FTX-driven crypto chaos exposes weaknesses but not another 2000 dot-com debacle

The fallout from the bankruptcy of FTX is far from over and bitcoin will drop to $15,000 before year-end as investors grow more skittish over investing in virtual currency, one expert says. That would mark a further 10% decline in price.

“I expect the selloff to continue and a further loss of value to occur,” Elvira Sojli told FOX Business. Sojli is an associate professor of finance and a Scientia Fellow alumni in the School of Banking and Finance at the University of New South Wales.

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Sojli said cryptocurrency growth has been fueled not by firm financial principles but by believers in the system and newcomers.

“The recent stories have stalled the waves of newcomers and are shaking the belief in some late entrants to the market,” she said.

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“I do not think we’ll see more crypto adoption by the general public, but we’ll see more countries moving towards Central Bank-issued digital currencies (CBDCs). How this market will evolve will depend on how CBDCs will be implemented,” Sojli said.

The finance professor is wary to call a crypto market bottom, noting that this year has already wiped close to 75% of bitcoin’s (BTC/USD) value. Crypto prices generally skyrocketed between March 2020 and November 2021, reaching $67,802 on Nov. 9, 2021, before plummeting in the so-called “crypto winter.”

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“My last prediction for Finder.com in May set BTC to about $15K at the end of the year. I expect that to be reached faster now. I do not think it will be possible to restore confidence in the short run.”

Another dot-com bust?

Last week’s bankruptcy of FTX rattled bones in the dot-com graveyard and raised the specter of a year 2000-like bust.

Since July, crypto hedge funds Three Arrows Capital, Voyager Digital and Celsius Network have all filed for bankruptcy following a crypto winter that saw cryptocurrencies lose more than $2 trillion in value through June.

The losses are reminiscent of the 2000 dot-com bust. At the time, CNNfn reported that a basket of 280 internet stocks lost $1.7 trillion by November 2000, with more than half down 80% or more from their 52-week highs, as the dot-coms ran out of venture capital money and imploded.

“The bankruptcies in the crypto space resemble the dot-com collapse in the sense that there was a rapid increase in value not justified by fundamental values [hype] and a very rapid [up the escalator down the elevator/cliff] decline,” Sojli said.

Irrational exuberance

Actor William Shatner served as Priceline spokesperson for two decades. Photo is from a March 22, 2021, press release. (Priceline)

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During the dot-com era, investors fueled by “irrational exuberance” piled into internet stocks in hopes of quick riches from initial public offerings (IPOs). For example, Priceline.com went public at $16 per share in March 1999 and gained 914% in one month. Priceline Group ultimately survived and is now Booking Holdings (booking.com).

Other start-ups quickly disappeared, including Chewy forerunner Pets.com and personal finance site OnMoney.com.

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“The bubble comparison is where the similarity between these two events ends,” Sojli said, explaining that the dot-coms had an underlying business model. Many were listed companies with operations and cash flows.

“This cannot be said for most crypto assets. There are no claims to real assets or cash flows,” she said. “Therefore, I do not see this as the bottom but more of a beginning of the weaknesses of the business propositions in this space being laid bare.”

Sojli sees the current wave of bankruptcies as an inevitable market consolidation among companies that offer the same product with little differentiation. She also noted the technology used by crypto exchanges is not unique, making the industry vulnerable to more mainstream companies. In August, Wall Street investment manager BlackRock launched a spot bitcoin private trust to provide institutional clients in the United States with direct exposure to the world’s largest cryptocurrency.

Government regulation

FTX’s bankruptcy may ramp up efforts by governments to regulate cryptocurrency transactions. Sojli said there’s been a lot of talk among officials, but actions have been hampered by the cross-country nature of the regulation, which she compares to the foreign exchange market.

“Coordination is the problem here, not the lack of desire to regulate.”

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Last week, White House press secretary Karine Jean-Pierre said the Biden administration monitors cryptocurrency and considers it an important issue.

“The most recent news further underscores these concerns and highlights why prudent regulation of cryptocurrencies is indeed needed.”