Tremor in the world of cryptocurrency

FTX, the largest cryptocurrency exchange is foundering as its rival Bianca, owned by Changpeng Zhao, pulled out of a deal to bail it out. FTX, owned by Sam Banks-Fried Zhao and Banks-Fried have been bitter rivals.

FTX, with a fortune of $17 billion and a January 2022 valuation of $32 billion, was facing ‘liquidity crunch’ because Bank-Fried seemed to indulge in holding FTX stakes in his own company and when there was a run on FTX with rapid withdrawals, FTX was in trouble.

Banks-Fried wanted to sell it out to Zhao but in course of due diligence, Zhao felt that he could not go with the bail-out package. Bank-Fried said he was looking for buyers and that leaves FTX at the precipice, and it might just collapse soon.

The collapse of FTX has caused enough turmoil in the market of cryptocurrencies, and established ones like Bitcoin roiled before they recovered at the end of the day.

The world of cryptocurrencies has been facing trouble ever since central banks have been raising interest rates and investors found it more attractive.

So, there was flight of capital of sorts from the cryptocurrency world. It might not have lasted too long, and it has not sucked out all the capital from the crypto world. But it has caused flight more than panic.

But what FTX has caused is panic selling because FTX stood on weak ground and it was ready to totter.

The business rivalry between FTX and BInance is just a small part of the story. Rivalries are quite common in the world of business, and the world of cryptocurrencies has its own share of competition and rivalries.

But what causes disasters of the FTX kind are real economic causes. You cannot play high stakes without enough backing. And that is what had happened with FTX and Bank-Fried had confessed to his employees that he had messed it up.

The FTX episode – and it is not the first one either – does not raise any existential questions about the viability of the cryptocurrency market.

It has created a niche for itself and there are enough daring investors and speculators who are only too willing to bet their fortunes on these digital counters.

It might seem that the play of cryptocurrencies is similar to that of play in casinos and the turn of the roulette. It is not as irrational as that.

Cryptocurrencies follow the rules of economics. The cryptocurrencies are backed by recognized currencies of the government-backed central banks, and people are investing real money on the digital money. The investor seems to believe that digital currencies are legitimate means of exchange. But governments and central banks have not recognized the cryptocurrencies.

So they operate in a parallel world. But not in an underworld because governments and central banks have not yet declared them illegal tender.

The expectation of those who deal in cryptocurrencies like FTX and BInance and scores of the others in many countries across the world is that cryptocurrencies will be recognized by governments one day and people will deal in them as they do with recognized currencies of different countries which find form through paper money and coins, and they are generally backed by gold, though in a nominal sense. What lends credibility to dollar, euro, pound, dirham, dinar, rial is that the governments back them.

Bitcoin and other cryptocurrencies hope to gain similar recognition in the future. Many sceptics would argue that as long as governments do not recognize them, cryptocurrencies have no existence, and people dealing with them are indulging in dangerous speculation.

But billions of dollars and thousands of people are invested in cyrptocurrencies and crypto exchanges like FTX and BInance. It is not an unrealistic enterprise. It is waiting in the wings as it were to make its formal appearance on the world economic stage.