Although my country has begun to extinguish the “false fire” of virtual currency speculation since 2017, the so-called “myth of wealth creation” in the currency circle still attracts many investors to enter the market. Now, when regulation comes, losses will expand, and ecological operations will not make ends meet. What will be the end of this game supported by faith?
Author | Tao Ting
Editor | Han Zhongqiang
Source | City Boundary
What is speculated is a spectacle, and what is lost is real money.
In June 2015, the A-share stock market crashed, and thousands of shares fell by the limit, and all eyes were green. This year, the reason why many people lost so badly is precisely because they used high leverage to realize their dream of getting rich overnight. The same is true for the currency circle. In 2021, the price of cryptocurrencies will skyrocket, and Bitcoin will become the world’s number one asset in terms of yield, and many people will enter the market with leverage. But the prosperity is the decline. In 2022, the direction of the wind will change drastically, and the price of cryptocurrency will plummet. While speculators will lose their money, the currency circle will also usher in a big shock.
On December 20, U.S. time, SBF, the founder of FTX, a cryptocurrency exchange that went bankrupt due to “thunderstorms,” was charged with eight charges by U.S. prosecutors. If convicted of all charges, he faces up to 115 years in prison. Coincidentally, on the same day, lawyers for a group of French cryptocurrency investors said they had filed a criminal complaint against Binance, the world’s largest crypto exchange, accusing it of misleading the public and promoting its services before the law allowed its legal services. Ann’s founder, Zhao Changpeng, the former richest man in China, is also facing unprecedented pressure.
On December 23, although Binance responded on the official website regarding news such as “the exchange suspended the withdrawal of USDC (a fully mortgageable stablecoin against the U.S. dollar)” and “refused to disclose financial information”, the outside world questioned The sound still hasn’t dissipated.
Lost 2.5 million in six days
Although since 2017, my country has begun to extinguish the “false fire” of virtual currency hype and put “protection locks” on investors’ wallets, the “myth of wealth creation” in the currency circle has still attracted many investors. field. Zhang Qi from Shenzhen is one of them.
At the end of 2019, Bitcoin took the lead in getting out of the correction market, and then started a round of sharp decline. Zhang Qi, who saw the right time, began to buy cryptocurrencies, including Bitcoin. In the ups and downs of the market, Zhang Qi also made losses and gains.
Until 2020, when the new crown epidemic hit, the United States began to increase the supply of money. Bitcoin broke through the tens of thousands of dollars in March of that year, and finally broke through the $60,000 mark in April. It was also in the expectation that “Bitcoin is expected to rise to more than 100,000 US dollars” that Zhang Qi bought more cryptocurrencies.
Stepping on this round of wind, he “raised the original 300,000 yuan to nearly 10 million yuan.” However, changes in the market are always unexpected. On May 19, 2021, the price of Bitcoin plunged rapidly, from around US$43,000 to US$29,000 at one point, with a single-day maximum drop of 34%. Another virtual currency, Ethereum, was almost cut in half.
From this day on, Zhang Qi’s investment profits began to take away, and by the end of 2021, about 70% had been cut. During the day when the price fell by 40%-50%, Zhang Qi was fidgeting, “Even eating is stupid, it’s a numb loss.” It was also this time that he almost lost all his money, which made Zhang Qi calm down and enter a rest state. “Unpredictable and risky, it feels like the biggest casino in the world.”
Zhang Qi, who stopped, was lucky to escape the great turmoil in the currency circle in 2022, but Hu Yao, a post-90s generation in Japan, was not so lucky. He started buying cryptocurrencies in January 2021 after seeing some small essays on social platforms that said “earn 10 million in 2 days by speculating in coins”. It was also at the beginning of 2021, during the surge of cryptocurrencies, that the 120,000 yuan invested by Hu Yao in Ethereum quadrupled to 500,000 yuan.
(Photo source/Visual China)
Tasting the sweetness of “getting rich overnight”, Hu Yao invested almost all of his money in Bitcoin and Ethereum in 2022. However, since November 2021, the cryptocurrency market has ushered in a long winter. Especially after entering 2022, the “money circle Moutai” LUNA coin crashed in May, and the earthquake caused by the currency circle reached its peak on November 11 due to the bankruptcy of FTX.
From November 6th to November 11th, in just six days, “I lost 2.5 million. These days, Bitcoin fell by more than 20%.” On December 19th, Hu Yao told the market circles, “Bitcoin mining is losing money now, and the mined coins are not enough for electricity.” On the other hand, Song Feng’s life has indeed changed since he wanted to “change his life against the sky” by speculating on coins.
Before that, although he didn’t earn much, he slept well every day and lived a fulfilling life. After entering the virtual currency market in May last year, Song Feng became extremely miserable. He couldn’t sleep well after staring at the market every day. “The market fluctuated greatly, and my heart couldn’t stand it.” Feng was also not happy, but panicked, “I know very well that this is a gambler’s behavior, but I feel like I’m stuck, and I don’t want to stop.”
Soon, reality gave Song Feng a heavy blow. In December 2022, amidst the continuous turmoil in the currency circle, the Ouyi system of the exchange where he bought the cryptocurrency had a flash crash, and the cryptocurrency he held could not be sold. After experiencing the extreme pain of being close to liquidation, the money Song Feng earned by staring at the market for a year, including the 50,000 yuan he earned that night and his savings of more than 10,000 yuan, was lost in the end. Now, facing the messy situation, Song Feng regretted it very much, “If I do it all over again, I will definitely not touch virtual currency, there is no prospect.”
This is just the tip of the iceberg in the currency circle. On May 19, 2021, nearly 600,000 people liquidated their positions, and more than 44 billion funds were wiped out. Since 2022, the liquidation in the currency circle is still intensifying. According to data from Glassnode, as of mid-December 2022, global Bitcoin investors have lost a total of US$195 billion, or approximately RMB 1,359.7 billion. Most holders sold their bitcoins in a “cutting” manner.
What happened to the currency circle that people flocked to in the past?
Behind the turmoil in the currency circle
How brilliant the currency circle used to be is how turbulent it is now.
There is a story widely circulated in the currency circle. That was in May 2010. On a bitcoin forum, someone bought a $25 pizza for 10,000 bitcoins. This is the first fair exchange rate for Bitcoin, corresponding to a price of $0.0025 per coin.
At the end of 2017, Bitcoin rose to around $16,000; in April 2021, the price of Bitcoin once exceeded $64,000. In other words, Bitcoin has increased by more than 25 million times in eleven years. If someone invested one yuan in that year, it would become 25 million yuan, and 10 yuan would appreciate to 250 million yuan.
However, the currency circle does not only have the myth of sudden wealth. In 2022, the unprecedented shock in the currency circle will wipe out a huge amount of wealth. This “earthquake” started with the flash crash of the cryptocurrency LUNA coin. On May 9, the LUNA coin, which had a market value as high as 41 billion U.S. dollars, plummeted continuously without warning. Its price dropped from nearly $90 to less than $0.00015 in just a few days.
The collapse of the market value of tens of billions of dollars of LUNA coins not only made countless investors lose their money, but also caused thousands of coins to fall in the currency circle. Taking bitcoin as an example, since the early morning of May 10, bitcoin has plummeted by more than 10% within 15 minutes, and many investors have liquidated their positions one after another. According to data from the currency world, on May 14th Beijing time alone, more than 160,000 users of virtual currency contracts on the entire network liquidated their positions, and the liquidation amount reached 2.12 billion yuan.
A domino effect broke out. Most of the leading companies in the virtual currency industry “survive the winter” through layoffs and other means. According to CoinDesk statistics, as of November 30, the virtual currency industry has lost more than 26,000 jobs in total. A number of financial institutions were exposed to bankruptcy and liquidation due to their inability to redeem user assets, including Sanjian Capital, a leading hedge fund in the currency circle.
(Photo source/Visual China)
This is an eventful year in the currency circle. From the end of October to the end of November, in just one month, three heads of cryptocurrency died suddenly one after another. With FTX filing for bankruptcy on November 11, its founder SBF was charged with eight charges by the US prosecutor. If convicted on all counts, SBF could face a maximum sentence of 115 years in prison.
Why is the currency circle in turmoil? We have to start with its origin. Virtual currency, its name is derived from the contrast with physical currency. The earliest virtual currency is Bitcoin, which is a peer-to-peer and decentralized digital asset, proposed by the Japanese Satoshi Nakamoto in 2008. Due to the use of cryptography to trade, Bitcoin has also become the earliest type of cryptocurrency. Other cryptocurrencies issued with reference to Bitcoin include Ethereum, Litecoin, Dogecoin, Quarkcoin, etc.
The rise and fall of cryptocurrencies are directly related to the Federal Reserve’s loose monetary policy.
Legendary American investor and “Godfather of Emerging Markets” Mark Mobius believes that in the past few years, the supply of U.S. dollar money has increased by more than 40%, which allows investors to have enough cash to speculate on cryptocurrencies. Since 2022 to December, the Fed has raised interest rates seven times. Raising interest rates reduces the amount of money available for investment in the market. In the decline of cryptocurrency prices and the US market, some network stablecoins (a type of cryptocurrency with “anchor” properties) that promised to be pegged to fiat currencies such as the US dollar but were inherently flawed were detonated. Affects financing institutions that provide leverage for cryptocurrencies, including exchanges like FTX.
But to talk about the root cause of the turmoil in cryptocurrencies, we have to start with the controversy of “whether there is value”. Still taking Bitcoin as an example, because it itself has no direct connection with the real industry, its price fluctuations are separated from the real world industry restrictions and the control of traditional methods. Because of this, as the price of Bitcoin continues to rise, scams of various cryptocurrencies emerge in an endless stream.
More importantly, “The huge transaction volume of the cryptocurrency market is affecting the real currency markets of major institutions and even countries, thereby bringing about new problems of giant influence and state control.” Deng Feng, a research institute at Fudan University, once mentioned arrive. For example, Musk once hyped Dogecoin, which has a very weak technical foundation, and caused its price to skyrocket.
In addition, the reason why FTX in this accident was accused of money laundering and fraud by the US prosecutors is because there is a huge gap of 8 billion US dollars on the FTX balance sheet. “SBF misappropriated billions of dollars in customer funds from trading platforms for his own personal gain and to help grow his cryptocurrency empire,” the U.S. Securities and Exchange Commission (SEC) said.
“Punishments against cryptocurrencies have just begun,” said SEC Chairman Gensler.
In addition to the bad situation of SBF, the founder of FTX, the founder of the cryptocurrency exchange Binance, the former “richest man in China” Zhao Changpeng is also in a difficult situation.
The troubles of the “richest man in China”
Changpeng Zhao, who was born in Jiangsu, immigrated to Canada when he was young and established Binance Exchange in China in 2017. In 2021, Binance will not only become the world’s largest cryptocurrency trading platform, but Changpeng Zhao will also become the “richest man in China” with a net worth of US$95.8 billion this year.
This position has not yet taken hold, and Changpeng Zhao’s personal wealth has shrunk from US$96 billion to US$11.6 billion during this year’s turmoil in the currency circle, evaporating nearly 90%. When Zhao Changpeng fell from the position of “the richest man in China”, Binance also reached a dangerous moment.
Some media used this passage to describe the current situation of Binance: the U.S. government is investigating it, international short sellers are attacking it, audit companies have abandoned it, tens of billions of funds have fled from it, and Binance’s 120 million users are about to move… The crisis of Changpeng Zhao, It started when FTX went bankrupt.
At the beginning of November 2022, due to concerns that FTX would experience a “death spiral” (that is, the debt continued to rise, but the economy could not grow), Zhao Changpeng began to sell 23 million FTX tokens FTT in his hand. Changpeng Zhao’s public selling made FTT token holders start panic selling, which peaked on November 9.
On the same day, Changpeng Zhao published an article, roughly meaning: SBF asked me for help, hoping that I would pay to turn the tide. I promised to save him. However, the next day, Changpeng Zhao posted again, probably meaning: FTX hole is too big, I can’t save it. When Changpeng Zhao made it clear that he would not pay, FTX declared bankruptcy on November 11. When the myth of FTX making wealth was shattered, the fate of Binance also changed.
What Zhao Changpeng didn’t expect was that the turmoil of FTX would come back to him. The outside world found that the financial status of Binance is more opaque than FTX. After all, most cryptocurrency exchanges were not regulated by regulators before the Merkle tree (a method that can verify whether a crypto exchange misappropriated user funds) was implemented.
Dangerous signals soon struck from all sides. On December 12, Binance suspended the withdrawal of USDC, a mainstream cryptocurrency, for eight hours. This move was considered “abnormal and very dangerous” by the industry; on December 13, investors withdrew $3 billion from Binance within one day, far exceeding the usual normal withdrawal amount.
On December 18, the US-based Mazars Accounting Firm deleted the audit report on the Binance Reserve Proof from its official website and stated that it would no longer provide services to encrypted exchanges; on December 20, lawyers for a group of French encrypted investors stated that they had Filed criminal charges against Binance for misleading the public and promoting its services before the law permitted them to be legal.
The most lethal is yet to come. The Paper cited media reports that U.S. prosecutors are considering ending the money laundering investigation of Binance by “initiating criminal charges against individual executives, including founder Changpeng Zhao.”
(Changpeng Zhao, photo source/Vision China)
In the face of centralized “cannonfire”, Changpeng Zhao and Binance tried to demonstrate the security of their assets to the public through Merkle tree verification, promotion of asset transparency, and frequent interaction with users. But from the public’s point of view, the key to Binance’s trust in users is to publish transparent financial data.
After thousands of calls, Binance finally spoke. On December 23, U.S. time, in response to market rumors and news such as “exchanges suspend USDC withdrawals”, “Mazars accounting firm and the Big Four accounting firms refuse to serve Binance”, “Binance refuses to disclose financial information” and other market rumors and news, Binance made a statement respond.
Binance stated that during the suspension of USDC withdrawals, users can still withdraw other stablecoins normally, and there is no liquidity problem. Regarding the business model, Binance said that it mainly makes money by charging transaction fees. Regarding the news that “accounting firms refuse to serve Binance”, Binance responded that Mazars accounting firm is not only targeting Binance, but for traditional accounting firms, it is important to verify the overall reserve assets on the chain of encrypted exchanges. very difficult.
As for the rumor that “Binance refused to disclose financial information”, Binance responded that Binance is a private company, not a listed company, and has no external financing needs for financial health, and does not need to disclose detailed financial status. In response to the media report that “the U.S. Department of Justice launched an investigation into Binance”, Binance stated that this is not the first time that the media has made such reports, and it is currently unable to respond to any controversial judicial discussions, and emphasized that its own exchange “is in Worldwide has the most compliance permits/licenses and invests the most in fighting crime”.
Although Binance responded one by one, it is clear that outside doubts will not dissipate until its financial data is transparent. In fact, the living space of virtual currency is getting narrower and narrower.
Space and time are running out
In the past few months, Huang Lichong, co-founder of Xiezong Strategy Management Group, who is familiar with American laws and stocks, has been helping a local fund company in the United States to promote the issuance of virtual currency. The fund company plans to issue new cryptocurrencies such as stablecoins. They hope that the project will be launched by June 2023, because the US-led global regulation of digital currencies will be implemented in June. The fund company originally had a clear plan, but the bankruptcy of FTX changed everything.
Before FTX went bankrupt, the situation was also grim. For example, under the impetus of the US executive order, the SEC, together with the Ministry of Finance and other departments, accelerated the legislation on cryptocurrencies. For example, in October, the European Union passed the landmark “Encrypted Assets Market Supervision Act,” ” In some places, as long as it follows the Howey test of the U.S. Supreme Court (a test of whether a cryptocurrency should be classified as a security), it will not be defined as a security token (let holders have appreciation expectations, rely on others to build ecology, operate Centralization, the income is used to invest in ecology or projects, and investors’ returns rely on others to generate profits, all of which can be defined as security tokens).” Huang Lichong told the market.
Although according to the above standards, the SEC believes that the logic that any digital currency is a security token is correct, but in fact the SEC has not strictly enforced the law. The bankruptcy of FTX has made the US Securities Regulatory Commission’s attitude tough and serious. Now they believe that: including functional tokens (generally referring to existing transaction history, using distributed ledgers or blockchain, unmodifiable, decentralized, Virtual currencies, including those that can be transferred without an intermediary), are unregistered securities and violate securities laws.
That is to say, under the long-arm jurisdiction of the U.S. regulators, “as long as it is identified as a ‘digital token for an investment contract’, any U.S. citizen, U.S. tax citizen, U.S. company, or unregistered in the U.S. and Hawaii, Marketing and promotion in Puerto Rico and the U.S. Virgin Islands, or violating local laws and regulations of the United States, may be subject to cross-border law enforcement,” Huang Lichong explained.
This also means that the cryptocurrency project that Huang Lichong participated in designing needs to be adjusted according to the legal structure designed before the FTX bankruptcy order. The old legal advice can no longer keep up with the expected regulatory changes. “Even if the project is finally issued successfully, it will face high legal risks. Basically, there is no effective way to avoid it. It is not possible to solve the problem by hiding in an offshore island.” .In the long run, it will end up being a piece of cake too.”
(Photo source/Visual China)
In fact, the cost of virtual currency in terms of technical maintenance, ecological chain, supervision, and compliance is much higher than that of traditional securities. They all hope to avoid compliance costs in order to maintain balance of payments, but even so, it is still difficult for digital currency exchanges to make a profit. Coinbase, which is listed in the United States, is considered to be the most mature digital exchange in terms of currency compliance, but it is also in a state of loss and shrinking revenue.
Coinbase’s financial report shows that it will lose $545 million in the third fiscal quarter of 2022, which is the third quarterly loss. Coinbase has lost $1.2 billion in the past 12 months due to rising compliance costs, listing fees, and declining transactions. “In the era of virtual currency speculation around the world, exchanges rely on high issuance and listing fees. Except for a few small profits, the rest are still losing money. They need to rely on market manipulation to subsidize costs. When regulation comes, losses will expand and ecological operations will not make ends meet.” Huang Lichong analyzed and pointed out. This is one of the reasons why most virtual currencies have come to a dead end, and FTX is the most representative example.
This is not the crime of blockchain technology, but similar to the 2002 dot-com bubble crisis. Huang Lichong explained that the reduction in cost and the wide range of applications are still unable to support the operating ecology of exchanges and virtual currencies. When financial bleeding continues, ecological operators will take risks and form a Ponzi scheme. For example, artificially manipulating prices, creating false markets, and selling them at high prices to subsidize operations, including pledging high prices to third parties and then withdrawing loans. “If you use this method to maintain the ecology, you can only run away. This behavior is already Financial crime, it’s just that it wasn’t dealt with before.”
Huang Lichong also told the market circles that although local regulators in non-common law regions (common law generally refers to the common law system) can also take action, U.S. regulators can also block customer accounts of banks that provide US dollar services in other countries. The digital currencies with return expectations are all “unregistered securities issuance”, and the “air coins” with no real value are likely to violate the securities law. It’s all about law enforcement.”
In fact, a siege operation is also being staged around the world. According to the 21st Century Business Herald, Jon Cunliffe, deputy governor of the Bank of England, said that cryptocurrencies and services should be more strictly regulated. South Korean regulators stressed that a comprehensive regulatory framework is expected to be completed next year. This means that many cryptocurrencies, globally, will take a hit.
Once this step has been reached, investors will be trampled if they want to flee. “It may be the final destination.” Huang Lichong judged. For this reality, Song Feng was in great pain. On the one hand, he also understands that speculating in coins is a “gamble”; on the other hand, he continues to indulge because of “wanting to get back his capital”. He didn’t know why he was like this.
Although gambling and game design use psychological and physiological knowledge to make people secrete dopamine, they are essentially a game of confidence. When people no longer feel confident, it’s game over.
(Song Feng, Zhang Qi, and Hu Yao are pseudonyms in the text)
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