The crypto market has had quite the month -- and year. The most recent debacle involves one of the world's largest crypto exchanges. Like stock trading brokerages, these exchanges allow investors to buy, sell, and even trade crypto on margin or leverage. But unlike traditional stock trading platforms, these crypto exchanges can operate in obscurity.
Recently, FTX, a popular crypto trading platform, announced that it had gone broke. The announcement sent shockwaves throughout the crypto market, causing the prices of just about every cryptocurrency to fall. The entire asset class lost somewhere around $200 billion or 20% of its market value.
The main concern of investors is that the implosion of FTX could cause a cascading effect due to the company's vast reach of ownership among other subsidiaries, spelling disaster for retail investors, institutions, and other companies that are now entering the crypto space.
As bad as this situation is -- and it's entirely possible that it still might get worse -- there's one institution that views the current crisis facing crypto as a growing pain that could end up benefiting the asset class.
A new supporter voices their opinion
JPMorgan Chase (JPM 1.94%) is one of the world's largest banks, and despite a long-standing rivalry between crypto and traditional financial companies, it is actively developing new strategies to facilitate its operations through blockchains. One of the bank's crypto analysts believes that out of the wreckage of the FTX collapse, a new, more regulated, and more transparent environment will be created, thus allowing crypto to ascend.
JPMorgan crypto analyst Steven Alexopoulos sees a lack of regulation in the space as one of the main obstacles preventing it from growing. For most of crypto's history, retail investors have been the primary participants. In the last few years, more institutional investors, like BlackRock and Tesla, have joined the party, but for the most part, institutions have avoided the asset class due to a lack of regulatory clarity. Alexopoulos thinks that the FTX debacle will end up "dramatically accelerating the timeline to which crypto-related regulation will be ushered in."
While the FTX situation might be viewed initially as one step back, Alexopoulos thinks that it could be the perfect foundation for crypto to take two steps forward.
He says that JPMorgan views the "establishment of a regulatory framework as the needed catalyst to massively ramp the institutional adoption of crypto." If that does happen, it could send crypto to heights not yet seen since institutional players control massive amounts of capital.
In his analysis, Alexopoulos touched on one other fascinating trend that has arisen in 2022. In a series of unfortunate events, FTX isn't the first casualty in crypto during 2022.
In May, a relatively similar situation occurred when the stablecoin TerraUSD, now rebranded as Terra Classic (LUNC 0.16%), completely collapsed. As a result, dominoes all around crypto began to fall. Crypto lending platforms Voyager (VGX) and Celsius (CEL) went bankrupt. Their bankruptcy trickled down to a crypto hedge fund, Three Arrows Capital, which eventually went bankrupt as well due to its exposure to Voyager and Celsius.
What Alexopoulos recognized is that all of these firms are inherently centralized, compared to the decentralized blockchains they were exploiting. A central point of power and control may have its upsides, but it also presents a single point of failure where damage or missteps can bring the whole system down. He pointed out that "all of the recent collapses in the crypto ecosystem have been from centralized players and not from decentralized protocols."
Rather than fueling crypto skeptics, the events of 2022 should prove that it isn't cryptocurrencies that are flawed; it's the companies and people experimenting with the assets in inappropriate and risky ways. Throughout the year, the blockchains and cryptocurrencies that are truly decentralized have remained steadfast in their day-to-day operations. Price fluctuations happen, and crypto winters seem to be a natural cycle, yet these blockchains continue to run without the need of middlemen or intermediaries. Just as they were designed.
Although this year has been excruciating for investors, I would contend that conviction in crypto should be at its highest point. The frightening events of the last year have only underscored the resilience of properly managed crypto projects.
The asset class is evolving. Similar to the dot-com bubble, many of the cryptocurrencies we see today likely won't be around as the field is whittled down to only those that serve a true purpose and have utility. If Alexopoulos is correct, then crypto's best days likely remain ahead.
