Despite ongoing legal scrutiny, the performance of the asset class this year has defied and dismayed skeptics.
Financial markets have alarmingly short memories. Dreaming about the future is a much more powerful force than dwelling on the past.
Just look at what transpired in the cryptocurrency market as the US government successfully prosecuted FTX exchange co-founder Sam Bankman-Fried for one of the biggest financial crimes in history. Rather than selling off amid the powerful reminders of how much everyone got wrong during the digital-asset bubble in general—and the ascendancy of Bankman-Fried’s empire in particular—crypto prices continued their vigorous rebound from last year’s face-plant.
In fact, as the traditional bond market heads for what may be an unprecedented third year of losses and broad stock market indexes cling to mostly ho-hum returns following last year’s bear market, crypto is poised to be the best-performing asset class of 2023. The price of Bitcoin has more than doubled this year, and some smaller coins such as Solana are doing even better. Fund flows are returning, with investors adding $807 million to crypto-focused exchange-traded products over the past year to bring their total assets to almost $10 billion, according to data compiled by Bloomberg. There are signs that leverage in the market is ramping up, with demand for crypto borrowing sending interest rates above 10% for some stablecoins designed to track the value of the US dollar.
Bankman-Fried’s conviction by no means clears the crypto industry’s court docket, however. Terraform Labs co-founder Do Kwon has been charged by the same US prosecutors with orchestrating an alleged fraud that last year wiped out at least $60 billion in market value from the TerraUSD and Luna cryptocurrencies, one of the triggers of the crisis at FTX. Alex Mashinsky, the former chief executive officer of Celsius Network LLC, was arrested in July and charged in connection with what prosecutors allege was a scheme to mislead customers before the crypto lender collapsed with more than $1 billion in debt. He’s pleaded not guilty to the charges. Su Zhu, co-founder of the bankrupt Three Arrows Capital hedge fund, was jailed in September in Singapore, as liquidators applied maximum pressure after months of sparring over locating the failed company’s assets. Meanwhile, the Winklevoss twins’ Gemini Trust Co. and Digital Currency Group’s Genesis Global Holdco are mired in lawsuits with each other as well as legal actions from regulators over their borrowing and lending partnership.
Which raises the question: What could be so bright about this market’s future that it overshadows all these negatives? Well, the very fact that all these criminal cases, bankruptcies and regulatory actions are taking place at once has led many in the industry to hope that these courthouse climaxes will mark the end of the Wild West era of crypto and usher in a more mature, less-chaotic phase.
Nowhere are expectations of that hoped-for transition more on display than in the exchange-traded fund industry, which this year saw investment giant BlackRock Inc. enter the crowded race for a spot Bitcoin ETF. It’s widely believed that approval of one or more Bitcoin ETFs is imminent after a court in August overturned the Securities and Exchange Commission’s rejection of Grayscale Investments LLC’s proposal to convert its trust into an ETF. Much of this year’s rally in Bitcoin, at least, has been attributed to hopes that an ETF will open up a new source of demand from the type of investors (and their financial advisers) who previously were reluctant to engage with crypto-native investment platforms. Although skeptics abound, crypto’s claim to fame as the year’s best-performing asset class means that FOMO is already percolating.
Only time will tell if this transformation to a more mature, mainstream post-FTX era for crypto is wishful thinking or not. There are signs it won’t occur without friction. PayPal Holdings Inc.’s plan to develop a stablecoin was swiftly met with an SEC subpoena. Coinbase Global Inc. is mired in an almost-existential fight with the SEC, which sued the largest US exchange in June for allegedly failing to register with the agency as a broker, an exchange or a clearing firm.
Any hopes that lawmakers in the US will pass bills to provide much-needed legal clarity to the crypto industry are slim, given the dysfunction on display in Congress. Even if that happens, there isn’t a long list of examples of governments preventing financial asset bubbles or the painful busts that inevitably follow. For better or worse, that’s a job typically done by the market itself—and on its own timeline, including the $2 trillion crypto wipeout last year that destroyed Bankman-Fried’s FTX empire.
“Let’s remember that he operated ‘the safe and regulated’ exchange, and not a single regulator caught him,” Erik Voorhees, an early crypto advocate, posted to X after the jury returned Bankman-Fried’s guilty verdict. “It was, instead, the market, which is not only a great fountain of innovation, but also the best arbiter of discipline and justice.”
As Bankman-Fried sits in a cell in a correctional facility in Brooklyn, New York, waiting to learn how many years he’ll spend behind bars, he has time to lament failures in his long-held ambition to pursue effective altruism—a philosophy that motivated him to earn billions of dollars in crypto so he could one day give it all away to causes that would make the world a better place. He shouldn’t be too hard on himself: Perhaps blowing up the Wild West era of crypto was the most effective altruism he could’ve ever performed.
Michael P. Regan is the global team leader for cryptocurrencies at Bloomberg as well as a former senior markets editor and former Americas team leader for Bloomberg's Markets Live blog. He has covered Wall Street for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.