greed, overuse of leverage, a dogmatic belief in \u201cnumbers go up\u201d<\/a> \u2014 are not new.<\/p>\nThey\u2019ve been present when just about every other asset bubble popped. In cryptocurrencies, though, and particularly at this very moment, they are landing in a new and still largely unregulated industry all at once, with boundaries blurred and failsafes weakened by a conviction that everyone involved could get rich together.<\/p>\n
Cryptocurrencies have gone through several major drops in its history \u2014 known by its cognoscenti as \u201ccrypto winters\u201d and to the rest of finance as a bear market \u2014 but the market\u2019s expansion and increasing adoption from Main Street to Wall Street means more is at stake now.<\/p>\n
Kim Kardashian hawking a cryptocurrency that tanked shortly afterwards is one thing, but Fidelity\u2019s plans to offer Bitcoin in 401(k)s could affect an entire generation.<\/p>\n
Its growth has also made this year\u2019s turbulence that much stronger: after the sector\u2019s last two-year hibernation ended in 2020, the sector spiked to around $3 trillion in total assets last November, before plunging to less than $1tn.<\/p>\n
\u201cIt\u2019s got a different flavour this time,\u201d says Jason Urban, co-head of trading at Galaxy Digital Holdings.<\/p>\n
Galaxy, the $2 billion digital-asset brokerage founded by billionaire Mike Novogratz, benefited immensely from cryptocurrencies\u2019 rise \u2014 but was also one of the industry\u2019s most prominent investors in the Terra experiment.<\/p>\n
If Terra was this crypto winter\u2019s Bear Stearns, many fear that the Lehman Brothers moment is just around the corner.<\/p>\n
Just as the inability of lenders to meet margin calls was an early warning in the 2008 financial crisis, cryptocurrencies this month had their equivalent: Celsius Network, Babel Finance and Three Arrows Capital all revealed major troubles as digital asset prices plunged, triggering a liquidity crunch that stems from the industry\u2019s interdependence.<\/p>\n
\u201cIn 2022, the downturn looks far more like a traditional financial deleveraging,\u201d says Lex Sokolin, global FinTech co-head at ConsenSys.<\/p>\n
\u201cAll the words that people use, like \u2018a run on the bank\u2019 or \u2018insolvent\u2019, are the same that you would apply to a functioning but overheated traditional financial sector. Consumer confidence and perception of bad actors definitely played a role in both cases, but what is happening now is about money moving out of deployed, functional systems due to over-leverage and poor risk-taking.\u201d<\/p>\n\n\n\n
\nChangpeng Zhao, founder and chief executive of Binance, is the world\u2019s richest crypto billionaire with a net worth of $65 billion. Bloomberg <\/span><\/p>\n<\/section>\n<\/div>\n<\/section>\n<\/section>\nIn bullish periods, leverage is a way for investors to make bigger profits with less cash, but when the market tanks, those positions quickly unwind. And because it\u2019s cryptocurrencies, such bets usually involve more than one kind of asset \u2014 making contagion across the market more likely to occur.<\/p>\n
Cryptocurrency loans \u2014 particularly those in decentralised-finance apps that dispense with intermediaries like banks \u2014 often require borrowers to put up more collateral than the loan is worth, given the risk of accepting such assets.<\/p>\n
But when market prices sour, loans that were once over-collateralised become suddenly at risk of liquidation \u2014 a process that often happens automatically in DeFi and has been exacerbated by the rise of traders and bots hunting for ways to make a quick buck.<\/p>\n
The rise of cryptocurrency prices last year was likely to have been fuelled by leveraged speculation, perhaps more so than in the previous crypto winter, says John Griffin, a finance professor at University of Texas at Austin.<\/p>\n
An environment of rock-bottom rates and ultra-accommodative monetary policy helped set the stage.<\/p>\n
\u201cWith interest rates rising, as well as lack of trust in leveraged platforms, this deleveraging cycle has the effect of unwinding these prices much more rapidly than they rose,\u201d he says.<\/p>\n
While traditional markets often rely on a slow and steady amount of leverage to grow, that effect is seemingly amplified in cryptocurrencies because of how speculation concentrates in the sector.<\/p>\n<\/p>\n
Regulators are circling the sector, watching for signs of instability that might threaten their infant plans to rein in cryptocurrencies. Even rules that were announced in spring have had to change after Terra\u2019s collapse, with some jurisdictions preparing rules to ease the systemic impact of failed stablecoin systems.<\/p>\n
Any further cryptocurrency failures could ultimately pave the way for tougher rules, making a market rebound soon less likely.<\/p>\n
On Tuesday, Bitcoin slumped along with much of the rest of the cryptocurrency market, declining about 2.02 per cent to $20,768.39 as of 9.45am in the UAE. The world\u2019s largest token is down about 35 per cent this month alone.<\/p>\n
\u201cThere may be some bear rallies, but I don\u2019t see a catalyst to reverse the cycle anytime soon,\u201d Mr Griffin says.<\/p>\n
\u201cWhen the Nasdaq bubble burst, our research found that the smart investors got out first and sold as prices went down, whereas individuals bought all the way down and continually lost money. I hope history doesn\u2019t repeat itself, but it often does.\u201d<\/p>\n
With capital of around $1tn, the cryptocurrency market is only marginally above the approximately $830bn mark it reached in early 2018 before the last winter set in, spurring a downdraft that sent the market to as low as about $100bn at its depths, according to CoinMarketCap data.<\/p>\n
\n
With interest rates rising as well as lack of trust in leveraged platforms, this deleveraging cycle has the effect of unwinding these prices much more rapidly than they rose<\/p>\n
John Griffin, finance professor at University of Texas at Austin<\/p>\n<\/div>\n
Then, digital assets were the playground of dedicated retail investors and a select number of cryptocurrency-focused funds.<\/p>\n
This time around, the sector has built a broader appeal to both \u201cmom and pop\u201d investors and hedge fund titans alike, causing regulators to frequently intervene with statements warning consumers of the risk of trading such assets.<\/p>\n
As one infamous (now banned) advert on London\u2019s transport network read in late 2020: \u201cIf you\u2019re seeing Bitcoin on a bus, it\u2019s time to buy.\u201d<\/p>\n
Unlike cryptocurrency\u2019s early believers, mass adoption means most investors now view them as just another asset class and treat them in much the same way as the rest of their portfolio. That makes cryptocurrency prices more correlated to everything else, like technology stocks.<\/p>\n
Unfortunately, that doesn\u2019t make most cryptocurrency bets any less complex to understand.<\/p>\n
Although most of the financial world is taking a beating in 2022, the recent cryptocurrency market crash was amplified by its experimental and speculative nature, wiping out small-town traders who stuck their life savings in untested projects like Terra with little recourse.<\/p>\n
And the sector\u2019s hype machine is blaring louder than ever, utilising tools like Twitter and Reddit that have been strengthened by new generations of cryptocurrency acolytes. Exchanges have also done their part, with FTX, Binance and Crypto.com all spending on marketing and high-profile sponsorships.<\/p>\n
That extreme level of risk demonstrates exactly why cryptocurrencies are not for everyone, says Sina Meier, managing director at crypto fund manager 21Shares.<\/p>\n\n
\u201cSome people should definitely stay away,\u201d she said during a panel discussion this month at a Future of Finance conference in Zurich. Many retail investors \u201care lost, they just follow what they read in the newspapers. That\u2019s a mistake.\u201d<\/p>\n
Before the last crypto winter, many start-ups had used initial coin offerings, or ICOs, to raise capital by issuing their own tokens to investors.<\/p>\n
They suffered when coin prices came crashing down because they had kept most of their value in that same pool of assets, plus Ether, and it worsened when regulators started to crack down on ICOs as akin to offering unregistered securities to investors.<\/p>\n
This time around, the funding landscape is vastly different.<\/p>\n
Many start-ups born out of the last freeze, such as nonfungible-token and gaming platform Dapper Labs, have sought out venture capital funding as a more traditional route to raising cash.<\/p>\n
Behemoths like Andreessen Horowitz and Sequoia Capital collectively plugged almost $43bn into the sector since late 2020 when the last bull market began, according to data from PitchBook.<\/p>\n
This means that instead of relying on cryptocurrency wealth, some of its biggest players actually have vast reserves of hard currency stored to get them through the blizzard as they work on growing new blockchains or building decentralised media platforms.<\/p>\n
On the other hand, the recent end to the bull market means they\u2019ve been spending that cash much faster than it\u2019s been coming in.<\/p>\n
This month Coinbase Global, Crypto.com, Gemini Trust and BlockFi are among the cryptocurrency companies to have announced swathes of layoffs, citing the general macroeconomic downturn for derailing their once ever-expanding plans.<\/p>\n
Coinbase, which had hired about 1,200 people this year alone, is now laying off about as many employees in an 18 per cent cut to its workforce.<\/p>\n
But thanks to the heights cryptocurrencies reached in the last boom, there\u2019s still a great amount of earmarked funding sloshing around Silicon Valley\u2019s coffers compared with previous seasons.<\/p>\n
Andreessen alum Katie Haun debuted her $1.5bn cryptocurrency fund in March, while Coinbase co-founder Matt Huang launched a $2.5bn vehicle in November. And while VCs might be more careful now about where they put their cash, it\u2019s still got to be spent somewhere.<\/p>\n
\u201cNone of these companies become mature for many years,\u201d says Alston Zecha, partner at Eight Roads. \u201cWe\u2019ve been spoiled over the last couple of years of seeing businesses get these amazing up-rounds after six or nine months. As the tide goes out, there\u2019s going to be a lot of people who are found to be naked.\u201d<\/p>\n
Updated: June 30, 2022, 5:00 AM<\/p>\n<\/div>\n
<\/p>\n
!function(f,b,e,v,n,t,s)
\n {if(f.fbq)return;n=f.fbq=function(){n.callMethod?
\n n.callMethod.apply(n,arguments):n.queue.push(arguments)};
\n if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version=’2.0′;
\n n.queue=[];t=b.createElement(e);t.async=!0;
\n t.src=v;s=b.getElementsByTagName(e)[0];
\n s.parentNode.insertBefore(t,s)}(window, document,’script’,
\n ‘https:\/\/connect.facebook.net\/en_US\/fbevents.js’);
\n fbq(‘init’, ‘797427810752825’);
\n fbq(‘track’, ‘PageView’);<\/p>\n
\n
Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"For a generation of alienated techies, the all-for-one ethos in cryptocurrencies was its biggest draw. Now, panic is spreading across this universe \u2014 and that same ethos is posing what may be the biggest threat yet to its survival. What started this year in cryptocurrency markets as a \u201crisk-off\u201d bout of selling fuelled by a […]<\/p>\n","protected":false},"author":1,"featured_media":21419,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false}}},"categories":[39],"tags":[7524,52,4577,9394,1874,2065],"class_list":["post-21418","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ico","tag-brothers","tag-cryptocurrency","tag-facing","tag-lehman","tag-moment","tag-sector"],"jetpack_publicize_connections":[],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"http:\/\/egrowonline.com\/wp-content\/uploads\/2022\/06\/YI47U6DIRVETLANAGKSPVR5F3E.jpg","_links":{"self":[{"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/posts\/21418","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=21418"}],"version-history":[{"count":1,"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/posts\/21418\/revisions"}],"predecessor-version":[{"id":21420,"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/posts\/21418\/revisions\/21420"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/media\/21419"}],"wp:attachment":[{"href":"http:\/\/egrowonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=21418"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=21418"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=21418"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}