A $ 2 trillion free fall rattles crypto to the core
(Bloomberg) – ↵
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For a generation of alienated technologists, cryptos, all-for-one ethos, was the biggest draw. Panic is now spreading across this universe – and the same ethos is what may be the biggest threat yet to its survival.
What started this year in crypto markets as a “risk-off” attack of sales driven by a Federal Reserve that was suddenly determined to curb profits, has revealed a network of interconnections that are somewhat similar to the jumble of derivatives that brought the global financial system. in 2008. As Bitcoin fell almost 70% from record highs, a number of altcoins also plunged. The collapse of the Terra ecosystem ̵[ads1]1; a much-hyped experiment in decentralized finance – began with its algorithmic stablecoin losing its link to the US dollar, ending in a $ 40 billion bankroll with tokens virtually worthless. Cryptocurrency that seemed valuable enough to support loans one day was deeply discounted or illiquid, which cast doubt on the fate of a previously invincible hedge fund and several high-profile lenders.
The seeds that created the meltdown – greed, overuse of influence, a dogmatic belief in “numbers go up” – are nothing new. They have been present when virtually every other wealth bubble appeared. But when it comes to crypto, and especially right now, they are landing in a new and still largely unregulated industry, with borders blurred and flawlessly weakened by a belief that everyone involved can get rich together.
Crypto has gone through several major setbacks in its history – known for its “crypto winters” and for the rest of its finances as a bear market – but the market’s expansion and growing adoption from Main Street to Wall Street means more is at stake now. Kim Kardashian acquiring a cryptocurrency that fell shortly afterwards is one thing, but Fidelity’s plans to offer Bitcoin in 401 (k) s could affect an entire generation. The growth has also caused this year’s turbulence to resonate so much more: After crypto’s last two-year hibernation ended in 2020, the sector rose to around $ 3 trillion in total assets in November last year, before plummeting to less than $ 1 trillion. “It’s got a different taste this time,” said Jason Urban, co-head of trading at Galaxy Digital Holdings Ltd., in an interview. Galaxy, the $ 2 billion brokerage house founded by billionaire Mike Novogratz, benefited greatly from cryptocurrency growth – but was also one of the industry’s most prominent investors in the Terra experiment. “Truly, it is to be a victim of your own success.” Read more: Novogratz breaks the silence, Luna calls ‘Big Idea That Failed’
If Terra was this crypto-winter Bear Stearns, many fear that the Lehman Brothers moment is just around the corner. Just as lenders’ inability to meet margin calls was an early warning sign of the financial crisis in 2008, crypto has had its equivalent this month: Celsius Network, Babel Finance and Three Arrows Capital all revealed major problems as digital asset prices plunged, triggering a liquidity crisis which ultimately stems from the industry’s interdependence.
“In 2022, the downturn looks far more like a traditional financial de-leverage,” said Lex Sokolin, global fintech chief at ConsenSys. “All the words people use, like ‘a run on the bank’ or ‘insolvent’, are the same as you would use in a functioning but overheated traditional financial sector. Consumer confidence and perceptions of bad actors definitely played a role in both cases, but what is happening now is that money is being moved out of deployed, functional systems due to over-borrowing and poor risk-taking. “
In bullish periods, influence is a way for investors to make bigger profits with less cash, but when the market falls, these positions quickly relax. And because it is crypto, such bets usually involve more than one type of asset – making infection across the market even more likely.
Cryptocurrencies – especially those in decentralized finance apps that dispense with intermediaries such as banks – often require borrowers to provide more collateral than the loan is worth, given the risk of accepting such assets. But when market prices soar, loans that were once over-mortgaged are suddenly subject to liquidation – a process that often happens automatically in DeFi and has been exacerbated by the emergence of traders and robots looking for ways to make money.
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John Griffin, a professor of finance at the University of Texas at Austin, said that the increase in crypto prices last year was probably driven by speculation, perhaps more than in the previous crypto winter. An environment with bottom interest rates and extremely accommodating monetary policy helped set the stage.
“With rising interest rates as well as a lack of confidence in leveraged platforms, this de-leveraging cycle has the effect of settling these prices much faster than they rose,” he said. Although traditional markets often rely on a slow and steady amount of influence to grow, this effect is apparently amplified in crypto due to how speculation is concentrated in the sector. Regulators are circling the sector looking for signs of instability that could threaten the infant’s plans to rein in crypto. Even rules announced in the spring have had to be changed in the wake of Terra’s collapse, with some jurisdictions drafting rules to ease the systemic impact of failed stablecoin systems. Any further crypto-errors could eventually pave the way for tougher rules, making a decline in the market at any time less likely.
On Monday, Bitcoin coincided with much of the rest of the crypto market, falling around 3.5% to $ 20,650 from 10:30 in New York. The world’s largest token is down around 35% this month alone.
“There may be some bear encounters, but I see no catalyst for reversing the cycle anytime soon,” Griffin said. “When the Nasdaq bubble burst, our research found that smart investors came out first and sold as prices went down, while individuals bought down completely and lost money continuously. I hope history does not repeat itself, but it often does.”
Now back around $ 1 trillion, the crypto market is just marginally above the $ 830 billion mark it reached in early 2018 before last winter set in, prompting a downdraft that sent the market to as low as around $ 100 billion at its depth, according to CoinMarketCap data. Back then, digital assets were the playground for dedicated retail investors and a select number of cryptocurrency-focused funds. This time, the sector has built a broader appeal to both mom and pop investors and hedge fund titans, which has prompted regulators to intervene with statements warning consumers about the risks of trading such assets. As a notorious (now banned) ad on London’s transport network read in late 2020: “If you see Bitcoin on a bus, it’s time to buy.”
Unlike crypto’s early believers, mass adoption means that most investors now view crypto as just another asset class and treat it in much the same way as the rest of their portfolio. This makes cryptocurrencies more correlated with everything else, such as technology stocks.
Unfortunately, this does not make most cryptocurrencies less complex to understand. Although most of the financial world is about to collapse in 2022, the recent crypto-market crash was exacerbated by its experimental and speculative nature, wiping out small-town traders who put their savings into untested projects like Terra with little resort. And the sector’s hype machine is roaring louder than ever, using tools like Twitter and Reddit that have been strengthened by new generations of cryptoacolytes. Stock exchanges have also done their part, with FTX, Binance and Crypto.com all spending on marketing and high-profile sponsorship.
Sina Meier, CEO of crypto fund manager 21Shares AG, said that extreme risk levels show exactly why crypto is not for everyone. “Some people should definitely stay away,” she said during a panel discussion earlier this month at Bloomberg’s Future of Finance conference in Zurich. Many private investors’ are lost, they just follow what they read in the newspapers. That is a mistake. “
Prior to last winter, many startups had used initial coin offerings, or ICOs, to raise capital by issuing their own tokens to investors. They suffered as coin prices plummeted because they had kept most of their value in the same pool of assets, plus Ether, and it got worse as regulators began cracking down on ICOs such as offering unregistered securities to investors.
This time, the financing landscape is very different. Many startups born out of the recent freeze, such as the non-fungible token and gaming platform Dapper Labs, have sought venture capital funding as a more traditional way to raise money. Behemoths such as Andreessen Horowitz and Sequoia Capital have raised nearly $ 43 billion in the sector since the end of 2020, when the last beef market started, according to data from PitchBook. This means that instead of relying on cryptocurrency, some of the major players actually have huge reserves of hard currency stored to get them through the blizzard as they work to grow new blockchains or build decentralized media platforms. On the other hand, the recent end of the beef market means that they have spent the money much faster than they have come in.
This month, Coinbase Global Inc., Crypto.com, Gemini Trust and BlockFi Inc. are among the crypto companies that have announced a number of layoffs, citing the general macroeconomic downturn to derail their previously growing plans. Coinbase, which had employed around 1,200 people this year alone, is now laying off about the same number of employees in an 18% cut in the workforce.
But thanks to the heights crypto reached in the recent boom, there is still a large amount of earmarked funding swirling around Silicon Valley’s coffers compared to previous seasons. Andreessen alum Katie Haun debuted with her $ 1.5 billion crypto fund in March, while Coinbase co-founder Matt Huang launched a $ 2.5 billion vehicle in November. And while VCs may be more careful now about where they put their money, they still need to be used somewhere.
“None of these companies have matured in many years,” said Alston Zecha, a partner in Eight Roads. “We’ve been spoiled over the last couple of years by seeing companies get these amazing upswings after six or nine months. When the tide goes out, there are going to be a lot of people being found naked.”
(Adds the latest Bitcoin trade, prices.)
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