A wolf in sheep’s clothing?

I had just joined an Investment Bank as a Financial Trader after graduating with an Honors Degree in Finance and Banking. The excitement was on an all-time high, a group of financial enthusiasts and in some instances, overzealous misfits, prepared to prove to the world that we had what it takes to shake the markets with our acquired knowledge. The dealing room was an exciting place for adrenaline junkies like me. When an opportunity for “arbitraging” presented itself, the appetite was always there and we drooled at the margins. The risk and rewards were worth it, at least we had the protection of a market that was regulated. Nothing in terms of trades would go way overboard, above the prescribed counterparty limits. The systems were always in check and the bank’s risk management team was always alert to ensure protection of investor funds.

Then came the unregulated world of cryptocurrency and what seemed to have topped the finance markets news worldwide. From our parts of the world, the third world, the first I heard of the Blockchain Technology, it felt like an alien from out of space sent to cause extinction to every living thing on Earth. How on earth would you then talk of cryptocurrency trading? We can all agree, this is a disruptive technology, hats off! In my books of records, the prize for the highly creative genius and inventor still goes to Satoshi Nakamoto.

Some may ask, what are cryptocurrencies and how do they work? Cryptocurrency is a digital currency, an alternative form of payment created using encryption algorithms. Unlike traditional fiat currencies controlled by national governments, cryptocurrencies can circulate without monetary authorities such as the central bank. This means they don’t need banks or any other third party to regulate them. Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders. According to www.coinmarketcap.com, a market research website, to date, more than 21,000 different cryptocurrencies are traded publicly. To use cryptocurrencies, one needs a cryptocurrency wallet to store encryption keys that confirm identity and link to the cryptocurrency. Losing the wallet and access thereof means you are done for! The investment is gone.

The month of November however, saw a great shaking in the Crypto world when in less than a week, the cryptocurrency billionaire Sam Bankman – Friedplunged into bankruptcy. At only 30years of age and once dubbed the “King of Crypto” and compared to the likes of Warren Buffett, Sam Bankman-Fried launched FTX in 2019 and managed to grow it into a leading exchange for buying and selling crypto derivatives. However,a report from CoinDesk on the balance sheet of Bankman-Fried’s trading firm, Alameda Research became the spark that ignited the fire causing a run on deposits which left FTX, his crypto-currency exchange with a massive shortfall in billions, causing losses and destabilizing other crypto companies. Well known Venture Capital companies where inadvertently forced to revalue their investments in FTX to zero. As if that was not enough, in the same month, BlockFi, a U.S company offering crypto exchange services, filed for Chapter 11 bankruptcy citing massive exposure to FTX. According to many analysts, like seismic waves, the ripple effects are just starting. Calls for regulation of the crypto industry have heightened due to widespread distrust of the once revered technology. Resultantly, many African nations have implemented some restrictions with others banning crypto altogether.

We can also say, in every basket, there always appears rotten fruits. What then is stopping most governments from adopting cryptocurrency as legal tender? Could it be lack of adequate knowledge, weak economic fundamentals or lack of systems to accommodate use of cryptocurrency? Is cryptocurrency a sheep in wolf’s clothing? For now, probably we should just say 2022 has been a terrible year for the cryptocurrency industry. Let’s hope many will survive the losses and the damage this has caused.