Axios AM Deep Dive: Crypto's many lives

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Crypto

Axios Crypto

Bitcoin has been written off time and again, yet it — and its many cryptocurrency progeny — keep running. It helps to keep that in mind during a downturn that shows no sign of letting up anytime soon. 

As of this writing, the current count for bitcoin obituaries is at 461, according to the tutorial site 99Bitcoins. That includes everything from news articles to predictions from academics and even former contributors.

The big picture: Cryptocurrency is definitely in a bear market right now, though the consensus is that crypto's blues reflect the broader risk aversion that's setting in for everyone.

The Fed's effort to put the brakes on inflation with higher rates has put the brakes on a number of asset classes. 

For that reason, digital currencies are no more likely to die than any other market, even if there's lots of short-term volatility.

Though brutal, this isn't crypto's first crisis, and it's unlikely to be the last.  

Every time the crypto market hits a new high and then retreats, the general public assumes it's dead. As long as there is someone (and there are still a lot) willing to buy a bitcoin, crypto's not dead. 

By the numbers: The most recent crypto boom peaked on Nov. 10, when bitcoin hit $69,044, following the prior peak of $19,783 on Dec. 17, 2017.

In December 2016, it was trading under $1,000. Lately, it's been hovering around $20,000, just above the 2017 high. 

Bitcoin's price nicely captures interest at any given time. 

So, the world is still more interested in bitcoin now than it was at the end of the last boom, but a lot less interested than it was last fall.  

Another number to keep in mind: Going into this bear market, we counted up nine crypto funds with more than a billion dollars in assets each, ready to be invested.

That same number when the bear market started in 2018? Zero. 

The major milestones for this industry so far:

2009: Satoshi Nakamoto mines the first block of bitcoin — a leaderless, distributed ledger. Hardly anyone cares.

2010: The first known purchase is made with 10,000 bitcoin, of two pizzas.

2011: The Silk Road, a website for illicit goods, opens up, giving bitcoin an initial use.

2013: Bitcoin breaks $1,000 for the first time.

2015: Vitalik Buterin and others launch Ethereum, which runs with the cryptocurrency ether, the first (and still only) blockchain that advanced bitcoin's core idea by making a leaderless, distributed computer.

2017: Initial Coin Offerings drive speculative demand for bitcoin and ether, creating the prior boom. But regulators started threatening (and then taking) enforcement actions, which killed the momentum.

2020: Decentralized finance gets some normal people experimenting with crypto again.

2021: El Salvador becomes the first country to make bitcoin legal tender as bitcoin trades a little above $50,000. 

2022: A billion dollars' worth of bitcoin evaporates in a failed effort to defend a stablecoin that was already doomed. Terra attempted to make crypto that used software alone to regulate volatility, swelling to $18 billion in market capitalization before crumbling to nothing in May.

Between the lines: Everyone in crypto is always looking for a "top signal," and Terra was a thunderclap, making it the trigger — if not really the cause — of the present malaise.

The bottom line: There are thousands of extremely creative people and lots of money working to find a killer application for crypto that will pique your interest. 

You don't have to buy, but don't tune it out. 

1. The many lives of cryptocurrency

There's never been a shortage of wrong obituaries for cryptocurrency.

Illustration of two coins with one becoming pixelated, a hand holding a coin, assorted shapes, a graph, and a grid.

Modern Money and Markets

Bitcoin has been written off time and again, yet it — and its many cryptocurrency progeny — keep running. It helps to keep that in mind during a downturn that shows <a class="gtmContentClick" data-vars-link-text="no sign of letting up anytime soon" data-vars-click-url="https://www.axios.com/2022/07/14/opensea-lays-off-20-braces-for-prolonged-downturn" data-vars-content-id="113f968e-779f-43b2-a271-8386c7dae43b" data-vars-headline="The many lives of cryptocurrency" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/07/14/opensea-lays-off-20-braces-for-prolonged-downturn" target="_self">no sign of letting up anytime soon</a>. As of this writing, the current count for bitcoin obituaries is at 461, <a class="gtmContentClick" data-vars-link-text="according to the tutorial site 99Bitcoins" data-vars-click-url="https://99bitcoins.com/bitcoin-obituaries/" data-vars-content-id="113f968e-779f-43b2-a271-8386c7dae43b" data-vars-headline="The many lives of cryptocurrency" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://99bitcoins.com/bitcoin-obituaries/" target="_blank">according to the tutorial site 99Bitcoins</a>. That includes everything from news articles to predictions from academics and even <a class="gtmContentClick" data-vars-link-text="former contributors" data-vars-click-url="https://blog.plan99.net/the-resolution-of-the-bitcoin-experiment-dabb30201f7#.5jvqjf9lg" data-vars-content-id="113f968e-779f-43b2-a271-8386c7dae43b" data-vars-headline="The many lives of cryptocurrency" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://blog.plan99.net/the-resolution-of-the-bitcoin-experiment-dabb30201f7#.5jvqjf9lg" target="_blank">former contributors</a>.

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

In 2021, more people bought cryptocurrency for the first time than in any prior year, and research from the crypto exchange Gemini found that crypto really does seem to be catching on in the developing world. 

The big picture: The use cases for crypto — including trade, internet property,  transparent finance, and even dodging the law — are broad and growing. 

Trade. It's the main use for crypto so far. People who have different opinions about crypto's value will express those views through buy and sell orders. 

Transparent finance. Borrowing and lending on blockchains is not capital-efficient, but it is robust. In "decentralized finance" (DeFi), everyone knows what all the deals are. As private crypto lending companies get vaporized in this bear market, DeFi has been coolly unwinding bad debt in an orderly fashion.

Internet property. Laugh all you want about people buying and selling JPEGs, but it's property on the internet. There's been a black market for digital items since forever, but non-fungible tokens (NFTs) give people a way to really own digital stuff, including virtual real estate. 

Black markets. Crypto — like cash — has always had use for folks outside the law. That said, crime only represents 0.34% of all volume in the market in 2020 (the most recent year that's been fully analyzed), according to the blockchain surveillance company Chainalysis — but that's still $10 billion worth. 

Evading capital controls. The International Monetary Fund found in March that use of crypto is "positively associated with higher perception of corruption and more intensive capital controls" — and said its analysis "adds to the case for regulating crypto usage."

Remittance. Migrant workers like to send money home. This has taken off more slowly than the industry had hoped, but Chainalysis has started to see some traction, specifically in Africa.

Store of value. Look closely at the chart for bitcoin's price, and it basically moves with the market. Zoom out, though, and it has consistently gone up ever since it went live in January 2009. That's why many people are happy to shrug off the volatility on a long ride they believe will continue going up. 

Between the lines: Notice anything missing from this list? Right, payments. The purpose for which Satoshi Nakamoto created bitcoin.

Inventors can make all the suggestions they want about their creations, but the way they're actually used is up to users. 

2. What crypto got right

Crypto has been used for trade, internet property, transparent finance — and crime. What's next?

Illustration of a glowing three dimensional diamond shape, a shopping basket becoming pixels, digital infrastructure, and assorted shapes on a grid.

In 2021, more people bought cryptocurrency for the first time than in any prior year, and <a class="gtmContentClick" data-vars-link-text="research from the crypto exchange Gemini" data-vars-click-url="https://www.gemini.com/state-of-us-crypto" data-vars-content-id="bb7d5774-b114-4ff5-b72f-feaefbc8e1fc" data-vars-headline="What crypto got right" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.gemini.com/state-of-us-crypto" target="_blank">research from the crypto exchange Gemini</a> found that crypto really does seem to be catching on in the developing world. The big picture: The use cases for crypto — including trade, internet property, transparent finance, and even <a class="gtmContentClick" data-vars-link-text="dodging the law" data-vars-click-url="https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/" data-vars-content-id="bb7d5774-b114-4ff5-b72f-feaefbc8e1fc" data-vars-headline="What crypto got right" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/" target="_blank">dodging the law</a> — are broad and growing.

Macro

Axios Macro

Governments around the world are taking steps to launch their own versions of digital cash — a global race in which the United States is notably lagging.

Why it matters: Broad issuance of central bank digital currencies (known as CBDCs) could reshape how people and businesses use money, and may even expand access to the financial system. 

How it works: A CBDC is a virtual version of an existing currency issued and backed by central banks. A digital dollar in the U.S., for instance, would be legal tender pegged to the value of the physical dollar — and fully backed by the Federal Reserve.  

Where it stands: About 109 countries are exploring a CBDC, nearly half of which are developing, piloting or launching digital cash, according to the Atlantic Council, a think tank that tracks digital currencies. (Others, like the U.S., are still in the research phase.)

The design and functionality of each CBDC differs from country to country.

A small number, for instance, are testing digital coins that enable bank-to-bank or consumer transactions across borders.

The biggest CBDC pilot in the world is underway in China, where the "e-CNY" does not use blockchain technology — a key distinction from cryptocurrency. Rather, the country's central bank holds records of every real-time payment.

What to watch: Of the G20 nations, there are only three countries still considering whether or not to move forward with a CBDC — including the United States.

The latest development was President Biden's executive order on digital assets directing agencies to consider the pros and cons of CBDCs — but stopped short of saying one should be created.

Here are two of the key issues shaping the debate over a U.S. government-backed digital dollar:

1. Adoption: It's unclear what the scale of a CBDC take-up would be in the U.S. "Just because you offer it doesn't mean people want it," Christopher Waller, a Fed governor who's argued digital cash is a "solution in search of a problem," said this month. 

The issuance of a CBDC could promote financial inclusion, allowing those outside the traditional banking system to send and receive payments.

2. Bank competition: Bank lobbying groups note that CBDCs would shift money from the banking system to the Fed, reducing the aggregate amount of deposits. That shift, in turn, would impact how much institutions can lend out.

Other analysts warn that consumers might turn to a CBDC in periods of financial stress, making the financial system more susceptible to runs. (Recent research from the Treasury Department concluded a CBDC could actually prevent bank runs.)

Between the lines: Perhaps the most immediate sticking point comes down to process.

The Fed says it will wait for the OK from Congress ("ideally in the form of a specific authorizing law," officials wrote in a paper earlier this year) before it begins developing digital cash. But it's unclear how big of a priority it is in Congress, so a green light could be slow to come.

The bottom line: A digital dollar backed by the full faith and credit of the U.S. government is years away.

3. The road to digital currency

The United States is noticeably behind in the global race.

Illustration of a glowing three dimensional hexagon becoming pixelated, a quarter, and assorted shapes and lines on a grid.

Governments around the world are taking steps to launch their own versions of digital cash — a global race in which the United States is notably lagging.Why it matters: Broad issuance of central bank digital currencies (known as CBDCs) could reshape how people and businesses use money, and may even <a class="gtmContentClick" data-vars-link-text="expand access to the financial system" data-vars-click-url="https://www.atlanticcouncil.org/blogs/geotech-cues/central-bank-digital-currency-can-contribute-to-financial-inclusion-but-cannot-solve-its-root-causes/" data-vars-content-id="0cc5665a-5984-4b81-8ad9-031e36777bfc" data-vars-headline="The road to digital currency" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.atlanticcouncil.org/blogs/geotech-cues/central-bank-digital-currency-can-contribute-to-financial-inclusion-but-cannot-solve-its-root-causes/" target="_blank">expand access to the financial system</a>.

The crypto winter has chilled the push to oversee digital assets. 

The big picture: Momentum behind creating a national regulatory framework for the sector has slowed, with an industry-wide shakeout pushing multiple firms to the brink of collapse. 

Why it matters: People who bought crypto during the bull run are suffering steep losses after exchanges and platforms lured them in with promises of big returns. But the threat of insolvency has led several of them to restrict or freeze customers' ability to access their money.

Meanwhile, Congress and the executive branch have had a hard time writing rules to protect investors. Basics — like defining what cryptocurrencies even are — have yet to come to fruition, though there have been suggestions about what they should be.

The indecision risks costing the U.S. in the global race to build the future of finance. 

Calls for the Securities and Exchange Commission to act have intensified lately, with Sen. Elizabeth Warren (D-Mass.) prodding the regulator.

Meanwhile, people who work for crypto firms and startup founders say digital assets regulation, as it stands in the U.S. today, is slow-moving. 

There is more talk of regulation than there is action.

Yes, but: The chair of the House Financial Services Committee, Maxine Waters (D-Calif.), is reportedly putting together legislation with Rep. Patrick McHenry (R-N.C.) that would create a legal framework for stablecoins, one very important facet of the industry. 

State of play: SEC chair Gary Gensler recently expressed concern that efforts in Congress to create rules for crypto could undermine existing market regulations.

Between the lines: A broad regulatory template, introduced in a bipartisan bill by Democratic Sen. Kirsten Gillibrand of New York and Republican Sen. Cynthia Lummis of Wyoming, contains a provision seeking clarity around which tokens would meet the legal definition of "security" that the SEC regulates.

It also carves out more substantial authority for the Commodity Futures Trading Commission (CFTC). 

What they're saying: "Policymakers feel like they need to be extra cautious, handle crypto issues with extra care," says Eric Soufer, who in January launched a new fintech and crypto lobbying practice public affairs firm, Tusk Strategies.

"They want to pass bills that are broadly popular, or at least defensible."

How it works: Right now, there are rules in place that tackle money laundering by requiring centralized marketplaces for crypto to "know your customer," for example.

That's a process verifying that the account holder is who they say they are, aimed at preventing money laundering, sanctions and tax evasions. Otherwise, local authorities rule, and so does the threat of "regulation via enforcement."

"The industry is well-regulated," but the regulation "exists at the state level and not the federal level," said Dante Disparte, chief strategy officer and head of global policy for stablecoin issuer Circle. 

"We're seeing renewed enforcement action effort from the SEC in particular," Joshua Rivera, general counsel at venture capital firm Blockchain Capital, tells Axios.

What to watch: The Financial Stability Board, the G-20's global watchdog, plans to propose how to regulate the industry in an October report that will cover stablecoins, as well as other digital assets.

If New York state is any example, local leaders appear to be grappling with licensing processes, as well as the environmental impact of bitcoin mining operations that proliferated in the U.S. after Beijing's mining ban in 2021. 

"Mining" in the world of crypto involves solving complex mathematical equations using high-powered computers to collect bitcoin rewards.

Lawmakers have asked the Environmental Protection Agency to look into the environmental impact of mining, though bitcoin boosters pushed back. 

Meanwhile, the European Union is making progress on implementing policies agreed upon last month.

What's next: In the U.S., two expected pieces of regulation are federal legislation that touches on stablecoins and oversight for digital asset spot trading. 

But the Gillibrand/Lummis bill is considered too big to pass the current Congress, industry leaders tell Axios.

Others think Congress needs more targeted legislation, which could result in "skinny" versions down the line.

4. The slow-motion pace of crypto regulation

The U.S. risks falling behind in the global digital currency race.

The crypto winter has chilled the push to oversee digital assets. The big picture: Momentum behind creating a national regulatory framework for the sector has slowed, with an industry-wide shakeout pushing multiple firms to the brink of <a class="gtmContentClick" data-vars-link-text="collapse" data-vars-click-url="https://www.axios.com/2022/06/30/crypto-bear-bad-ugly" data-vars-content-id="c7dcb7f1-9a9f-4fac-8598-b8cddf982b49" data-vars-headline="The slow-motion pace of crypto regulation" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/06/30/crypto-bear-bad-ugly" target="_self">collapse</a>.

Data: Messari; Note: Top five stablecoins as of April 1, 2022; Chart: Simran Parwani/Axios

Stablecoins are designed to be, you know, stable. Yet one algorithmically-backed version from Terra proved to be rather unstable, and it shook the crypto market as a whole.  

Why it matters: The emerging asset class is being increasingly used as an on-ramp into crypto. Because of this, central banks and governments around the world are expressing concern that stablecoins, which can be vulnerable to runs, pose financial risks.

How it works: Stablecoins are cryptocurrencies tied to state-backed currencies, like the U.S. dollar, making them less likely to see the wild swings characteristic of other coins.

Professional traders use them to buy other cryptocurrencies. 

Meanwhile, Russia's invasion of Ukraine showed how the digital tokens could be used to hold value, as their respective state-backed currencies plunged in value. 

The big picture: Despite the May collapse of TerraUSD and the Luna token, stablecoins have shown staying power: The collapse has barely been felt in terms of market capitalization. 

But the controversy is the question of which assets are propping up their value — and how opaque their issuers have been about those details. 

State of play: Tether and Circle's USDC remain the dominant stablecoins in the market, with total stablecoins market value roughly flat since Terra/Luna tanked, according to a recent Goldman Sachs report. 

The market cap of stablecoins totals more than $150 billion.

Of note: The three largest issuers — Tether, Circle and Binance — constitute the lion's share of the stablecoins market. 

What's next: Regulatory bodies have recently published text showing that rules for stablecoins might be on the way. 

One guidance, published in mid-July by the Bank for International Settlements and the International Organization of Securities Commissions, recommended that existing payment regulations should be applied to stablecoins. 

5. Stablecoins look stable after one big collapse

Stablecoins show staying power despite the May 2022 collapse of Terra.

Stablecoins are designed to be, you know, stable. Yet one algorithmically-backed version from <a class="gtmContentClick" data-vars-link-text="Terra proved to be rather unstable" data-vars-click-url="https://www.axios.com/2022/06/06/terra-stablecoin-fell-apart-bitcoin-bear-report" data-vars-content-id="f026c309-7043-4b70-b1b5-1f25e1857a9b" data-vars-headline="Stablecoins look stable after one big collapse" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/06/06/terra-stablecoin-fell-apart-bitcoin-bear-report" target="_self">Terra proved to be rather unstable</a>, and it shook the crypto market as a whole. Why it matters: The emerging asset class is being increasingly used as an on-ramp into crypto. Because of this, central banks and governments around the world are expressing concern that stablecoins, which <a class="gtmContentClick" data-vars-link-text="can be vulnerable to runs" data-vars-click-url="https://www.axios.com/2022/05/12/terrausd-crypto-stablecoin-pegs" data-vars-content-id="f026c309-7043-4b70-b1b5-1f25e1857a9b" data-vars-headline="Stablecoins look stable after one big collapse" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/05/12/terrausd-crypto-stablecoin-pegs" target="_self">can be vulnerable to runs</a>, pose financial risks.

We should level with you: No one knows when, or if, cryptocurrency will really take off. It definitely has not found its killer application yet, and no one knows when that will happen. 

But the highest and best uses for new technologies are only obvious in hindsight. 

The big picture: Since the '90s, we’ve seen email, the internet, social media and mobile technology completely change the world.

Every single time, geeks and weirdos got obsessed first, while normal people rolled their eyes. Never forget the Today show hosts asking: "What is internet, anyway?" in 1994.

Early versions of the internet existed for decades before normal people slowly started using it in the '90s. Few foresaw sites like Facebook, or the web's obsession with cats.

Central bank digital currencies. The perceived wisdom on these is that they will drive cryptocurrencies out of business, but they could also just make using real crypto much easier. 

Websites and video games. Think money works "just fine" today? Try spending less than a penny somewhere. Try spending literally any sum of money in an instant, without taking your eyes off what you're doing. You can't, but doing so could make it easier to charge for online content of all kinds.

Side hustles. Lots of people are working in a gray crypto economy right now, doing all sorts of work, from PR to coding. Teenagers are becoming millionaires because crypto gives them a way to work and get paid whenever they have time. 

Non-fungible tokens (NFTs). Who knows, man … Those things are crazy, and they're just getting started. 

What's next: The thing that will really click is probably not on this list. 

If we could go back in time and meet the prehistoric human that first carved a bone into a primitive flute, we could never explain that that little innovation would one day lead to Britney Spears. (We wouldn't even be able to explain Britney Spears.)

Inventions have a life — many lives — of their own.

Our thought bubble: Blockchains are still buggy and hard to use, so the best use of entrepreneurship today is probably to focus on them interacting with each other (rather than blockchains for real estate, medicine or other real-world stuff). 

Not everyone agrees. Multicoin Capital, always a contrarian fund, is betting on what it calls "proof of physical work."

The bottom line: The only sophisticated answer to the question "What problem does blockchain solve?" is also unsatisfying. It is: "No one actually knows."

6. What to watch with cryptocurrency

The best uses of new technologies such as crypto are only obvious in hindsight.

Illustration of a large glowing cube, three chains with one pixelated, assorted shapes, and a graph over a grid.

We should level with you: No one knows when, or if, cryptocurrency will really take off. It definitely has not found its killer application yet, and no one knows when that will happen. <ul><li>But the highest and best uses for new technologies are only obvious in hindsight. </li></ul>

Good afternoon, and welcome to our Modern Money & Markets Deep Dive series. This edition is a guide to digital currency, led by Axios Crypto authors Brady Dale and Crystal Kim.

Digital dollar, digital Yuan or bitcoin: A guide to understanding the digital currency revolution from Axios.

Illustration of cubes that become pixelated, digital coins, assorted shapes, and digital infrastructure.