The disaster we are all still watching play out with Sam Bankman-Fried and his cryptocurrency exchange FTX could actually be suitable for the longer-term viability of Bitcoin, Ethereum, and other cryptocurrencies.
I know it sounds crazy, and if you were an investor who had money in FTX, you are certainly not happy with this, but long-term, the size of the losses incurred by investors in FTX could benefit the crypto market in years to come.
Since massive losses were incurred, regulators are taking note and investigating what happened.
Sam Bankman-Freid has been arrested and charged with many crimes, including conspiracy, fraud, money laundering, and campaign finance violations.
However, while those charges against him don't have much to do with cryptocurrencies, it is likely that the investigation into how these crimes were committed and, more importantly, how he and his team at FTX were able to evade detection sooner will lead to some changes in the crypto world.
The change I'm referring to, which would boost cryptocurrencies and in some ways turn a bad situation into a good one, would be government oversight and regulation of the cryptocurrency markets.
Since Bitcoin, Ethereum, and all the cryptocurrencies came into existence, we have had no legitimate regulation or oversight of the industry.
While some believe that is a good thing, a lot of investors have been hesitant up to this point to jump into the world of crypto because there is limited to zero oversight. And I am not just talking about small retail investors who have sat on the sidelines, but big-time money managers who are not permitted to invest client funds in such investments due to their largely unregulated markets.
We are talking billions of dollars that could be invested in Bitcoin, Ethereum, and the other cryptocurrencies, and thus increase demand for these investments and ultimately push their prices higher.
It's not just money managers, though. Regulation and more oversight could also open the door even more for cryptocurrency Exchange Traded Funds.
We currently have ETF products that track a few cryptocurrencies but nothing that holds a large basket of them. Until this point, the SEC has been very restrictive of new crypto ETFs and set stringent guidelines about what they can hold and how they can invest in cryptocurrencies.
So why do I think the FTX collapse could be good for Bitcoin and crypto?
Typically it takes an event such as we see play out for outsiders to take note and get involved in fixing a problem. Investors losing billions is usually the type of problem needed.
Think of the dot.com bubble bursting or the more recent housing crisis. Regulators didn't walk in after the fact and say, "we are no longer going to allow technology start-ups to be traded on the public markets." Nor did they say, "We are no longer going to allow homeowners to have mortgages on homes or allow bankers to buy and sell those mortgages."
This fact was recently noted by Sen. Patrick J. Toomey (Pa.), the top Republican on the Senate Banking Committee and a leading crypto booster in Congress. He compared the FTX meltdown to the 2008 subprime mortgage crisis.
"Did we decide to ban mortgages?" asked Toomey. "Of course not," he said. But, the guidelines for opening a mortgage were tightened, and regulators changed rules about what the banks who owned mortgages were required to do in an attempt to protect the banks themselves and the economy as a whole.
I don't think the FTX collapse will cause regulators to ban crypto, the time and place for that are long gone.
But this could, at the very least, get people talking again about how it should be regulated and what safeguards should be implemented.
Perhaps if that is done, we can avoid this situation occurring again but hopefully make the crypto markets a little less like the wild wild west and more like a civilized society.
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.