Crypto was created to end bank runs…
The bitcoin white paper was the industry’s “big bang.”
And it’s no coincidence that it was published on October 31, 2008.
That was two weeks after the fall of Lehman Brothers and the near collapse of the traditional financial system.
Bitcoin’s pseudonymous creator, Satoshi Nakamoto, wanted us to remember its roots.
Satoshi digitally inscribed the following words at the start of the bitcoin blockchain…
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.
It’s a reference to a January 3, 2009, Times of London headline about the British government’s bank bailouts. (The Chancellor of the Exchequer is Britain’s Secretary of the Treasury.)
So how did it come to pass that the headlines are now filled with news of a bank run on crypto exchange FTX?
Bitcoin removed the need for potentially corrupt middlemen in online transactions.
Then, in 2015, Ethereum began building on this principle.
It’s a fully programmable blockchain. And developers used it to build a suite of decentralized finance (DeFi) apps. These allow for middleman-free crypto exchanges, lending, and other financial services.
But here we are…
FTX is a smoldering mess. And billions of dollars in customer funds have gone up in smoke.
But there is a silver lining… The FTX fiasco is bringing crypto back to its original mission of removing this kind of risk through its code.
FTX was a centralized exchange…
Its business was servicing crypto users. But its business model was the same centralized one Wall Street banks followed in the runup to 2008 – make profits and enrich the insiders.
If this means fiddling with customers’ funds… making risky loans… or cozying up to regulators… that’s what these companies will do.
DeFi is the antidote to this…
Take decentralized exchanges or “DEXs.” They allow two parties to exchange cryptos on a blockchain without a middleman.
That’s why DEXs such as Uniswap and Curve have been working without hiccups through the crisis.
DEX users never handed over custody of their cryptos to any company. So they were never at risk of losing them.
It’s consumer protection by code.
So it’s no surprise that traders have been flocking to DEXs…
Take the most popular DEX, Uniswap.
Last Tuesday, it posted a tripling of trading volume… overnight.
And another popular DEX, Curve, saw its trading volume almost double from $700 million to $1.3 billion.
That was the same day crypto exchange Binance agreed to bail out FTX. (Binance has since withdrawn from the deal).
Crypto investors are realizing something important. Centralized players such as FTX are no different from the Wall Street banks they were hoping to replace.
It’s something Jeff Brown’s chief crypto analyst, Andrew Hodges, hammered home…
FTX wasn’t built on a blockchain. Its founder, Sam Bankman-Fried, used a centralized model that lacked transparency. That runs counter to the original mission of crypto.
There’s a saying in the industry, “Don’t trust, verify.” Blockchains are transparent by design. Anybody can audit a DeFi protocol such as Uniswap at any time. You don’t have to have special permission to see everything. It’s all on a public blockchain.
FTX may have masqueraded as a crypto company. But it didn’t uphold the central tenets of the industry. If FTX had been decentralized, it wouldn’t have blown. The undercollateralized loans, the hole in the balance sheet, the lending of user funds – the protocol would have rendered it all impossible.
We’ll eventually use DEXs to trade stocks, bonds, other assets…
DeFi protocols let us trade tokenized versions stocks and bonds the same way they let us trade crypto.
We’ll also exchange title deeds for houses this way.
And that’s a gigantic addressable market.
The global bond market is valued at $120 trillion… there’s $41 trillion in stocks… and another $3.7 trillion in real estate.
So that’s a $165 trillion opportunity for blockchain technology to squeeze out costly middlemen.
And that’s just the start…
Jeff believes we’ll get to a point where almost every asset we own will be tokenized using NFTs (non-fungible tokens). Jeff…
The titles to our house or and our car will one day be represented as an NFT. We’ll representing ownership of these real-world assets with digital tokens on a blockchain instead of pieces of paper.
This will allow for fractional ownership, too. Imagine investing a few hundred dollars in an NFT that gives you fractional ownership in a vintage Ferrari… or a commercial office building… the winning horse at the Kentucky Derby.
But that’s not what most folks are thinking about right now…
They’re thinking of the plunge in crypto prices.
It reminds me of what happened at the end of the 1990s, when the dot-com bubble burst.
I was working for an internet startup in Buenos Aires, Argentina, at the time. So I remember it well.
Overvalued dot-com stocks began to plummet. And starting in March 2000, people who’d claimed all along that the internet was a fad wrote scathing articles in the press.
There were plenty of “I told you so’s” from internet doubters and haters.
But here we are, two decades later. And Microsoft, Apple, Amazon, and Google have become the biggest companies on the planet.
And the internet has changed dramatically since those early days – with the introduction of social media, streaming video, and even metaverse worlds.
The same will happen with blockchain technology. The usual naysayers will claim the industry is dead as asset prices crash. But use cases will evolve… along with the underlying technology.
And we’ll see blockchains used in ways we haven’t yet imagined.
Meanwhile, it’s critical you keep your crypto safe…
We’ve gotten a bunch of questions from subscribers about concrete steps they can take to immediately protect their crypto assets.
And Andrew has three specific steps you can take right now…
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Be your own bank – Instead of leaving your funds in a CeFi exchange, self-custody your crypto assets. I strongly suggest a hardware wallet such as Ledger or Trezor. These are devices that resemble a USB memory stick that allow you to store your crypto offline. This protects you from hacks or malware infections.
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Hire a custodian – Custodians such as Coinbase Prime and Fireblocks specialize in safeguarding assets for institutional clients. This is a good option if you have a large exposure to crypto.
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Be selective with your exchanges – Some popular exchanges such as KuCoin, Bitfinex, and OKX are based offshore like FTX was. Others such as Kraken, Gemini, and Coinbase are regulated in the U.S. The safest of them is probably Coinbase. It’s publicly traded. So, it’s required to regularly publish audited accounts.
Crypto will rise from the ashes, as it has every time it’s collapsed.
Meanwhile, it’s crucial you keep your crypto assets safe. It’s the only way to profit over the long term as we step in the decentralized future Satoshi envisioned more than a decade ago.
Regards,
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Chris Lowe
Editor, The Daily Cut