The final quarter of 2021 sent crypto assets plunging from their November all-time highs. Since then, it seems like a domino effect hit the entire sector. Crypto hedge funds, lending platforms, and exchanges came tumbling down.
Earlier this year, FTX swooped in to try and save the distressed firms, posing as the blue-chip of crypto companies. But its recent bankruptcy filings, along with the fraud charges brought against its founder, Sam Bankman-Fried, caught many investors by surprise.
David Ripley, COO at crypto exchange Kraken and incoming CEO of the firm, says price drops tend to expose those that aren’t following proper protocol. While FTX is making headlines now, there were many more failures, including Voyager, Celsius, and Genesis that all fell.
We’ve seen this happen in other markets as well, he added. For example, the decline in real-estate prices led to the exposing and failure of many of the largest banks in 2008 and 2009, he noted.
Two major lessons need to be taken from this downfall, he said. The first is exchanges and crypto firms need to demonstrate proof of reserves, which means they must be able to provide transparency and evidence that client assets are appropriately backed. Additionally, security protocols need to be prioritized to avoid major hacks.
“We think the events here point to actually the true value of crypto originally, which is removing a trusted third party,” Ripley said. “And so the failure of this trusted third party that is FTX, highlights the need and the benefit of cryptocurrency more than anything else. So it is a bit ironic, I will admit that.”
While progress isn’t at the top of everyone’s mind in the midst of an entire sector collapse, Ripley says once the dust settles, we’ll start to see new projects come to the surface. Investments that were poured into the space over the past couple of years are still funding developers who are innovating and building new use cases, he said.
During the previous bull run, DeFi and non-fungible tokens came to the forefront.
But their use cases only scratched the surface, he said, especially for NFTs that were used simplistically, such as for art pieces. However, it’s really about the underlying technology which can be used in ticketing systems and gaming, just to name a few. We will start an integration into more complex systems, he said.
How investors should think about this trend is that to the extent that there are tickets and items pegged to NFTs moving across blockchains, for example, the Ethereum network, it will have a positive impact by growing that ecosystem. In turn, that would increase the price of ether.
The same goes for bitcoin: the more people that begin to use its network as a payment method, the more its price will increase, he added.
One area we’re seeing significant adoption in is cross-border payments, especially through the use of bitcoin’s Lightning Network, which is a layer 2 payment protocol. It will take the crypto from being just a global payment mechanism to a fast and low-cost global payment network. The network’s capacity hit 5,000 BTC, up from 4,000 BTC in July.
Another major use case that Ripley believes will see significant adoption is decentralized storage. This is like a Dropbox that exists on the blockchain so it doesn’t require a third party. He pointed to Filecoin as a great example. It’s an open-source, public cryptocurrency and digital payment system intended to be used for digital storage and data retrieval.
As for major providers in the space, trusted and reliable crypto companies will see an increase in their market share to fill the demand, he said. Additionally, traditional fintech companies like PayPal, Square, and Robinhood, are coming into the space. All companies will eventually add cryptocurrency to their business models, including banks, he said.
“Then, I think it’s going to even go beyond that. I think you already see some of the social media and online internet companies supporting cryptocurrencies,” Ripley said. “So for example, Twitter, Facebook, Instagram, all supporting the ability to display, validate, and verify an NFT.”
Finally, we’re seeing an increase in the self-custody of crypto, which is fantastic, he noted, because that’s the key benefit and premise of crypto in general, and bitcoin specifically.
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