The crash of cryptocurrency exchange FTX has been dominating headlines for days. For currency holders, this is a crisis.
For everyone else, it’s seemingly unimportant. Professor Michael Connell at Monmouth College said that’s the beauty of cryptocurrency: its optional. Most people would never consider owning Euros, Yen or Pesos. Because so many other forms of private money exist, cryptocurrency can be avoided entirely if the consumer chooses.
“This is a dream of a perfect money that government can’t tax or inflate. And most Utopian dreams fail,” he said.
But, that doesn’t mean people are not still interested in buying and exchanging it. The first thing to keep in mind about cryptocurrency, Connell said, is that its not an investment, but exactly what it says it is: currency. An investment requires a product to come of it. For example, investing in a farm would mean producing, building and improving the farm.
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“You’re not building anything (with cryptocurrency.) You’re not producing anything and you’re not creating any wealth,” he said.
Connell described it as “punting to the future” and waiting for it to accumulate value. When it comes to money, there are two distinct kinds: public and private. Public money is government issued green dollars and coins. Private money includes things like Apple Pay, debit cards and Venmo. Cryptocurrency falls into the private money category.
“The problem with all the money we have, is government money can be inflated. The other monies can be traced and taxed,” he said, explaining cryptocurrency was created to be a utopian money where none of that applies. “It’s magic money that the government can’t control or tax.”
Just like there are a plethora of private monies — debit, check, Paypal — more than 21,000 cryptocurrencies exist because most exchanges will create their own coin. The most recognizable include Bitcoin, Ethereum and Tether.
One of the big issues with cryptocurrency is that its difficult to spend. In the Quad Cities region, there is no place that accepts it as a form of currency. Major brands Microsoft, Gamestop and Overstock have all announced they take some form of cryptocurrency. On Craigslist, there is an option to search for sellers who accept it. Currently, the closest options are in Wisconsin or Chicago.
But, it’s catching on in other countries. El Salvador has adopted it as a legal tender. Augustana professor Dr. Andrew Sward said the big promise with Bitcoin is that it saves residents time, the danger of being robbed while trying to get to the bank, and it’s fast.
“I have seen instances where people would have to travel hours to get to the nearest bank ... but with Bitcoin, they can send and receive that money instantaneously,” he said.
Cryptocurrency is kept in an electronic wallet. Or, it can be placed in an exchange, like FTX. Connell likened the digital wallet to a wall safe in a home. Once the money is in there, only the owner can get it out. They can do so whenever they want, and they are in charge of it.
Cryptocurrency can be placed in a bank/exchange where someone else takes care of it. FTX is just one of more than 500 cryptocurrency exchanges. It recently made headlines after filing for bankruptcy on Nov. 11. Later that same day, more than $600 million dollars was taken from users wallets. Company officials have not been able to recover that money.
But the problems do not stop there. In a court filing on Nov. 19, FTX listed its top 50 creditors. They are owed nearly $3.1 billion combined.
“To me, it was like putting your money in the bank, but what they did fraudulently is stole it or loaned it out,” he said. “Somebody took that money. It didn’t disappear. There were big winners in this thing.”
Sward called the fall of FTX a “Lehman brothers type moment,” likening the fall of the exchange to the financial company that went belly-up in 2008. Employees within the firm were selling to each other, and nobody knew who owned the underlying collateral.
“We’re seeing a similar situation now in the crypto space, and it’s a bit ironic because Bitcoin was created as a direct response to what happened in 2008,” he said.
After the financial crisis, the federal government issued massive bailouts that pushed more money into the economy to prevent a further collapse. Bitcoin was introduced in 2009 as a way for people to send money over the internet without central control from a bank.
A number of cryptocurrency exchanges have gone under recently, including Celsius and Voyager. FTX is just the latest victim. Sward said the fall of the exchanges is because they were operating on similar principles that banks were in 2008. Employees were taking in deposits and lending them out to other exchanges to try and earn a high yield.
Companies were framing this as a “low risk investment” but the problem was with the companies being interconnected. Most cryptocurrency companies issue their own tokens, and use those for collateral for loans. Therein lies the problem with FTX.
The assets FTX was holding were allegedly being used to fund high-risk hedge funds without owner permission. When the market tanked, consumers tried to get their coins back. But it was gone. Investigations are ongoing in New York and in the Bahamas, where FTX is based.
Before it collapsed, Sward was a customer of the exchange Celsius. He has been a staunch advocate for cryptocurrency for years. He called the money “permissionless” because it is not run by a nation or government.
“I view Bitcoin as a free speech platform,” he said. “It’s always appealed to me that we have this monetary layer on top of the internet.”
The fall of FTX is a lesson that has been learned in the cryptocurrency world before. But, for those who still have faith in the exchange, Sward said the phrase cryptocurrency enthusiasts use is “not your keys, not your coins,” which means to not let other people access the currency.
“Secure your own crypto,” he said. “Be your own bank. Take ownership of your Bitcoin, and don’t lend it out to other exchanges.