FTX is over. Is crypto, too?

It would be easy to write crypto’s obituary right now. The technological ecosystem has never quite managed to justify the logic of its existence or reach the mass adoption its boosters have promised for years. The latest crypto winter is turning into the crypto ice age, with company after company appearing to be in trouble and, at the very least, facing questions about their stability.

Months of turmoil in the space have culminated in the spectacular implosion of crypto exchange FTX and the incredible downfall of its founder, Sam Bankman-Fried. His business operations have been revealed to be a disaster, and Bankman-Fried as a deeply unserious person and potential fraudster.

According to a count from the website Web3 is Going Just Great, nearly $12 billion have been lost to intentional crypto grifts and scams. That count doesn’t include the $8 billion that appears to have been lost by Bankman-Fried, not to mention other recent high-profile collapses. (Disclosure: This August, Bankman-Fried’s philanthropic family foundation, Building a Stronger Future, awarded Vox’s Future Perfect a grant for a 2023 reporting project. That project is now on pause.)

For those who have been paying attention to the sector, this sort of feels like waking up from a worldwide hypnosis. The metaverse thing, which is basically Zoom meetings with legless cartoons, never made sense. Neither did this idea that images of pixelated punks and weird-looking monkeys were worth millions of dollars as NFTs. Thousands of crypto tokens and coins spun up out of thin air have been revealed to be nothing more than magic beans. Project after project has fallen apart, often taking customers’ money with them, and then there’s the multitude of outright crypto scams.

Crypto isn’t just a financial space where the line goes up and the line goes down; it’s also a place where the line goes poof! and disappears.

“We’re back to the Dark Ages with regards to trusting crypto,” said Phillip Shoemaker, the executive director of Identity.com, an identity verification company that works in the Web3 space, and a tech industry veteran who was once the head of the Apple App Store. At the same time, this isn’t entirely new. “With crypto, we have these massive ups and these massive downs, and it’s a super volatile asset, and we know that.”

This could — and in many people’s minds, should — be the death knell of the industry. Will it? Ehhh.

Crypto has undergone a series of boom-and-bust cycles and a number of high-profile collapses over the years. In 2014, Mt. Gox, a Tokyo-based crypto exchange, went bankrupt after losing hundreds of thousands of bitcoins. In 2017, US authorities shut down the exchange BTC-E amid money laundering allegations. (Disclosure here: I had invested about $100 in Litecoin on the exchange a few years before and that money is absolutely gone.)

In 2019, Canadian crypto exchange Quadriga went under. Canadian authorities later determined it was a Ponzi scheme orchestrated by a founder who, before its downfall, mysteriously died. The arena is rife with scams and schemes and so-called rug pulls and pump-and-dumps. There’s constant hand-waving from regulators and policymakers and critics that something has to be done about crypto, but exactly what that something is remains hazy at best. Until very recently, a lot of those lawmakers and policymakers were listening to Bankman-Fried.

Crypto may be the cat with nine lives; it’s just not clear which life it’s on right now.

“There are many people who tell you, ‘Hey, the market crashes every few years.’ I think eventually that logic has to run its course, or that pattern,” said Jacob Silverman, a journalist currently working on a book on crypto and fraud with crypto critic and actor Ben McKenzie. “Sam was supposed to be the safe bet.” The thing is, in crypto, there might be no such thing.

FTX’s collapse is bad bad bad

What happened with FTX and other major crypto collapses in recent months is bad for customers, for investors, and for the industry itself, full stop. Venture capitalists are likely to think twice before investing in the next crypto project that comes before them. Interest from retail investors in the space is slowing down. Some institutional investors previously skeptical of the space had opened up to it somewhat in recent years as prices climbed and it became clear there was money to be made. Bridgewater’s Ray Dalio went from warning bitcoin could be outlawed to thinking it might be a gold-like alternative. Now, institutions are likely to become hesitant about how involved they want to be.

“You don’t want to be the last person in, but there’s obviously a danger of going full throttle into it, so we’ve been going very slowly,” one senior vice president at a major hedge fund told me. He asked for anonymity to speak candidly about the situation. “We were actively uninterested five years ago, and now, we’re dabbling. Is this going to make institutional players more scared? It can’t make anybody more comfortable knowing that one of your major counterparties is clueless, for lack of a better word. That’s just terrifying.”

A trader at another prominent hedge fund said he hasn’t spoken with anyone in traditional finance who thinks crypto is going to “die die,” though he added that “obviously, expectations have been scaled back quite a bit.” He admitted that in recent months, he looked at Bankman-Fried and wondered how he and others were pulling off some of what was supposed to be this wild business success. “There’s been moments when I’ve been sitting here where I’m like, ‘Am I just actually a fucking idiot? I don’t get it, how are these dudes making so much money?’ And now I’m like, ‘No, no, actually, you understood exactly what was going on here.’”

What was going on here, to be clear, is that a lot of fake money was being made up and a lot of real money was being lost. “It’s like if you had supermarket loyalty points, and you’re counting them as money, and you’re only solvent if you’re counting your own loyalty points that you made up as your assets,” said David Gerard, a prominent crypto blogger and critic based in the UK. “Their liabilities were real, but their assets were imaginary.”

FTX’s downfall has caused contagion across the crypto industry, with other companies being caught in a crunch. There have been rumblings of more bankruptcies on the horizon, and US exchange Coinbase has seen a massive drop in its market value.

“It’s obviously a super, super dark cloud. And the other unfortunate thing is it’s not only impacted FTX, it’s metastasized to affect a lot of different funds and startups in this space that have had a pretty substantial role in building out this entire industry,” said Caitlin Cook, head of marketing and communications at Hxro Labs, a contributor to Hxro, a network building crypto derivatives infrastructure. “It wasn’t a contained blowup, it’s very clearly spread.”

Doug Colkitt, the founder of Crocodile Labs, which is developing a decentralized crypto exchange, said there are a lot of projects that had ties with FTX that are now just completely shutting down. “Up until last week, they had years of runway. That’s zero now,” he said.

And it’s not just a financial problem, it’s a morale problem. Many crypto believers and builders, the people dedicated to the cause and entwined in the HODL culture — holding on for dear life — will stick around. But not everyone.

“I’ve never talked to so many people in the space and who have been in the space full-time for years who have said, ‘I think I’m done, I think I can’t do it anymore,’” Colkitt said. “People lost significant amounts of money, they had their projects destroyed. Even if you didn’t, you have friends in the space who were just zeroed. It’s a very, very pessimistic mood right now.”

Everybody hates Sam

It should go without saying that Bankman-Fried has plenty of enemies at the moment.

He has undertaken major efforts to place himself and his companies at the center of the crypto narrative in recent years by hosting flashy conferences, partnering with big celebrities, hobnobbing with regulators, making splashy investments, and injecting large donations into political and philanthropic causes. He’s attracted a lot of media intrigue and coverage — the son of fancy lawyers who went to a fancy college, a disheveled wunderkind who seemingly figured this whole confusing system out.

Neeraj Agrawal, director of communications at Coin Center, a crypto-focused policy think tank, told me in a text message that he doesn’t feel there’s “much else to say” about Bankman-Fried. “It sucks that one guy can do so much damage,” he said.

Among those who have been working to legitimize crypto in terms of policy and regulation, there’s a sense of frustration that Bankman-Fried sucked all of the air out of the room after a pretty rapid rise. “You can ‘communicate’ for a decade and then one guy comes along and undoes any good you’ve done,” said Jerry Brito, the executive director of Coin Center, on Twitter. “Kinda demoralizing.”

There was also a sense that Bankman-Fried was trying to push regulators and policymakers in directions that would have favored his company — something many in the industry, including the Binance founder who ultimately helped orchestrate FTX’s collapse, took issue with.

Some people in the industry say that this is proof that centralized exchanges like FTX won’t work. They say that decentralized finance, or DeFi, which tries to replicate a lot of the financial system, but without intermediaries and depending largely on smart contracts, is the way. “In DeFi, you see every single loan,” said Tarun Chitra, founder and CEO of Gauntlet Networks, a financial modeling platform for blockchains. “You entered that contract and you getting wiped out means you took irresponsible risks. Whereas in this centralized finance space, they just let people keep taking irresponsible risks with customer money.”

It is worth noting that many in the DeFi space worried the legislation Bankman-Fried was backing could kill DeFi altogether in the US, giving centralized exchanges like FTX an enormous leg up.

The argument that DeFi is the answer to this is a little hard to swallow, at least for now. For one thing, DeFi is still a nascent space that is very difficult for regular users to navigate. It is often subject to scams, too. And regardless, most regular people looking at the crypto space aren’t really going to get the difference.

“From one perspective, especially building decentralized protocols that are competing or hoping to provide an alternative to centralized exchanges like FTX, we hope that some fraction of people would move over and at least realize the distinction there. But the reality is, for 90 percent plus, it tarnishes the entire space,” Colkitt said.

Bankman-Fried is not really doing himself any favors here by putting out weird tweets, giving terrible interviews to reporters, and in a DM exchange with Vox’s Kelsey Piper, appearing oblivious to the weight of the situation and its consequences. A pullback of the curtain of the boy genius’s business operations and balance sheet reveals a complete and total mess.

“I always thought he was a clear-eyed trader who was in a business that I thought was a little shitty,” the hedge fund vice president said. “If even half of the reporting is to be believed and the bankruptcy filing is accurate, that’s a fucking shitshow. I cannot believe they were that stupid.”

Crypto people will say that Bankman-Fried was an outlier, and are now trying to distance themselves from him. But it’s not clear how much of an outlier he and FTX really were. Again, these kinds of implosions in crypto are not exactly uncommon. “[Crypto] is set up to produce people like Sam or elevate people like Sam,” Silverman said.

If you take a step back, so is a lot of finance and startup culture, where some figures have been able to fake it until they make it and then, ultimately, are caught faking it. (See: Bernie Madoff and Elizabeth Holmes.)

Maybe the question isn’t whether crypto will die but whether it should

Basically no one I spoke to for this story on either side of the crypto debate said they think this is the end of the industry, though their reasons as to why were different.

Hilary Allen, a law professor at the American University Washington College of Law and an expert in financial stability regulation — who is not a fan of crypto — said she just doesn’t see the efforts to get the government’s blessing on it stopping, given how much money, despite significant losses, is still on the line. “There are still people in the crypto industry lobbying for legislation that would allow crypto access to the government safety net to allow it to keep going,” she said. “The rhetoric from people who have large crypto positions is entirely cynical because crypto has no value if you have no one to sell it to. They have a vested interest in maintaining that rhetoric. There’s a lot of sunk cost here.”

Alex Gladstein, chief strategy officer at the Human Rights Foundation and an advocate largely for bitcoin for humanitarian and cross-border reasons, believes that crypto remains “cyclical” and that a bull cycle will come back around. “It’s a massive setback for the crypto industry, and I hope people learn the right lessons,” he said. (One lesson here: Don’t leave your money on the crypto exchange, really, even if those crypto exchanges are easier to use and promise they are super-duper aboveboard.)

Jonathan Victor, ecosystem lead at Protocol Labs, an open-sourced research and development lab, said he sees this moment as a “reset” and an “end of a certain era of crypto with the headiness of people doing stuff.” But he sees it as an opportunity to keep trying and creating something useful in the space. “It definitely creates noise, and it affects, in the short term, the general perception around things, but ultimately the true weighing machine for all of this stuff is: Do we build valuable things?” he said.

It is probably true that this is just another crypto bust and that in X amount of years from now, we’ll see another boom. (Fortune’s Term Sheet reported that some venture capital firms are already on the hunt for where to park their money in the arena next.) It will probably look different, because it always does, and likely have new players and technologies and acronyms that we’ll all have to learn about if we want to play along. And after that boom cycle, let’s face it, there will probably be another bust.

But maybe there’s a distinction here between what will happen and what should. Crypto’s not great for the planet, it’s wildly volatile and speculative, and it’s costing a lot of people a lot of money that results in very real pain. I’m not saying there are no upsides to it or dismissing the possibility that someday its potential will be realized. But you do have to wonder how much and how long any of this is worth it.

Crypto remains largely a solution in search of problems, and in the process of that search, it’s causing a lot of problems on its own.