The Great Silent Crash of the 21st Century

Abstract

A mysterious creator under the alias Satoshi Nakamoto (a pseudonym) launched the world’s first successful cryptocurrency in early January 2009 which, not only was a historic moment, but was one that cultivated a technology revolution and money’s evolution into a digital form. However, technical issues (inherent flaws) in the design of Bitcoin blockchain, non-technical issues (political backlash, regulatory hurdle, and environmental hazard), plus the opaqueness surrounding the launch of Bitcoin have opened the door for an endless debate, incessant criticism, spurious claims, heated arguments, plethora of articles, and media frenzy contemplating what Bitcoin really is (crypto-asset, commodity, or investment vehicle) or it is not (currency). On the technical side, blockchain that made Bitcoin a household name fails miserably; high latency (8 minutes or more), low transaction throughput (7 per second), low-scalability (mining, proof-of-work based validation using consensus and cryptography), and high energy cost make Bitcoin unfit to compete with new and fast-scalable cryptocurrencies such as Solana’s transaction speed (50,000 per second) or XML’s $0.00001 fee per transaction. Although technical problems are not without a solution, non-technical issues are not easy to resolve because their resolution depends on politicians, law makers, regulators, and various government agencies (central banks, the Fed and the ECB in particular) who choose to run headlong into backlash to Bitcoin and other cryptocurrencies. On Tuesday (October 8, 2022), prices of cryptocurrencies tanked, citing the industry-shaking collapse of FTX (second largest after Binance), some even dubbed the event as “Crypto’s Lehman moment”. But erratic price movements is not something new in the crypto industry which has been on a roller-coaster since December of 2021, i.e. after Bitcoin price hit almost $68,000 and its market cap $1.24 trillion, jittery investors in a hurry began to cash out their hefty gains. The inability of FTX’s CEO Sam Bankman-Fried to handle his plan to sell his company (which was regarded as one of crypto’s “blue chip” companies) to the rival crypto exchange Binance set off a widespread selling panic, as a result, cryptocurrency market shed a mindboggling $236.7 billion ($81 billion by Bitcoin) in just two days (Tuesday and Wednesday), which by any standard was insanely bonkers.

Keywords: Bitcoin; Market Crash; Cryptocurrency; Digital Revolution; Environmental Hazard

JEL Classification: G12, G21, G32, E42, E44, E51