Crypto Bros Can’t Kill Crypto

After a scandal-ridden year, is crypto poised for a ‘supercycle’?

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As we wind down this turbulent Year of Our Lord 2023, it would be very hard to exaggerate the severity of the blows rained upon the crypto industry – admittedly, in response to the fiendish and dastardly acts of some of crypto’s biggest players.

Who could forget the now-defunct Three Arrows Capital, which splurged on a 170-foot, $50 million yacht, dubbed the “Much Wow,” even as the hedge fund sank into bankruptcy

Or the billions of dollars of customer funds fraudulently pilfered and squandered on white elephants and exotic escapades by Sam Bankman-Fried and his monster crypto exchange, FTX? 

Or, more recently, the guilty plea to money laundering by Changpeng Zhao, founder of Binance, the largest cryptocurrency exchange in the world, slapped last month by U.S. regulators with $4 billion in fines and penalties?

And yet crypto prices, once again, are climbing, with Bitcoin, their bellwether, soaring as much as 150 percent since the start of the year.

This month, Bitcoin punched above the $40,000 mark for the first time in 20 months – more than 60 percent higher than this time last year, when Bankman-Fried could be found holed up in a Bahamas penthouse, attempting to wait out the authorities – who arrested him anyway, this week in 2022.

What a difference a year makes. This past September, Three Arrows’ co-founder Su Zhu, who dodged authorities investigating the failure of his hedge fund, was sent to prison in Singapore. In early November, Bankman-Fried was convicted in New York on seven counts of criminal fraud and sent to prison. And late that month, Binance’s Zhao admitted to wrongdoing and was ordered to stay in the U.S. until his sentencing.

While Bitcoin is still well below its all-time high of $68,569, reached in November 2021, its December rebound may signal an end to the crypto winter (which would be somewhat ironic, seeing as it is winter.) 

“Price doesn’t lie, the tape doesn’t lie,” says David Tawil, president of New York-based crypto hedge fund ProChain Capital. “Just look at the price appreciation we’ve seen this year. And now we have many traditional finance players trying to get into this asset class just as quickly as they can – the likes of BlackRock, Fidelity and others.”

Tawil tells Power Corridor his multistrategy crypto fund, which invests broadly in cryptocurrencies, crypto equities and other crypto-linked assets, ended November up 63 percent on the year. “It was a very good year,” he says. 

Could it be that this year’s crackdown on some of the most unsavory of the planet’s so-called “crypto bros” might usher in a step-change?

Coinbase co-founder and chief executive, Brian Armstrong, suggested as much, telling CNBC in late November that he hoped the crush of recent enforcement actions would give the crypto industry a chance to “turn the page” and “close that chapter of history.” 

Armstrong says this in the face of a seemingly endless barrage of legal and regulatory hurdles that continue to beleaguer the crypto sector. His San Francisco-based company, Coinbase, is still battling the U.S. Securities and Exchange over how it regulates the sector

The skirmish is expected to be drawn out, according to sources familiar with the situation, although one pointed out, “If the SEC settled with Binance, which tried to completely ignore U.S. regulators, it will have to settle with Coinbase, which is trying to work with them.”

Coinbase has been appointed the custodian for 12 of the 13 ETFs awaiting SEC approval, one of the sources notes, which only further legitimizes Coinbase and puts the SEC in a bind if it seeks to move forward on both its case against Coinbase and the ETF approvals. “The SEC really seems to be on its heels,” the source tells Power Corridor.

The SEC sued Coinbase earlier this year, saying it had operated illegally as a U.S. securities exchange, broker and clearing agency without registering with the agency. Coinbase strongly denied any wrongdoing and moved to dismiss the case. SEC Chairman Gary Gensler has made no secret of his distaste for crypto. In congressional testimony covered by Power Corridor in September, he told lawmakers, “I’ve been around in finance for 44 years now, I guess, and I’ve never seen a field that’s so rife with misconduct – it’s just daunting.”

Nonetheless, part of the reason for crypto’s end-of-year bull run are expectations that a Bitcoin spot ETF will be green-lighted by the SEC in early 2024, with some market participants forecasting billions will pour into the market as soon as it’s approved. 

“We’re hearing that the SEC’s responses to the ETF applications are finally moving forward,” one of the sources familiar with the situation told Power Corridor. “What many are expecting is that the top-tier companies, like BlackRock and Fidelity, will be approved at the same time.”

While the crypto crackdown of 2023 will certainly continue into the New Year, with Binance’s Zhao scheduled to be sentenced in February and Bankman-Fried up for sentencing in March (with a second trial pending), crypto is expected to finish 2023 with the wind at its back.

Even with all the crypto scandals, Tawil notes that crypto assets this year boasted lower volatility than equities, and crypto’s correlation with equities and gold has dropped, which he thinks will only increase demand for crypto among investors looking to diversify with a Bitcoin ETF. 

“Characters like Bankman-Fried and CZ [Changpeng Zhao] have been effectively defused,” he says. “Crypto has proven its resilience; the train has left the station and, as an asset class, it is here to stay.”

Still, issues in Washington and within regulatory circles will “not be going away,” he adds. “I have seen a number of asset classes grow up and, in the U.S., they need to go through a lengthy regulatory and legal process, so there’s a long way to go.”

One reminder that crypto’s legal and regulatory reckoning will be ongoing cropped up Tuesday, with Kyle Davies, the other disgraced co-founder of Three Arrows, posting a prediction on social media that crypto is now entering a four-year “supercycle.”

In crypto, a supercycle represents a period of unbridled exuberance that aims to test previous highs. The last one, two years ago, nearly took Bitcoin to $70,000.