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The logo of at a stand during the Bitcoin Conference 2022 in Miami Beach, Fla., on April 6.MARCO BELLO/Reuters

The best sales pitches are built around stellar stories, and the crypto sector concocted one for the ages: Buy bitcoin or any other digital asset, investors were told, or risk missing out on the future of finance. Maybe even of humankind., a major trading hub, filmed a Super Bowl commercial to caution viewers that “fortune favours the brave,” while Wealthsimple went more meta with its approach, hiring actors to play a primitive community that calls the invention of the wheel a Ponzi scheme. The message: Anyone who doubts crypto will eventually look just as foolish.

That retail investors believed the hype, helping send the amount invested in digital assets to US$3.2-trillion in November, 2021, isn’t all that surprising. They’re unsophisticated buyers.

But it all grew so feverish that major institutional investors started taking the bait, too. In October, the Ontario Teachers’ Pension Plan invested in FTX, another prominent crypto trading hub, and the Caisse de dépot et placement du Québec co-invested in a US$400-million deal that valued Celsius Network, a New Jersey-based cryptocurrency lending platform, at more than US$3-billion. “The way we look at Celsius is that it is the bank of the future,” Alexandre Synnett, executive vice-president and chief technology officer at the Caisse, told The Globe at the time.

Now that bitcoin is dead (again), is it time to buy?

On Monday, Celsius froze all withdrawals and transfers by its 1.7 million customers, citing “extreme market conditions” and the need to stabilize its liquidity. The news sent the crypto sector spiralling and exacerbated a seven-month crash. Bitcoin lost 12 per cent of its value Monday, and it is down 65 per cent from its peak in November, while ether, the second most popular cryptocurrency, dropped 13 per cent Monday and has lost 74 per cent since its record high.

The crypto sector is known for being volatile, so it would be silly to write the whole thing off. But the recent crash has, in charitable terms, broken many of the promises made to investors. More critically, it has exposed the sector’s lies, the worst of which are detailed below.

Promise broken: Investing in crypto is betting on the future

In the early days, the crypto sector’s underlying technology was one of its key selling points. Hardly anyone could define the term “blockchain,” but it was marketed as a powerful technology – and it is.

As the industry exploded, more and more money poured into crypto assets, often called cryptocurrencies. But most of those assets sit atop the underlying technology and are not the infrastructure itself – an important distinction that most people eventually stopped making. That left the crypto sector vulnerable, because as crypto assets soared no one was able to prove why one specific asset or company should be worth more than another. Everyone rode the wave because it became cool to believe crypto was the next internet.

What everyone forgets is that very few saw the internet coming. That’s what made it so lucrative for those who were in early. The crypto phenomenon has been the reverse: The major players have piled in hoping to get rich, and that has forced them to tell stories about why the industry will eventually be so great.

Promise broken: Crypto will never be regulated like stocks or bonds

Even when trillions of dollars were pouring into crypto assets, the sector was not governed by a watchdog. Gary Gensler, the head of the U.S. Securities and Exchange Commission, famously launched a media campaign late last summer to warn investors that the industry is “rife with fraud, scams and abuse,” but even he could not craft guidelines.

The dithering largely stems from a philosophical debate: No one can decide how to define a crypto asset. The industry used to argue that its assets were currencies – hence the term cryptocurrency – because bitcoin, its proponents said, was going to become a global medium of exchange. But more recently the sector has begun to look more like shadow banking, complete with loans and mortgages.

It all grew so complicated that last year the Ontario Securities Commission had to devise a novel approach: Instead of focusing on the underlying asset, the watchdog determined that the relationship between a crypto platform and an investor can be considered a “crypto contract,” and can therefore be regulated as a security.

The current crash makes it pretty clear that crypto assets do look pretty similar to securities. These “currencies” still aren’t being used very often to buy and sell goods and services, even though bitcoin has been around for 13 years. And, during the current market rout, they’re collapsing just like tech stocks, because central banks are hiking interest rates.

The debate over defining crypto assets is still raging, but regulators and authorities aren’t sitting by idly any more. Earlier this month, the U.S. Department of Justice charged a key employee at OpenSea, a leading marketplace for buying and selling digital assets, alleging wire fraud and insider trading. The case looks like a lot like any old securities-related prosecution.

Promise broken: The best time to buy crypto is all the time

No matter how volatile crypto assets have been, the sector’s evangelists have always stressed looking five or 10 years out. “People will sit there and say bitcoin is down 30 per cent, 50 per cent, 60 per cent … but who cares? The reality is you have to look at these assets on what your five-year vision is for this area,” Som Seif, whose company Purpose Investments launched Canada’s first bitcoin ETF, said during an online investor conference in late May.

That message has resonated. Even though bitcoin and ether prices have crashed this year, Canadian crypto exchange-traded funds still had positive sales, with $804-million flowing into crypto assets during the first five months of 2022, according to data from TD Securities Inc.

At the same time, many retail investors have adhered to a mantra: HODL, or “hold on for dear life.” No matter how nasty a crypto crash is, their nearly religious belief is that it’s best to wait it out, because there ought to be a rebound.

Until recently, it was hard to argue with anyone who followed this rule. But there have been two key changes. The first is that the era of ultralow interest rates is over. Second, institutional investors have joined the fray. Unlike retail buyers, who believe in a simple strategy, institutional players treat crypto like they would any other asset, and they are constantly buying and selling.

This unspoken truth was exposed last month when the prices of two crypto assets whose values were tightly interlinked, luna and terraUSD, capitulated. Mike Novogratz, the CEO of crypto trading platform Galaxy Digital Holdings Inc., had been one of luna’s biggest backers. But he didn’t lose it all, because Galaxy had been trading in and out of crypto assets.

In a mea culpa to investors, including retail buyers who lost everything, Mr. Novogratz came clean on what the sector should reasonably expect going forward. “At a high level, it’s important to understand that volatility is likely to continue, and the macro situation is going to remain challenging,” he wrote. “There is no cavalry coming to drive a V-shaped recovery. The Fed can’t ‘save’ the market until inflation falls.”

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