Dubai: With $8 billion (Dh30 billion) in customer funds stolen, the wrongdoings of Sam Bankman-Fried – the founder of now-bankrupt crypto exchange FTX –– will go down as one of the biggest financial scams on record, after the 31-year-old was convicted of defrauding investors days ago.
The ex-billionaire, widely known as SBF, now faces more than 100 years in prison, which is why he is being widely compared to Bernie Madoff, a financier who was sentenced to 150 years after masterminding the largest known Ponzi scheme that was worth about $18 billion (Dh66 billion).
But what does all this mean for the future of the crypto industry? More importantly, how does this impact prices of cryptocurrencies bought by investors? Do they sell their investments or hold onto it while bracing for a profitable boom in the years ahead?
“The recent events surrounding the conviction of SBF should not be taken lightly by crypto investors as it sheds light on improper practices and highlights the wider risk of the industry in general,” said Brian Deshell, an Abu Dhabi-based cryptocurrency trader who works as an industry researcher.
Cryptocurrencies are still down
Cryptocurrencies are still down over $1.5 trillion (Dh5.5 trillion) in value since the height of a massive price rally in 2021, with the total market valuation currently standing at $1.4 trillion (Dh5.1 trillion) along with the volume of daily traded crypto at $70 billion (Dh257 billion).
Consequently, Bitcoin’s portion of the $1.38 trillion cryptocurrency market has decreased to approximately 49 per cent, down from its peak of 51.5 per cent in October, as reported by cryptocurrency ranking web site CoinGecko.
“The market decline signals increasing risk. As the price of Bitcoin was erratic, most other crypto follow its larger price swings. This volatility attracts investors who hope to buy when the price is low and sell at its peak, turning a profit. But this does little for price stability,” Deshell added.
The ‘crypto winter’ also wiped out over 67,000 crypto millionaires since peaking at about 100,000 millionaires in 2021. Also the trading volume of the world’s largest crypto token Bitcoin, which makes up majority of the overall market, is currently at its lowest in more than four years.
Why are crypto prices pressured now?
To crypto experts, the prime reason for the market downturn is “undeniably” the downfall of one of the largest global cryptocurrency exchange, FTX and the “misdeeds of SBF”. FTX’s bankruptcy has not only triggered a huge sell-off but has also reduced liquidity from the crypto market.
“Multiple issues with FTX’s finances and regulatory investigations into SBF stunned crypto investors and left Bitcoin to tumble to the lowest level in two years,” added Deshell. “The surprising turn of events also led to a turmoil like situation in the crypto industry.
“This resulted in high level of distrust and skepticism among the investors towards crypto establishments and on the regulation front. The FTX contagion effect is quite evident, several questions have now been pointed out on the survival of other crypto trading firms worldwide.”
So while the slump last year was triggered by the collapse of FTX, which handled around $1 billion (Dh3.67 billion) transactions each day, its collapse is having a knock-on effect on other crypto exchanges, and this poses a threat to the pace of recovery of the cryptocurrency prices even today.
Crypto starts staging gradual recovery
Now, cryptocurrency experts believe that if Bitcoin sticks to its level of $30,000 (Dh110,189), then it could bounce back likely from here. They have also predicted the Bitcoin price could surge next year, driving it to $150,000 (Dh550,947) by 2025 and giving it a market valuation of $3 (Dh11) trillion.
However, most cryptocurrencies still lag much behind their all-time highs. Bitcoin is still down 50 per cent from its record high touched in November 2021 at $69,000 (Dh253,400), and second biggest crypto Ethereum was at $1,900 (Dh7,000) levels, down 100 per cent from its all-time high in 2021.
But it’s not all bad news. Much to the relief of investors, Bitcoin and Ethereum are staging somewhat of a recovery now. Bitcoin has risen 100 per cent this year and similarly, Ethereum has rallied almost 58 per cent till this time of the year. So the digital investments cannot be written off just yet.
“So even though cryptocurrency trading volumes are still far lower than before, the good news is that, 2023 has been able to absorb all the major losses which the market suffered in 2022,” added Deshell.
“Crypto is risky for a lot of reasons. But the big reason it's not a safe investment is because it can have huge swings in price in the blink of an eye. In the investing world, that's called volatility. And volatility isn't good for an investment portfolio.”
Even though Dunn says that cryptocurrency's future outlook is still very much in question, Deshell is a proponent who see risks waning in the near future. However, even Dunn conceded that there are certain applications where cryptocurrency is a viable solution.
Bottom line: Should you be worried about your crypto investments after SBF’s guilty verdict?
The bottom line is that the cryptocurrency market has seen worse and the crypto market has literally gone through the roughest storms during the past few years. But as the burnt crypto market now has a fresh start and is showing positive signs of a recovery, should investors still be worried?
If you are an experienced or a seasoned investor, crypto experts widely believes that in this kind of scenario, you can look up to invest in stable digital coins such as Bitcoin or Ethereum, but should only give 5 per cent exposure to cryptocurrencies in their overall investment portfolio.
This is because cryptocurrency prices are still highly volatile and extremely speculative, so it is advisable to invest only an amount which you can afford to lose, particularly if you’re an investor new to an incredibly risky asset class.
As to whether or not the investment will turn more stable in the near future, while there is still uncertainty on that front among industry analysts, with more global crypto regulation around the corner, the digital currency can get steadier in the months to come. But only time will tell for certain.
“With cryptocurrencies, it is always better to not impulsively invest. Moreover, for a new investor, now is also a crucial time to observe how the cryptocurrency market performs, as once this chaos fizzes out, you may be able to find your favourite digital asset at a much fair value,” Dunn added.
