The past six months have been nothing short of a financial soap opera for the cryptocurrency market, with more drama appearing to be unfolding every other day. So far, a growing number of major crypto entities have fallen like dominoes since early May, and the trend is likely to continue in the near term.
The contagion, for lack of a better word, was fueled by the collapse of the Terra ecosystem in May, with the project’s associated digital currencies becoming worthless almost overnight. After the event, crypto lending platform Celsius was facing bankruptcy. Then Zipmex, a Singapore-based cryptocurrency exchange, froze all customer withdrawals, a move mirrored by crypto-financial services firm Babel Finance late last month.
It’s worth noting that nearly $2 trillion has been wiped out of the digital asset industry since December 2021. And while markets across the board – including stocks and commodities – have been hit hard by the prevailing macroeconomic environment, the aforementioned series of collapses has certainly played a part in the ongoing crypto drain. So far, Ben Caselin, head of research and strategy for crypto exchange AAX, told TBEN:
“Contagion has played a major role in the recent downturn, but we cannot ignore broader market conditions and the change in fiscal policy as key factors influencing price. The situation regarding Celsius, Three Arrows Capital but also Terra is an expression of an over-leveraged system that cannot withstand severe market stress. In any case, this should be a wake-up call for the industry.”
He added that increasing mass adoption of digital currencies in the future should be done by expanding the scope of crypto beyond the prevailing “sound money story.” Caselin stressed that the market as a whole must now consider and implement financial practices that are sound and sustainable in the long term.
What do the recent bankruptcies mean for the sector?
Felix Xu, CEO of the decentralized financial (DeFi) project Bella Protocol and co-founder of ZX Squared Capital, told TBEN that the past month has been something of a “Lehman moment” for the crypto market. For the first time in history, this sector has witnessed the bankruptcy of major asset managers such as Celsius, Voyager and Babel Finance within a few months.
According to his personal research records, while ailing projects like Voyager and Genesis collapsed due to having the most exposure to Three Arrows Capital (3AC), the collapse of 3AC, Celsius and Babel Finance stemmed from rogue management practices related to the assets of their users. Xu added:
“I believe the first wave of forced liquidation and panic selling is now over. As asset managers and funds file for bankruptcy, it will take a long time for their crypto collateral to be liquidated. On the other hand, DeFi lending platforms such as MakerDAO, Aave and Compound Finance performed well during this downturn as they have too much collateral with strict liquidation rules written into their smart contracts.
Going forward, he believes the crypto market will likely move in correlation with other asset classes, including equities, with the sector potentially taking some time to rebuild lost investor confidence. That said, according to Xu, what happened to the crypto market last month is nothing new when it comes to the traditional financial space. “We saw it during the 2008 financial crisis and the 1997 Asian financial crisis,” he emphasized.
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Hatu Sheikh, co-founder of DAO Maker – a provider of growth technologies for emerging and growing crypto startups – told TBEN that the aftermath of this contagion has been strongly negative, but not for the reason many people would imagine:
“A major loss here is that many of the centralized funding platforms that went out of business as a result of the contagion were active ramps into the industry. Their unsustainable and often deceptive way of attracting new industry entrants led millions of people to get deep into non-replaceable tokens and DeFi.”
According to Sheikh, many venture capital firms operating within its space have already raised billions and are thus able to continue injecting money into many emerging startups, although DeFi’s onboarding may stall in the near term or at least slow down. can go. “We will have a new list of companies that will replace the lost role as a stepping stone to the industry,” he said.
Undoubtedly damaged to the reputation of the market
Misha Lederman, communications director for decentralized peer-to-peer and self-custody crypto wallet Klever, told TBEN that the recent crash has certainly damaged the industry’s reputation, but believes the aforementioned insolvencies have helped purge the industry. of bad players, add:
“This presents a huge opportunity for blockchain platforms and crypto communities with a responsibility-based approach to innovation, protecting user funds at all costs. As an industry, we need to be better than the fiat debt system we want to replace.”
A similar view is shared by Shyla Bashyr, public relations and communications leader for UpLift DAO – a permissionless and decentralized platform for token sales and swaps – who told TBEN that the industry has been hit hard and is currently shrouded in more negativity than ever before.
However, she believes that such scenarios are sometimes necessary, as they open up new opportunities to build transparent products that provide additional insurance, hedging and security for people’s investments.
Sheikh pointed out that while there is rampant criticism that DeFi apps have lost billions, it’s worth noting that the losses accumulated by CeFi backers are significantly higher:
“The fact remains that DeFi’s remarkable blue chips have remained largely unscathed, but the losses in CeFi are from industry leaders. However, as crypto CeFi is a stepping stone in people’s journey to DeFi, industry adoption will be seriously damaged in the near term.”
He concluded that the “CeFi contagion” could eventually prove to be a powerful catalyst for the growth of its decentralized counterpart, as well as a validation of crypto’s key use-cases, such as self-sovereign wealth.
The future might not be all bad
When asked about what lies ahead for the crypto market, CoinStats CEO Narek Gevorgyan told TBEN that despite the prevailing conditions, the market is already beginning to show promising signs of recovery, stating that institutional investors are back on the playing field. and exchanges are flowing in. are emerging.
In this regard, banking giant Citigroup recently released a report stating that the market slippage is now in recession, with researchers noting that the “acute deleveraging phase” that had recently come into play has come to an end, especially given that a vast majority of Major brokers and market makers in the industry have come forward and disclosed their exposures.
Not only that, but the study also shows that stablecoin outflows have stopped, while crypto exchange-traded fund outflows have also stabilized.
Gevorgyan believes that the confidence that investors had built up in recent years has somewhat faded due to recent events. Nevertheless, the blockchain community is still better funded than at any point in its short history, and development will most likely continue. He then added:
“The Terra implosion caused a meltdown that involved several CeDeFi platforms. The community has become more aware of the shortcomings of the CeDeFi model. Overall, the series of insolvencies has given the crypto market a chance to start over as DeFi2 and Web3 become increasingly important. Perhaps the Metaverse is central to this new configuration.”
CeFi vs DeFi
Sheikh believes that the best of CeFi has lost more than the worst of DeFi, stressing that Bitcoin (BTC) has remained one of the most liquid assets in the world. According to him, the next wave of retail users will have glaring references to the self-preservation skipping problem, paving the way for more focus on decentralized apps, especially as the market matures.
On the other hand, Bashyr sees many protected projects such as insurance protocols and covered products flourish from now on. In her view, Decentralized Autonomous Organizations (DAOs) will become more prominent and functional, provide real governance and enable users to participate in instrumental decisions by voting on proposals that make a difference.
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Finally, in Xu’s view, the insolvencies have led millions of users to call for regulations such as those for traditional finance within the global crypto economy to increase transparency over user asset investments. Xu added that since DeFi does not have a single point of control while providing full transparency and autonomous rules, it will eventually take over the crypto asset management business.
Therefore, as we move into a future plagued by economic uncertainty, it will be interesting to see how the future of the crypto market develops. This is because more and more people continue to look for ways to preserve their wealth – thanks in large part to the recession fears looming large on the horizon – and therefore view crypto as their way out of the madness.