FTX-driven crypto chaos exposes weaknesses but not another 2000 dot-com debacle

The fallout from the bankruptcy of FTX is far from over and bitcoin will fall to $15,000 before the end of the year as investors become more wary of investing in the virtual currency, one expert says. This will be a further 10% drop in price.

“I expect the sale to continue and a further loss of value to occur,” Elvira Sojli told FOX Business. Sojli is an Associate Professor of Finance and a Scientia Fellow Alumni in the School of Banking and Finance at the University of New South Wales.

Sojli said cryptocurrency growth was fueled not by fixed financial principles, but by believers in the system and newcomers.

“The recent stories have stemmed the waves of newcomers and shaken faith in some late entrants to the market,” she said.

Bitcoin for sale sign

Bitcoin is available for purchase at ATMs in gas stations, drug stores, tobacco shops and elsewhere, including this gas station in Cherry Hill, New Jersey, November 12, 2022.

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“I don’t think we will see more crypto adoption by the general public, but we will see more countries move towards Central Bank-issued digital currencies (CBDCs). How this market will develop will depend on how CBDCs will be implemented ,” Sojli said.

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The finance professor is careful to call a crypto market bottom, noting that almost 75% of bitcoin’s (BTC/USD) value has already been wiped out this year. Crypto prices generally soared between March 2020 and November 2021, reaching $67,802 on November 9, 2021, before falling in the so-called “crypto winter”.

“My last forecast for Finder.com in May put BTC at around $15K at the end of the year. I expect it to be reached faster now. I don’t think it will be possible to restore confidence in the short term. “

Another dot-com bust?

Last week’s bankruptcy of FTX rattled bones in the dot-com graveyard and raised the specter of a Year 2000-esque bust.

Since July, crypto hedge funds Three Arrows Capital, Voyager Digital and Celsius Network have all filed for bankruptcy following a crypto winter that saw cryptocurrencies lose more than $2 trillion in value through June.

The losses are reminiscent of the 2000 dot-com bust. At the time, CNNfn reported that a basket of 280 Internet stocks had lost $1.7 trillion by November 2000, with more than half off 80% or more from their 52-week highs as the dot-coms ran out of venture capital money and imploded has.

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“The bankruptcies in the crypto space resemble the dot-com crash in that there was a rapid increase in value that was not justified by fundamental values [hype] and a very fast one [up the escalator down the elevator/cliff] decrease,” Sojli said.

Irrational exuberance

William Shatner for Priceline

Actor William Shatner served as a Priceline spokesperson for two decades. Photo is from a press release dated March 22, 2021. (Price Line)

Typist Security Last Alter Change %
BKNG BOOKING HOLDINGS INC. 1,979.25 -36.52 -1.81%

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During the dot-com era, fueled by “irrational exuberance,” investors piled into Internet stocks in hopes of quick riches from initial public offerings (IPOs). For example, Priceline.com went public in March 1999 at $16 per share and gained 914% in one month. Priceline Group eventually survived and is now Booking Holdings (booking.com).

Other startups quickly disappeared, including Chewy forerunner Pets.com and personal finance site OnMoney.com.

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“The bubble equation is where the similarity between these two events ends,” Sojli said, explaining that the dot-coms have an underlying business model. Many were listed companies with operations and cash flow.

“That can’t be said for most crypto assets. There are no claims to real assets or cash flow,” she said. “That’s why I don’t see this as the bottom, but rather a start of the weaknesses of the business propositions in this space being exposed.”

Sojli sees the current wave of bankruptcies as an inevitable market consolidation among companies offering the same product with little differentiation. She also noted that the technology used by crypto exchanges is not unique, making the industry vulnerable to more mainstream companies. In August, Wall Street investment manager BlackRock launched a mock bitcoin private trust to provide institutional clients in the United States with direct exposure to the world’s largest cryptocurrency.

Government regulation

FTX’s bankruptcy could increase efforts by governments to regulate cryptocurrency transactions. Sojli said there was a lot of talk among officials, but action was complicated by the nationwide nature of the regulation, which she compared to the foreign exchange market.

“Coordination is the problem here, not the lack of desire to regulate.”

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Last week, White House press secretary Karine Jean-Pierre said the Biden administration was monitoring cryptocurrency and considered it an important issue.

“The most recent news further underscores these concerns and underscores why prudent regulation of cryptocurrencies is indeed necessary.”

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