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Is Bitcoin dead?
Bitcoin has had a bad 2022. The industry has been beset by rising interest rates and a series of high-profile failures, from the collapse of Terra and Celsius Network to a long list of bankruptcies, most recently FTX, the Lehman Brothers of the industry.
The result? The total market capitalisation of all crypto assets is now less than $1 trillion, down from over $3 trillion since October 2021.
Bitcoin itself is now worth around $15,950, down from $34,900 in early 2022, and even further from its peak of $68,000 late last year.
Is this the end? Will the tombstone of the world's largest crypto-currency soon read "RIP Bitcoin, 2009-2022"?
Below, we look at the main obstacles that threaten bitcoin. We also ask whether Satoshi Nakamoto's dream of a decentralised digital currency can still be realised.
Regulation
The promise of decentralisation was one of bitcoin's main selling points. But following pump-and-dump schemes, security breaches and mismanagement by crypto-currency companies, government regulation is on the horizon.
The FTX implosion, in particular, highlights the need for greater scrutiny. The balance sheets of crypto-currency companies are often murky and it is not easy to establish the assets on which digital tokens are based. But the extent to which FTX inflated its own balance sheet with large amounts of the FTT token, which FTX actually issued, will only serve as a catalyst for central intervention.
Yet the scope and extent of this intervention is not yet clear. The ECB was not very nice to the crypto-currency industry this week, stating that crypto-currencies are on the "road to irrelevance".
ECB director general Ulrich Bindseil and analyst Jürgen Schaff added: "Bitcoin is not suitable as an investment. It does not generate cash flow (like real estate) or dividends (like stocks), cannot be used productively (like commodities) or provide social benefits (like gold). The market valuation of Bitcoin is therefore purely based on speculation."
The result is that many investors in bitcoin and other cryptocurrencies may withdraw their capital to avoid future controls and constraints.
Industry instability
But while FTX is the latest high-profile crypto-currency company to disappear this year, it is not the first.
Terra Luna is second in the industry's bankruptcy rankings this year. In May, more than $2 billion of UST stablecoin was taken out of circulation, and within hours Luna's price dropped by 85%. When the dust settled a few days later, $59 billion was gone.
A few weeks later, Celsius Network filed for bankruptcy, citing volatile market conditions and rising inflation. The company went bankrupt with a debt of $2.7 billion.
July brought another victim, Voyager. After partnering with Terra Luna, it could not escape the company's collapse and went under with losses exceeding $1 billion.
There are signs that other major players are also in trouble. Kraken, the third largest crypto-currency exchange, announced this week that it was shedding 1,000 employees. Crypto.com laid off 2,000 people in October, while Gemini, BlockFi and Coinbase have also cut staff in recent months.
Of course, the party line is often the uncertain economic environment, but this paints a picture of an industry fighting cardiac arrest.
Mining costs
With geopolitical events leading to inflation and rising energy prices, the cost of Bitcoin mining has also been on the rise. Some miners even made losses when the value of Bitcoin fell below $20,000, meaning that the cost of mining a Bitcoin was higher than the price of a Bitcoin.
But interestingly, bitcoin's hash rate, the amount of computing power used to mine bitcoin, actually increased for much of 2022, standing at 323.88 EH/S on 1 December compared to 208.62 EH/S on 1 January.
This can be partly attributed to supply compression and, more importantly, is good news for bitcoin. If bitcoin were dying, we would expect to see a decline in network activity, not an increase in the number of users.
About Bitcoin:
Bitcoins are the world's first cryptocurrency. A cryptocurrency is also called a digital currency, a crypto or a virtual currency. Bitcoins cannot be physically touched, they are pieces of code that only exist in a digital format.
Created in the aftermath of the 2009 financial crisis, Bitcoins were designed to offer an alternative to fiat currencies and traditional financial institutions. What makes Bitcoins different from previous attempts at digital currencies is the clever network and security systems on which they are based.
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