Crypto's wild ride: From boundless prosperity to the brink of collapse

Crypto proliferation

According to Statista, citing Investing.com, as of December 2024, there were roughly 10,300 cryptocurrencies, not all of which hold value. Thousands are inactive. The same report suggests that there are 600 million cryptocurrency users worldwide and more than 20,000 companies that accept cryptocurrency as a means of payment.

Bitcoin is still the dominant player, commanding around 58% of the total market value. Other notable cryptocurrencies include Ethereum, Tether, Binance Coin, Solana, USD Coin, XRP, Dogecoin, Tron, Toncoin, and Cardano. Among these are so-called stablecoins, such as Tether and USD Coin, designed to maintain a stable value relative to a specific asset or assets. 

Unlike traditional cryptocurrencies like Bitcoin or Ethereum, which can experience significant price fluctuations, stablecoins aim to provide a steady store of value and a medium of exchange. They achieve this through asset backing (such as fiat currencies, cryptocurrency reserves, or gold), algorithmic controls, or a combination.

The Financial Times highlights that "approximately $200bn worth of stablecoins pegged to the US dollar play an essential role in expanding the dollar's reach as a global reserve currency". It adds that "stablecoin issuers are already among the 20 largest holders of Treasury securities in the world".

Acquiring cryptocurrency means opening an account on a digital trading platform, enabling the purchase of one currency, and trading it for another. Traders can convert cryptocurrency into cash or fiat currency. This explains the record-breaking and highly controversial collapse of the FTX cryptocurrency platform in November 2022, the effects of which still linger today. More on that later. 

Without the middleman

Cryptocurrencies are now regarded as a decentralised funding tool, forming part of what is known as the Decentralised Finance (DeFi) system, which operates without intermediary financial institutions. They fall under the umbrella of 'financial inclusion,' as seen when organisations under international sanctions use crypto to bypass restrictions.

The decentralised nature of cryptocurrencies in both finance and trade helps explain their enduring popularity. They attract traders in part because they require minimal oversight or regulation. This is because they rely on blockchain technology, which is both tamper-proof and transparent, offering investors security and trust.

Cryptocurrencies are a new asset class, attracting investors with their rapid rise in value despite the volatility that comes with it, yet they are still a nascent tool, some way off rivalling traditional financial instruments by volumes under management. Crypto funds manage $116bn in assets, compared to $132tn in global financial assets under management, as reported by the consultancy McKinsey.

Venture capital investments in crypto companies were estimated at $2.4bn in the first quarter of 2024, according to PitchBook, and reached $8bn by the end of the third quarter, as reported by Galaxy Digital. Yet this is still much lower than the $10bn recorded in the first quarter of 2022.

A cautious embrace

After nearly a decade of resistance, the SEC finally approved the launch of spot Bitcoin exchange-traded funds (ETFs) in early 2024. These ETFs, managed by major firms like BlackRock (which recently attracted investments of $60bn) and Fidelity, were followed by the launch of Ethereum ETFs, the second-largest cryptocurrency after Bitcoin. This marks a shift in the SEC's stance.

The agency once saw cryptocurrencies as susceptible to manipulation and fraud. Former SEC chairman Gensler said: "While we approved the listing and trading of certain spot Bitcoin ETP (exchange-traded products) shares, we did not approve or endorse Bitcoin." He urged investors to "remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto."

Despite these kind of warnings about the risks of an unregulated and country-law-free market, by 2021, the sector had begun attracting an increasing number of traditional financial investors.

Nassim Taleb, a Lebanese American analyst and author who focuses on investing caused waves when he published his book The Black Swan in 2007. In it, he declared that cryptocurrency was worthless, likening it to a colossal structure built by a group of unruly children. He described holders of cryptocurrency as naïve and lacking in financial awareness. Many took heed.

He was not alone. Warren Buffett, aka 'the Sage of Omaha' known for his prophetic investing, predicted in 2018 that the end of cryptocurrencies would be catastrophic. He famously declined to buy all the Bitcoin in the world even if offered to him for just $25, arguing that—unlike traditional investments—cryptocurrencies lack intrinsic value. They remain speculative assets, driven solely by buying and selling. 

A volatile trajectory

Unlike traditional bank deposits, cryptocurrencies are digital assets that can be traded without the involvement of formal financial authorities or central banks. This leaves them outside the purview of rules and regulations that protect investors. 

Unlike the risks associated with bank failures, where the US government intervenes to support and stabilise the system with necessary funds, cryptocurrencies enjoy no such backing. This amplifies the impact of their volatility and increases the likelihood of exchange collapses with every investor's confidence shock. 

This is what happened in November, when the FTX exchange collapsed, wiping nearly $1tn off the value of the crypto market, which dropped to less than $800bn the following month. Investors rushed to withdraw $6bn in deposits from FTX amid reports of a liquidity crisis and the discovery of a massive gap between its liabilities and assets. 

Ironically, FTX had earlier bailed out other crypto exchanges, only to drag several companies into bankruptcy with it, including Genesis, Salt, Liquid Global, BlockFi, and many others, after halting all withdrawals. The panic was triggered earlier, in May 2022, when Coinbase announced that its customers' assets—including cryptocurrencies—were not secure in the event of bankruptcy. 

Opacity and panic

Around the same time, Celsius Network stopped withdrawals, trading, exchanges, and transfers between accounts. This followed the sudden collapse of Terra (LUNA), a so-called stablecoin, causing traders significant losses, as it lost about 36% of its value (or $5bn) in a single day. Its implosion set off a chain of bankruptcies among crypto lenders like Celsius, BlockFi, and Voyager Digital.

Investors, including pension funds and major banks, were spooked by the Terra (LUNA) collapse because the entity responsible for withdrawing the funds remained unidentified. The panic of mass fund withdrawal accelerated the collapse, as it did with Lehman Brothers in 2008. 

While FTX initially stepped in to rescue BlockFi and buy Voyager Digital's assets to support the crypto market, FTX itself faced internal financial irregularities tied to its affiliate trading firm, Alameda Research. 

This eventually led to FTX's bankruptcy in November 2022 and the arrest of its founder and boss, Sam Bankman-Fried. Arrested on eight charges of fraud, he was convicted, sentenced to 25 years in prison, and ordered to pay $11bn. It served as a warning.

Crypto in the Arab world

The Middle East and North Africa (MENA) region was ranked as having the seventh-largest cryptocurrency market globally in 2024, according to the Global Crypto Adoption Index 2024. The region recorded an estimated trading volume of $338bn from July 2023 to June 2024, or 7.5% of the global transaction volume. Turkey and Morocco are two of the region's largest traders, with volumes of $137bn and $12.7bn, respectively. 

Morocco banned cryptocurrency trading in 2017, but traders found ways to bypass the restrictions, and after an ineffectual seven-year ban, the Kingdom is preparing to allow it, according to the governor of Morocco's Central Bank, Abdellatif Jouahri.

Most cryptocurrency activity in the MENA region is concentrated at the professional and corporate level, with 93% of transactions exceeding $10,000 per transaction. Dubai has emerged as a crypto hub. The Dubai World Trade Centre is now a dedicated crypto zone where cryptocurrencies and other virtual assets are regulated. 

Regulatory authorities in Abu Dhabi have issued a guide on regulating the virtual asset market within the Abu Dhabi Global Market, enabling companies to establish crypto asset exchanges, act as brokers, and invest in the market. In February 2022, Dubai announced the establishment of the Dubai Virtual Assets Regulatory Authority (VARA).

Arab central banks 

In mid-2024, the Central Bank of the United Arab Emirates introduced new regulations for stablecoins, set to take effect in June 2025. These will allow companies and traders in the UAE to accept stablecoins for trading goods and services, provided they are backed by the UAE currency, the dirham.

The new rules allow the use of foreign payment tokens solely for purchasing specific virtual assets within the UAE. This framework aims to encourage safe collaboration between fintech companies and virtual asset service providers, such as cryptocurrency exchanges, wallet developers, and payment facilitators. Non-stable cryptocurrencies, including Bitcoin and Ether, will remain limited to investment and trading within the UAE.

The Central Bank of Bahrain's approval of Binance—the first official regulatory endorsement of the platform in the Middle East—show the region's progressive stance on cryptocurrencies. Bahrain also hosts Rain, a crypto platform licensed by its central bank and compliant with Sharia (making it the first of its kind in the region). 

Additionally, Bahrain has gained access to European markets through CoinMENA, a platform licensed by both the Central Bank of Bahrain and the European Union. This is also Sharia-compliant. Bahrain is home to over 120 fintech companies, with a strong presence in the payments solutions, blockchain, and cryptocurrency sectors.

**To be continued in Part Two tomorrow: Cryptocurrencies: caught between Trump's hammer and regulatory fire**