Created in 2008, Bitcoin was the world's first cryptocurrency. The goal was to provide for the anonymous exchange of commerce outside the scope of government or private oversight. No bank, credit card company or payment processor, such as PayPal, is used to broker the transaction between buyer and seller. The identities of the buyer and seller, along with the transaction detail, is concealed via complex cryptography.
A lot has changed since 2008. According to CoinMarketCap.com, a leading cryptocurrency website, today there are 22,141 different cryptocurrencies. For better or for worse, the initial legacy of cryptocurrencies is less an alternative form of currency and more of an ultra-high-risk investment. Investors can easily buy or sell cryptocurrencies on one of the nearly 600 cryptocurrency exchanges spread out across roughly 50 countries. These exchanges serve as an electronic platform for buying and selling digital currencies.
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But 2022 was a brutally tough year for cryptocurrency investors. Bitcoin, the world's most popular cryptocurrency by market cap, was trading at $16,639 as of Thursday. This is a 64% decline from its $46,311 price on Jan. 1, 2022. Bitcoin reached an all-time high of nearly $69,000 in November 2021. Etherium, the world's second most popular cryptocurrency, has seen its price decline by 67%. The vast majority of the other 22,000-plus cryptocurrencies have also suffered punishing declines in 2022.
By comparison, other "risk investments" have fared much better. As of Thursday, the S&P 500 has declined 19.2%, the Dow Jones Industrial Average has fallen 8.6% while the tech-heavy NASDAQ has lost 33.1% so far in 2022.
Adding fuel to cryptocurrency's 2022 decline is the industry's continual besiegement by theft and customer complaints of fraud, price manipulation and fabricated trades. The industry's hallmark — the anonymous exchange of value free from regulatory control or oversight — has become its greatest obstacle. In the realm of cryptocurrencies, there are few, if any, restrictions on who can create their own digital currency or digital currency exchange. The rules, integrity and oversight for these currencies and exchanges are often determined solely by their individual creators.
The latest scandal is the recent collapse of FTX Trading Ltd., the Bahamas-based company that operated its own cryptocurrency exchange as well as a cryptocurrency investment hedge fund. Two weeks ago, its American founder and CEO Sam Bankman-Fried was extradited to the U.S. and is now charged with multiple felonies including wire fraud, securities fraud and money laundering, among others. FTX, which was valued at $32 billion earlier this year, has filed for bankruptcy protection. This once-darling of the cryptocurrency industry, along with an estimated $8 billion in misappropriated customer funds, is now essentially worthless.
So, what's in store for the cryptocurrency industry in 2023? Noted economists and Wall Street heavyweights remain heavily divided. Depending on whom you ask, many will argue cryptocurrency represents the cutting-edge future of currency. Others will vehemently state it's an absolute worthless endeavor destined for failure. Whom do you believe?
One thing we should expect, however, is greater government control and oversight. The FTX debacle is just one of a growing list of casualties caused by the industry's founding purpose — commerce free from regulatory intrusion. However, the industry's continued aversion for even self-regulation continues to place it in the crosshairs of national and international regulatory agencies. If the cryptocurrency industry truly wants to thrive, it may have to realize that regulation may be the ultimate cost to achieve that endeavor.
Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.
Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.
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