Cryptocurrency: Integrity Destroyer or Policy Scapegoat?
Cryptocurrency is failing. Or so it seems.
Last week, the arrest of Su Zhu, cofounder of failed crypto hedge fund Three Arrows Capital, brought to light the integrity issues which have plagued the crypto landscape. Along with cofounder Kyle Davies, the fund faced $3.5 billion of creditor’s claim, making its collapse one of the largest hedge-fund collapses of all time.
Zhu’s arrest came from a long line of incidents. The JPEX scandal, the 2022 crypto crisis, and perhaps most infamously FTX’s downfall have elicited criticisms from prominent financial experts and created a sense of apprehension in the general public. A recent poll found that 75 percent of Americans who have heard of crypto are not confident in its safety and reliability.
To combat deteriorating trends, policymakers around the world have zeroed in on the industry. In July 2023, twin actions filed by the Securities and Exchange Commission against Binance and Coinbase made it clear that regulators believe crypto should not exist in the United States. Across the street, bipartisan efforts were made on a bill to institute crypto market structure rules. As oppositions against crypto are mounting and the battle over the Fed’s controversial central bank digital currency is intensifying, it suddenly becomes vital to put these occurrences in context.
Sure, Integrity Issues. What about Macroeconomics?
As easy as it is to magnify the bewilderingly irresponsible actions of individuals such as Zhu and Sam Bankman-Fried, crypto assets are not exempt from macroeconomic issues. In fact, the past decade has shown that bull and bear runs in the crypto market have coincided with periods of loose monetary policies and of significant tightening.
Figure 1: Fed Assets and Bitcoin Prices Since 2016
- Quantitative easing/quantitative tightening: The chart above shows the total assets on the Fed’s balance sheet and the price of bitcoin since 2016. After a bitcoin rally in 2017, a sharp drop in 2018 coincided with a Fed balance sheet reduction program. Another rally in 2020 coincided with the quantitative easing that started during the pandemic and increased institutional interest in the cryptocurrency market. Bitcoin’s price ultimately reached its peak around November 2021 before steadily declining as the stark possibility of inflation dawned, leading to the quantitative tightening starting June 2022. The downturn was coupled with crypto-specific collapses such as stablecoin TerraUSD in May, crypto lending company Celsius in July, and crypto exchange FTX in November.
Figure 2: Interest Rates for Risky Assets and Bitcoin Prices Since 2017
- Interest rate: Low interest rate increases demand for higher-risk assets and returns, which can be extended to crypto assets. Conversely, a high interest rate implies tighter monetary conditions and decreases the appetite for risky assets. In the chart above, we u
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