Why Crypto Failed After Performing Well with Their Promises and Apps

Cryptocurrency, once hailed as the future of finance, experienced a significant downturn after a period of remarkable growth and optimism. This report examines the factors that contributed to the failure of crypto despite its initial promises and applications.

Market Volatility and Economic Factors

The crypto market's inherent volatility played a crucial role in its downfall. In 2022, the crypto market experienced a severe crash, with its total value plummeting from a peak of $3 trillion in 2021 to significantly lower levels (Gura, 2022). This crash was exacerbated by broader economic factors:

• Looming recession fears
• Soaring inflation rates
• Rising interest rates
• Increasing living costs

These economic pressures led to a risk-averse investment climate, causing many investors to sell their crypto holdings and seek safer alternatives (BBC, 2022).

Systemic Issues and Interconnectedness

The crypto industry's failure revealed deep-rooted systemic problems. Lee Reiners, a crypto expert, pointed out that the "crypto winter" exposed numerous firms with poor risk management practices or engaging in fraudulent activities (NPR, 2022). The interconnectedness of crypto firms meant that problems in one area quickly spread throughout the sector, leading to a domino effect of failures.

High-Profile Collapses and Scandals

Several high-profile collapses and scandals severely damaged public trust in cryptocurrencies:

1. Terra and Luna cryptocurrencies collapse (May 2022)
2. Voyager trading platform failure
3. Three Arrows Capital crypto hedge fund bankruptcy
4. BlockFi and Celsius platform collapses
5. FTX exchange scandal and bankruptcy

The FTX scandal, in particular, dealt a significant blow to the industry's credibility. Allegations of fraud and misuse of customer funds by FTX founder Sam Bankman-Fried highlighted the lack of oversight and regulation in the crypto space (Gura, 2022).

Regulatory Concerns and Lack of Protection

The unregulated nature of cryptocurrencies became a major liability. Unlike traditional financial instruments, crypto investments are not protected by financial authorities. This lack of regulation meant that when crypto values plummeted or users lost access to their digital wallets, there was no recourse for recovering their losses (BBC, 2022).

Overextension and Poor Risk Management

Many crypto firms were found to be overextended and engaging in risky practices. The interconnected nature of these firms meant that when one faced problems, it quickly spread to others, creating a systemic crisis within the crypto ecosystem (NPR, 2022).

Public Perception and Loss of Confidence

The series of failures and scandals led to a significant shift in public perception. People who were not deeply invested in crypto began to view it as a potential scam, leading to a loss of confidence in the entire concept. This perception problem posed an existential threat to crypto, as its success relies on continual adoption and investment (NPR, 2022).

Technological and Practical Limitations

Despite promises of revolutionary applications, many cryptocurrencies and blockchain projects failed to deliver practical, user-friendly solutions that could compete with traditional financial systems. The technology's complexity and the steep learning curve for average users hindered widespread adoption.

Market Saturation and Lack of Differentiation

The crypto space became oversaturated with thousands of different coins and tokens, many offering similar features. This abundance made it difficult for investors to distinguish between legitimate projects and speculative or fraudulent schemes, further eroding trust in the sector.

Conclusion

The failure of crypto after its initial success can be attributed to a perfect storm of factors, including market volatility, economic pressures, systemic issues within the industry, high-profile scandals, lack of regulation, and a shift in public perception. While some true believers expect Bitcoin and other cryptocurrencies to bounce back eventually, the industry faces significant challenges in rebuilding trust and demonstrating real-world utility.

For crypto to regain its former promise, it will need to address these fundamental issues, particularly in areas of regulation, risk management, and practical applications. Until then, the crypto industry's future remains uncertain, with its grand promises unfulfilled and its apps struggling to find mainstream acceptance.

References:

BBC. (2022). Recession looms, inflation is soaring, interest rates are rising and living costs are biting.

Gura, D. (2022). 2022 was the year crypto came crashing down to Earth. NPR.

NPR. (2022). Why cryptocurrencies have gone from the next hot thing to a full-on meltdown.