Cryptocurrency markets were thrown into crisis last week on news that the second largest exchange, FTX, run by Sam Bankman-Fried, was collapsing. The events have destroyed investors’ trust in the industry, and created massive volatility in that space.
“It is shocking; it is upsetting; it is disconcerting. It’s a black eye on crypto,” said Ric Edelman, former financial advisor and founder of the Digital Assets Council of Financial Professionals, on a webinar he hosted on the FTX debacle.
But Matt Hougan, chief investment officer at Bitwise Asset Management, doesn’t believe this will change the future trajectory of cryptocurrencies, although it will take time for the system to heal. In fact, Hougan expects this will ultimately be a good thing for the crypto markets; it will bring the regulatory clarity needed to take crypto mainstream.
“This is going to catalyze regulators to come into the space—aggressively and rapidly,” Hougan said on the webinar. “To some degree this shows that they already should’ve. One of the reasons FTX grew so fast and was headquartered offshore is because regulators haven’t provided clarity on how to regulate spot markets in the U.S., so U.S. institutions who wanted to trade in this market were forced to go offshore for these more innovative exchanges. They didn’t have an option here. So I think there is some blame to be shared on the regulators for moving too slowly. But what we’re going to get out of this is a regulated crypto market. And I actually think that that is going to be one of the keys to moving crypto into the mainstream.”
Hougan said better regulation is what ultimately will get institutions off the sidelines and to dip their toes in the crypto markets. And we’ll eventually look back on this period as the “Wild West days” of crypto.
FTX has destroyed investors’ short-term trust in the crypto markets, Hougan admitted, and that’s going to keep investors who would otherwise enter at these prices on the sidelines.
“The one thing investors hate, Ric, more than anything else, is uncertainty, and this injects a great deal of uncertainty into the market,” Hougan said.
Hougan also said this is a setback for the near-term prospects of a spot bitcoin ETF, but long term, it will lead to the regulation needed for multiple spot ETFs.
FTX is currently under investigation by several federal and state agencies, including the Department of Justice, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Texas State Securities Board.
“The fact that all of these agencies are now doing hearings and investigations and suits shows there actually are a robust set of crypto regulations already in place that could’ve protected investors in this instance,” Hougan said.
With Democrats looking unlikely to maintain control of the House of Representatives, U.S. Rep. Patrick McHenry (R-N.C.) is poised to take over as chair of the House Financial Services Committee. (U.S. Rep. Maxine Waters, D-Calif., currently holds that position.) Hougan said McHenry is one of the more informed members of Congress on crypto.
“The key to crypto regulation right now is that it is informed,” he said. “The risk of crypto regulation is that it is uninformed, if it comes from the sort of close-your-eyes, ostrich corner of the anti-crypto wing. As long as it’s balanced, the crypto industry should welcome this.
“I do think it’ll be a harsher environment than it would’ve been a year ago, but quite frankly, crypto deserves it," he said. "And it needs to go through this fire if it wants to emerge into the industry that I think it can be on the other side of the spectrum.”
Hougan argued that the thesis behind crypto as a fundamental technological advance is still there. In fact, more venture capital funding has gone into crypto in the last year than its entire history, he said. But people are going to miss the positive fundamentals in the wash of this short-term news.
“Whatever fundamental metric you look at—users, revenue, developers, venture capital activity—they’re all up significantly over the last couple of years, and I think it’s laying the groundwork for a really great bull market at the end of the tunnel, but for sure volatility before we get there,” he said.
He pointed to three milestones investors should look for in the coming months to see if the crypto markets are recovering from this, including no new failures, clearer regulations and new applications.
“The short term, as Matt said, is going to be volatile; the long term, we think remains intact, and you have to decide if you’ve got the stomach to hang in there short term to survive the long term,” Edelman said.