The Economics of Risk and the Future of Cryptocurrency (2023)

In November 2022, the world of cryptocurrency hit the news wave as the trading giant, FTX, filed for bankruptcy on Nov. 11. FTX had become a household name, valued at close to $40 billion, and was the third largest exchange platform in the digital currency market. However, since November, CEO and founder Sam Bankman-Fried has been arrested and charged with eight counts related to fraud, and an $8 billion hole in the company has been unearthed. This collapse has led to worries and predictions regarding the future of the digital currency market.

As of December, Bitcoin prices had fallen approximately 63% throughout 2022 and 16% in November alone. While many companies and investors remain confident the currencies will quickly bounce back and remain trustable assets, the fall of the company re-sparked debate over the area of policy and finance.

The world of cryptocurrencies is uncharted territory. As such, looking at the impact of the trading giant and the journey of cryptocurrency throughout 2022 is best understood by outlining its rise, controversies and debates in modern financial history.

First, a bit about the evolution of money

The role of money has generally been subdivided into three categories: to act as an accepted medium of exchange, have a store of value and serve as a unit of account to price and compare goods and services. Moving from a bartering-centered system, forms of money have constantly morphed from country to country. Paper money was initially printed during the Yuan dynasty, and credit cards entered the scene in the 1950s. Since, modern finances have operated primarily on the use of debit/credit cards and cash.

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The financial system underwent its subsequent change with the evolution of the internet and commercial websites, with digital payments becoming more common in the 1970s and 80s. Money now started moving through online intermediaries.

For instance, companies such as Paypal helped move the needle toward online transfers through the creation of third-party payments. Additionally, firms such as Safaricom, which began utilizing cellular sim cards to promote digital transactions, according to MIT Professor Gary Gensler, presented innovations for moving money.

The introduction of Bitcoin and the rise of cryptocurrency

The first concrete and surviving digital crypto-currency, Bitcoin, comes after a series of primarily failed attempts in the 1980s, 90s and 2000s to apply the idea of cryptographic technology to cash and credit. Cryptography refers to a system of encoding and decoding data back and forth.

On Halloween 2008, still anonymous, Satoshi Nakatomo sent out an email announcing work on a new electronic cash system. The proposal was technically advanced but conceptually simple: the creation of a new peer-to-peer direct system that would require no third-party intermediary. The email introduced Bitcoin to the world, and while the system has undergone various changes since, most cryptocurrencies today still operate primarily on the same skeletal structure.

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Bitcoin is an electronic currency that runs transactions using a system of public and private keys unique among users, who maintain a certain level of anonymity because transactions need confirmation through these electronic keys. Bitcoins are defined, according to Nakatomo, as a chain of computer-generated digital signatures, free-floating.

These digital signatures allow a way to record and verify online transactions on a distributed and shared ledger. Digital signatures operate as a sort of “virtual fingertip,” ensuring correct transactions are taking place.

Later, transactions are given a unique serial number and form a block that comes into contact with blockchain technology to timestamp and adds to the ledger through a process known as mining. Mining operates to ensure scarcity, so only a limited amount of bitcoin, 21 million Bitcoin, are mined each year.

Additionally, to create a consensus protocol, the communication network only adds and accepts new blocks after proof-of-work, a specific computation that verifies transactions, is established through the computer system.

Cryptocurrency stands apart from traditional currency due to its distributed ledgers and model. Since Bitcoin, countless other digital currencies have hit the market, including Ethereum, released in 2014, and Tether.

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Although initially primarily used in the underground economy and illegal activity, cryptocurrency started boosting value and becoming mainstream. Yet, due to their politically decentralized nature, cryptocurrencies are generally highly volatile and face low scalability. Thus, outside of El Salvador and the Central African Republic, which became the first countries to legalize Bitcoin as legal tender to settle debts, cryptocurrencies are today traded and used as speculative financial assets for consumers and investors. At its peak in 2021, the total crypto market was valued at $2.9 trillion.

Current Situation and FTX

So how did FTX enter the scene? The introduction of cryptocurrency helped start its capital market and various trading companies were established for selling, buying and managing the currencies beginning with the industry giant Binance in 2017. Binance was followed in 2019 by the creation of FTX, which quickly established itself as a player in cryptocurrency exchange. FTX created and introduced its denomination of cryptocurrency, or token, known as FTT. The company became the third largest exchange company in the international market, helping bail out several other firms after the crypto-winter price fall in the spring of 2022.

Co-founded by American Sam Bankman Fried, the FTX entrepreneur became a public figure, frequently appearing in US congressional panels to talk about cryptocurrency.

FTX worked in coordination with its hedge fund, Alameda Research, but the company’s story began unraveling in November when another cryptocurrency exchange company, Coinbase, released information FTX was performing a series of high-risk trades and loans through their FTTs. Coinbases’ information release led to a decrease in consumer confidence that, fueled by the public statements of other exchange companies, sparked a consumer-run that uncovered several weaknesses and pains in the corporate model. The company did not hold enough reserve resources and after a failed acquisition plan, it filed for bankruptcy. After further investigation, its American CEO was extradited from the Bahamas, then FTX’s less regulatory operations center, on claims of company-wide defrauding; the scandal even rendered many investors unable to withdraw their initial investments.

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Broader developments and debates

FTX’s collapse marked one of the most notable developments in the timeline of cryptocurrency. Following the fall of FTX, many in the financial sector began criticizing the exchange market as an overly centralized environment, with few companies dominating and monopolizing much trade.

The long-term ramifications on the value of crypto-assets remain fluctuating, but FTX’s first hearings in the US Congressional House Committee have led to talks regarding regulatory policies.

In the wake of FTX, on Jan. 2, the Federal Reserve and Federal Deposit Insurance issued a joint statement regarding crypto-asset risks on banking organizations. Additionally, Coinbase reached a 100 million dollar settlement with New York regulators after failing to comply with New York’s reporting requirements. FTX’s fall has led to wavering consumer trust and placed a heavier spotlight on the possible weaknesses and effects of the exchange market.

Furthermore, on Nov. 18-19, the Group of 20 countries, or G20, issued in their leaders’ declaration support for the Financial Stability Board’s proposal for creating an international regulatory framework of crypto activity to promote consistency.

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This has led to increasing talks on regulation programs, including the European Union’s approval of the Markets in Crypto-Assets Regulation Bill (MiCA) in October 2022. MiCA was one of the first international efforts to regulate digital market assets. The bill, which will be brought before the EU Parliament for Voting in early 2023, would require crypto companies to register with national authorities and meet a series of guarantees for investors.

The fall of FTX came at a time when cryptocurrency had grown extremely prevalent, a recent poll showing as many as 1 in 5 Americans had contact with or held cryptocurrency. Looking forward, investors and regulators must track the international community’s continued response, determine how to place cryptocurrency in the market and what types of regulations will or should be implemented.

Despite recent price falls, cryptocurrencies and assets do not seem to be going anywhere anytime soon. In the economic game of risk and expected values, FTX has jump-started discussion on how countries should navigate domestic and international supervision and standards of the digital market.



Is cryptocurrency the future of the economy? ›

A new survey shows that a majority of Americans believe cryptocurrency is the future of finance. Both Democrats and Republicans believe cryptocurrency needs stronger regulation. With strong appeal to young people and minorities, cryptocurrency has the potential to create a fairer economy.

What are the main risks with cryptocurrency? ›

A cryptocurrency's value can change constantly and dramatically. An investment that may be worth thousands of dollars today could be worth only hundreds tomorrow. If the value goes down, there's no guarantee that it will rise again. Nothing about cryptocurrencies makes them a foolproof investment.

How can cryptocurrency change the future of the economy? ›

A majority of macroeconomists interviewed agree that cryptocurrencies and stablecoins should both have a regulated role in economies. These digital currencies could be potential drivers of financial stability, equity, innovation, and market incentives for environmental sustainability.

What are cryptocurrencies economic benefits and risks? ›

The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure. The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities.

What is the future of cryptocurrency? ›

Bitcoin is an indicator of the crypto market with the largest market cap, and the rest of the cryptocurrency tends to follow its path. Fear of a global recession impacts equities and currencies. As a result, despite high trade volatility, some experts hope that cryptocurrencies will likely see some revival in 2023.

What is the future predicted for cryptocurrency? ›

In Analytics Insight, Sanyal says that market analysts predict that Bitcoin could hit USD $100,000 by the end of 2023, and others say it can climb to the mark in the first quarter of 2022. Others write that Bitcoin won't reach more than USD $70,000 by the end of 2022.

Is cryptocurrency a threat to the economy? ›

“Crypto-asset activities could pose risks to the stability of the U.S. financial system if their interconnections with the traditional financial system or their overall scale were to grow without adherence to or being paired with appropriate regulation, including enforcement of the existing regulatory structure,” the ...

What is the impact of cryptocurrency on the economy? ›

Cryptocurrency is far more than just a financial innovation — it's a social, cultural and technological form of progress. Through its accessible character, cryptocurrencies have the potential to spur the economy immensely. Cryptocurrencies are digital assets managed with cryptographic algorithms.

Is cryptocurrency trying to replace money? ›

The top US bank regulator says that crypto tokens are unlikely to replace traditional currency and that banks should proceed cautiously when they experiment with the asset class.

Why is cryptocurrency a high risk investment? ›

Crypto is a high-risk investment. The value of crypto is very volatile, often fluctuating by huge amounts within a short period. More than with any other investment, you must be prepared to lose what you invest.

Why is crypto risky investment? ›

Unlike stocks and bonds, crypto doesn't derive its value from an underlying entity. As it's considered to be a highly volatile asset that is subject to erratic price fluctuations, financial experts typically advise against investing more than you're willing to potentially lose.

What are 3 benefits of cryptocurrency? ›

Advantages of Cryptocurrency :
  • Protection from inflation – Inflation has caused many currencies to get their value declined with time. ...
  • Self-governed and managed – ...
  • Secure and private – ...
  • Currency exchanges can be done easily – ...
  • Decentralized – ...
  • Cost-effective mode of transaction – ...
  • A fast way to transfer funds –
Sep 30, 2022

Is crypto future risky? ›

Cryptocurrency is known for its volatile price swings, which makes an investment in cryptocurrency futures risky. You can trade cryptocurrency futures at brokerages approved for futures and options trading.

Will crypto go away forever? ›

The average crypto winter lasts for four years, which means crypto may not recover until 2026. Crypto is still a new and relatively untested market, which makes it much higher risk than stocks.

Which Cryptocurrency has highest potential in future? ›

About the Biggest Cryptocurrencies Ranked by Performance in 2023
  • 1) Polkadot. This is one distinctive proof-of-stake crypto that aims to deliver interoperability among the other blockchains. ...
  • 2) Cardano. ...
  • 4) Tether. ...
  • 5) Binance Coin. ...
  • 6) Ripple's XRP. ...
  • 8) Shiba Inu. ...
  • 10) Avalanche.
Jan 12, 2023

Which crypto will explode in future? ›

From the sea of different crypto projects, we have singled out 7 which are going to explode in 2023, and with which you will certainly not go wrong if you invest in them. But we have to highlight 5 projects from the top of the list (Fightout, Dash 2 Trade, C+Charge, RobotEra, and Calvaria) because they stand out.

What will happen to crypto in 2025? ›

Bitcoin halving, which occurs every four years, will make bitcoin even more scarce. The next halving is expected to happen in 2024, reducing the mining reward to 3.125. The halving is usually followed by massive price proliferation. After this event, a bull market could follow and spill over to 2025.

Will crypto crash if the economy crashes? ›

It's abundantly clear that during periods of slowing economic growth cryptocurrencies are not spared. In fact, they're often hit the hardest. When recession fears arise, it isn't uncommon for cryptocurrencies to lose three-quarters of their value during these times.

Why are banks against cryptocurrency? ›

Oftentimes, banks are under the impression that cryptocurrency transactions can't be tracked for AML and KYC considerations, which could lead to illegal activity and scams on the network.

How cryptocurrency will change the world? ›

Cryptocurrency and blockchain technology can help change the scientific roadblocks we face by providing everyone access to real-time data and eliminating the major institutions, foundations, and corporations sitting on important information.

What happens to cash if crypto takes over? ›

Possible Concerns if Cryptocurrencies Replace Cash

If cryptocurrencies outpace cash in terms of usage, traditional currencies will lose value without any means of recourse. Should cryptocurrencies take over entirely, new infrastructure would have to be developed in order to allow the world to adapt.

Can government shut down crypto? ›

As Bitcoin is decentralised, the network as such cannot be shut down by one government. However, governments have attempted to ban cryptocurrencies before, or at least to restrict their use in their respective jurisdiction.

What will replace the U.S. dollar? ›

The currency wars are getting hot and it's looking increasingly likely that the world is going to start moving away from the US dollar as a reserve currency – gold or bitcoin are the front runners to replace it.

What are three reasons why you should not invest in cryptocurrency? ›

Many financial experts say that they won't recommend cryptocurrencies to their customers because of the lack of characteristics common to other investments or asset classes including traditional currency or cash, as well as their volatility, security, the potential for future regulation, and other factors.

Why is crypto riskier than stocks? ›

Simply put, cryptocurrency is in the “high risk, high reward” category of investments. It's considered much riskier than investing in traditional stocks because the sector is still highly speculative at this point. The future of cryptocurrency, its success in becoming a currency of the future, is uncertain.

What is the main goal of crypto? ›

It's a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions.

What is the main point of crypto? ›

What is cryptocurrency? A cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system.

Why is cryptocurrency the future of finance? ›

Cryptocurrency allows the control of money to be transferred from a bank into the hands of the people. It is not subject to the rules and regulations imposed by banks and other financial institutions. Anytime that people get control over their own money, it's a good thing.

Is cryptocurrency helping the economy? ›

Cryptocurrency is far more than just a financial innovation — it's a social, cultural and technological form of progress. Through its accessible character, cryptocurrencies have the potential to spur the economy immensely. Cryptocurrencies are digital assets managed with cryptographic algorithms.

Does cryptocurrency affect the economy? ›

Cryptocurrencies are much helpful for developing economies since they can increase their economic and social status. Entrepreneurs get more control, and thus, access to capital becomes much easier due to the advent of blockchain technologies. Everything contributes to the rise in economic activities.

Why crypto will change the world? ›

Cryptocurrency and blockchain technology can help change the scientific roadblocks we face by providing everyone access to real-time data and eliminating the major institutions, foundations, and corporations sitting on important information.

What is the main benefit of cryptocurrency? ›

The benefits of cryptocurrencies include cheaper and quicker money transactions and decentralized systems that do not fail at a single point.

Will Cryptocurrency cause a recession? ›

No, crypto doesn't threaten the financial system — the numbers aren't big enough to do that.

What is the disadvantage of Cryptocurrency? ›

Cryptocurrency relies heavily on digital technology. As a result of this, it is open to breaches in cybersecurity. Among some worries over dealing with any crypto exchange is the fact that accounts can be hacked into.


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