;
- It is not only in the crypto markets that there are scammers: who has forgotten Madoff (cost of the fraud between 20 and 50 billion dollars!)? And other.
- the 2008 crisis revealed more than dubious practices of some regulated financial institutions, such as the “right to use securities” without the consent of customers by their banks (re-mortgaging)!
- the lack of internal control can lead to gigantic losses in banks: who has forgotten Kerviel in 2008 at Société Générale (4.9 billion dollars of losses for the bank) or even Leeson who, single-handedly in 1995, managed to bring down the very old and reputable Bearings bank, or even Yamanaka at Sumitomo in 1996, and at Stanford in 2009 and of course in 20021 at Enron, archetypal and “definitive” to date of a giant organized fraud?
Last but not least, if digital assets finance the so-called real economy little or not at all, it is to forget that they are an integral part of the digital economy.
In short, what is it with FTX and others? This has been said, and it is starting to spread a bit: it is a crisis of confidence in an immature market (client assets were not even segregated from proprietary assets!) and insufficiently regulated (thanks to the EU for being in the process of adopting the draft MiCA regulation), combined with fraud and swindling as there will always be as soon as money is “easy” and controls are absent.
Without relativizing the massive scandal, let’s look at the beam in the eye of so-called traditional finance before we look at the speck in the eye of the cryptocurrency market.
But the subject is not really there. The question is rather whether and how the cryptocurrency industry will emerge from this slump: from a healthy rebound like in 2000 with Tech? Or from a return to pre-2015 dark web uses of cryptocurrencies? If the value of different cryptocurrencies keeps falling very sharply, then anything is possible. Including the marginalization of this activity.