In the beginning, there was nothing. And then the first bitcoin appeared. In 2008, an anonymous person working under the pseudonym Satoshi Nakamoto published eight pages. Eight little pages that will change the world because they describe a system that allows two people who do not know each other to carry out a secure electronic transaction without a trusted third party. Since then, his idea has been copied and adapted. Many blockchains have emerged (Ethereum, BNB Chain, Solana…). And a vibrant $3 trillion ecosystem used by 320 million people was built from the ground up in fourteen years. Since then, this new world has faced a terrible collapse. Cryptocurrency prices collapsed (-48% for Bitcoin, -51% for Ether, etc.) and $2 trillion in valuation evaporated. What happened?
One source of the crypto bubble, of course, was the low rates that central banks put in place to prevent the economy from collapsing during the Covid pandemic. A strategy that encouraged investment so much that it benefited increasingly risky values until it flooded cryptocurrencies. The panic of their curves then attracted the general public, dreaming of lightning-fast fortunes.
However, the reasons that push so many people towards crypto are heterogeneous and worth exploring. There are many people in this community who are genuinely passionate about the innovative technology on which the system is based. But interest in blockchain is also fueled by distrust created – and rightly so – by the 2008 crisis. And in 2022, that distrust has not dropped an inch, quite the opposite. “I buy cryptocurrencies in anticipation of the day when global financial institutions collapse,” says a wealthy Parisian executive in his thirties. A speech given to us by several crypto users and professionals. A sign that the crypto craze is also in part a symptom of the unease of the population, faced – mainly – with the threat of global warming, Covid and war in Ukraine.
“Have fun while being poor!”
Community affiliation also explains the appeal of cryptocurrencies. Those who buy the NFT of the infamous Bored Ape Yacht Club do not do so for the Bored Ape Virtual Card. They join the circle of select, fashionable people. These virtual circles mock those who don’t understand the interest in crypto: “Have fun, stay poor!” They cement their bonds with bear memes, laser-eyed profile pictures, and their secret jargon (“WAGMI!”, we can do it), no doubt elated to see a layman work to trade them for hash. “burning” or “gas fee”. Not surprisingly, regulators have little trouble keeping up. And that caused some problems.
Social media has been filled with opaque advertisements for high-risk, high-yield products. Numerous scam projects have emerged, such as the crypto game Squid Game, which posed as Netflix partners before paying with money. Even when there is no malicious intent, cryptocurrencies remain risky. The fact that blockchains like Bitcoin are open source is reassuring: anyone can innovate on them. But if someone can create a rival bitcoin, that raises tough questions about the intrinsic value of this UFO. Approximately 6,000 more or less serious, more or less eccentric cryptocurrencies have appeared. Instructive is the case of Dogecoin, launched by two engineers to ridicule cryptocurrencies. Ever since Elon Musk joked about it, his price has exploded (9 billion euros today). In this story, it is interesting who will have the last laugh.
Popular crypto projects have also shown their flaws such as Do Kwon. His Luna token and his stablecoin TerraUSD, which should have always been worth the Luna dollar thanks to a system of automatic corrections and financial incentives, attracted many people. But these mechanisms “do not work when people are panicking,” economist Francis Coppola warned in the summer of 2021. In May 2022, the sudden collapse of Luna and TerraUSD (which brought down Three Arrows Capital and Celsius) proved him right. Last November, the FTX case erupted, revealing a less-than-stellar behind-the-scenes behind the scenes of one of the most popular cryptocurrency exchange platforms. Access to customer funds without security checks, keys stored without encryption… “I have never seen such a complete failure of corporate controls at all levels,” said former Enron liquidator John Ray III. Incompetence or embezzlement, justice will decide. Arrested Sam Bankman-Freed is awaiting trial.
Apart from these scandals, the sector’s biggest problem remains that it has no clear idea of what constitutes its added value. Is it a completely anonymous means of payment? No, researchers have invented sophisticated tracking methods. So this is an innovative payment method? Safe harbor? The fall of bitcoin has largely undermined this assumption. And while the cryptosphere is making great strides, it doesn’t have the high-volume processing capabilities that Visa has. As for the idea that cryptocurrencies will someday replace currencies, it doesn’t make sense for countries with good banks and stable currencies like France or the US.
However, the blockchain remains an invention that ingeniously answers the key question: who can we trust, especially in the virtual world? Bitcoin has been proving for years that its system works: two people who don’t know each other from Eve or Adam can safely make digital transactions. And Ethereum seems to have found a much less power-hungry way to do it. Therefore, in countries with a small number of banks, the blockchain option is worth exploring (provided that the population has access to the Internet). “In a dictatorship or in countries in crisis, blockchain can also become a life jacket for the population. We cannot confiscate your cash at the border or arbitrarily freeze your savings,” says Alexander Stashchenko, Director of Blockchain & Cryptos at KPMG France. In recent months, parts of the Lebanese population have also turned to cryptocurrencies. For diasporas, cryptocurrencies can also have attractiveness: the fees charged when transferring funds are much lower.
NFTs also remain promising, allowing you to attach a certificate of authenticity to physical (paintings, etc.) or virtual (video game items, membership card, etc.) objects. Admittedly, this is increasingly monetizing the digital space, making it “rare” what it isn’t. But digital is taking more and more space in our lives. In order for people to want to develop something better there, perhaps new reward systems are needed. Another path to follow is DAOs, programs that allow people who don’t know each other to coordinate by acquiring voting rights and running a common bank. Poorly built, they can be flawed (the first DAO was robbed of money due to incorrectly coding the rules). But their potential is intriguing.
In fact, this is one of the great virtues of the cryptosphere: anyone can get their hands dirty. Just as Uber forced taxis to modernize, perhaps this competition will force traditional finance to modernize. However, the crypto world will also benefit from getting to know its ancestor better. Web3 sometimes resembles hippie idealists who create autonomous societies and end up reinventing voting rights or pooling health care costs… Sometimes they invent better systems. Sometimes they painfully come to the same compromises. And sometimes they choose completely wrong decisions. The traditional economy has valuable experience in preventing fraud, managing risk, dealing with dirty money, etc. If the cryptosphere does not learn from what it considers the past, it is doomed to repeat it.