FTX-Driven Crypto Mayhem Exposes Weaknesses But Not Another 2000s Dot-Com Debacle

The aftermath of FTX’s failure is far from over, and bitcoin will drop to $15,000 before the end of the year as investors become more skittish about investing in virtual currency, says expert. This would mark a further 10% drop in price.

“I expect the sell-off to continue and further impairment to occur,” Elvira Sojli told FOX Business. Sojli is an Associate Professor of Finance and Scientia Fellow alumni in the School of Banking and Finance at the University of New South Wales.

Sojli said the growth of cryptocurrencies has not been fueled by solid financial principles, but by system believers and newcomers.

“Recent stories have stalled waves of newcomers and are shaking confidence in some laggards in the market,” he said.

Bitcoin is available for purchase at ATMs at gas stations, pharmacies, tobacconists and elsewhere, including this gas station in Cherry Hill, New Jersey, Nov. 12, 2022.

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“I don’t think we will see more adoption of cryptocurrencies by the general public, but we will see more countries move towards central bank-issued digital currencies (CBDCs). How this market evolves will depend on how CBDCs are implemented,” Soji said.

The finance professor is wary of calling a cryptocurrency market low, noting that it has already wiped out nearly 75% of the value of bitcoin (BTC/USD) this year. Cryptocurrency prices generally skyrocketed between March 2020 and November 2021, reaching $67,802 on November 9, 2021, before plunging into the so-called “cryptocurrency winter”.

“My last forecast for Finder.com in May pegged BTC at around $15,000 at the end of the year. I expect it to be reached faster now. I don’t think it will be possible to restore confidence in the near term.”

Another dot-com bust?

Last week’s FTX bankruptcy rattled the bones in the dot-com graveyard and raised the specter of a Y2K-like bankruptcy.

Since July, cryptocurrency hedge funds Three Arrows Capital, Voyager Digital and Celsius Network have filed for bankruptcy following a crypto winter that saw cryptocurrencies lose more than $2 trillion in value through June.

The losses are reminiscent of the dot-com crash of 2000. At the time, CNNfn reported that a basket of 280 Internet stocks lost $1.7 trillion in November 2000, with more than half down 80% or more compared to 52-week highs as dot-coms ran out of venture capital and imploded.

“Failures in the crypto space resemble the dot-com crash in the sense that there has been a rapid rise in value not justified by core values [hype] and very quick [up the escalator down the elevator/cliff] decline,” Sojli said.

Irrational exuberance

William Shatner for Priceline

Actor William Shatner was a spokesperson for Priceline for two decades. The photo is taken from a press release dated March 22, 2021. (Price)

Ticker Safety Last Change Change %
BKNG extension BOOKING HOLDINGS INC. 1,979.25 -36.52 -1.81%

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During the dot-com era, investors fueled by “irrational exuberance” piled into Internet stocks in hopes of quick riches from initial public offerings (IPOs). For example, Priceline.com went public at $16 a share in March 1999 and was up 914% in one month. The Priceline group eventually survived and is now Booking Holdings (booking.com).

Other startups quickly disappeared, including Chewy precursor Pets.com and personal finance site OnMoney.com.

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“The bubble confrontation is where the similarity between these two events ends,” Sojli said, explaining that dot-coms had an underlying business model. Many were public companies with operations and cash flows.

“That cannot be said for most cryptocurrencies. There are no claims to real assets or cash flows,” he said. “So, I don’t see this as the bottom line, but rather a start of the weaknesses of the business propositions in this space being laid bare.”

Sojli sees the current wave of bankruptcies as an inevitable market consolidation between companies offering the same product with little differentiation. He also noted that the technology used by cryptocurrency exchanges is not unique, making the sector vulnerable to more traditional firms. In August, Wall Street investment manager BlackRock launched a spot bitcoin private trust to provide institutional clients in the United States with direct exposure to the world’s largest cryptocurrency.

Government regulation

The failure of FTX could intensify government efforts to regulate cryptocurrency transactions. Sojli said there were many discussions among officials, but actions were hampered by the cross-border nature of the regulation, which she likens to the foreign exchange market.

“The problem here is coordination, not an unwillingness to regulate.”

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Last week, White House press secretary Karine Jean-Pierre said the Biden administration monitors cryptocurrency and sees it as an important issue.

“The latest news further underscores these concerns and underscores why prudent regulation of cryptocurrencies is indeed needed.”

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