Crypto Wants to ‘Build’ After FTX. But Build What?

Welcome to Bloomberg Crypto, our twice-weekly look at Bitcoin, blockchain and more. If someone forwarded this to you, sign up here. In today’s edition,  weighs the prospects for crypto’s reconstruction in the wake of FTX’s collapse: 

Crypto’s problematic reconstruction 

“It’s time to build.” That’s a phrase you hear a lot in the cryptosphere at times like these, when a crisis or market slump — or both — saps confidence in digital assets and causes many who flocked to the space to retreat. The idea is, when user demand is low, companies have more time to improve their products for the next round of buyers. The only problem is ... well, what exactly are they building, and how are they paying for it?

Ideally, crypto technicians are building the banking systems of the future, along with some out-of-this-world fan experiences and blockbuster video games, all on the blockchain. But much of what’s actually been built so far by the industry’s biggest companies is trading infrastructure: exchanges, lending protocols and decentralized finance apps that only appeal to crypto cognoscenti. Meanwhile, the things that have been built for the average consumer, like metaverse environments and NFT ticketing, are both poorly used and too technically challenging to get enough bang for your buck.

As for investors — and now more than ever, thanks to the collapse of FTX — they are unlikely to be hungry for crypto. Some of the VC industry’s biggest backers, such as Sequoia Capital and SoftBank Group, have been forced to write down their investments in the bankrupt crypto exchange to near zero. If they didn’t spot the warning signs in FTX’s balance sheet when signing those deals, what’s to say they’re confident they could spot it in newcomer projects? 

Since crypto’s bear market firmly set in earlier this year, venture capital funding for crypto projects across the board has plunged. Of those that did obtain financing in the third quarter, blockchain gaming projects were among the more notable recipients, largely because of their potential to solve for the lack of easily digestible consumer options for crypto — but in the wake of FTX’s demise, even that’s starting to sour in certain ecosystems. 

During this period when the money for “building” hasn’t been forthcoming from Silicon Valley or Wall Street, the industry has responded to the call. This year, crypto companies took it upon themselves to finance their own rescues, ranging from FTX CEO Sam Bankman-Fried’s now-defunct deals with Voyager Digital, to Binance’s bailouts for Axie Infinity creator Sky Mavis and later a (hastily retracted) offer for FTX itself, to name but a few. Others like Coinbase, Gemini and CRYPTO.COM sought to use their funds simply to keep their own companies above water, cutting costs and collectively laying off thousands of staff to survive the crypto winter.

If the industry is to grow back to its original size and then some, the crypto community needs to figure out how it can attract those outside its peripheral vision with usable products and convince external investors it’s worth waiting out the storm. Plus, It must do this even as it fends off regulators and seeks to avoid the centralization and concentration risks that all of the above may create. All while the industry remains under the darkest of clouds. A tall order indeed.

Charting it out

Hearing them out

What we’re reading (and writing) 

• Sam Bankman-Fried’s Magic Money Box Enriched Vast Crypto Network
• Binance’s Billionaire CEO Casts Himself as Crypto’s New Savior
• Why Did We Put So Much Faith in the Crypto Whiz Kid? (New York Times)
• Bankman-Fried Courted Regulators. Now, They’re Shunning Him
• Wait, Wasn’t Bitcoin Supposed to Solve This? (Financial Times)
• Matt Levine’s Money Stuff: Crypto Wants a Central Bank (Bloomberg Opinion)

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— With assistance by Sidhartha Shukla