After rising to tottering levels, cryptocurrencies like bitcoin have lost more than half of their total value in the past few months.
Recent high-profile financial breakdowns at Terraform Labs, Bitcoin and Celsius which together mopped out hundreds of millions in market value, helped stimulate a flight from the digital currency market, driving its value from as high as $2.9 trillion last fall to less than $800 billion for now.
In the dynamic monarchy of finance, the outlook of cryptocurrencies stands as an evidence to the continuous advancement of digital assets. As we stand on the escarpment of a new year, it is wise to reflect on the path crypto is set to form in 2024. As the crypto market continues to grow in the past few years, so does the urbanity of cyber threats. In 2024, we can expect a elevated emphasis on security threats within the crypto space.
A wave of liquidation in the cryptocurrency market have raised concerns about the future of these digital assets in general, and whether the market will make it through this crash or not.
First, considering the spread of the damage: The list of in-deptness in the cryptocurrency market related to bankruptcy problems has grown significantly this year. Till the date, Three Arrows Capital, Voyager Digital, Genesis BlockFi, FTX, and Celsius Network have ceased customer withdrawals after being unable to continue operations.
FTX, that was once considered among the world’s largest crypto exchangers, collapsed after a downfall of assets in its balance sheet. Gossips are circulating that the exchange might have been insignificantly liquidated that led to customers pulling out $650 million in assets by November 7. This led to the disclosure that FTX was striking into customer accounts to fund risky stake by associated trading firm. FTX was a leader in crypto industry and its news of collapse came as a major wonder that has dented the confidence in these digital assets.
Holders of crypto currencies have witnessed huge losses of more than $2 trillion in market capitalisation have already disappeared. Most of the recent issues are concerned about crypto lenders, a corner of the crypto industry that grew over the last few years. Just like the conventional banking system offer a certain interest rate on customers’ savings, crypto holders that deposit their digital assets at digital exchange also earn some amount of money. While savings accounts at banks offered modest returns over the past few years because of significantly low-interest rates, some crypto exchanges and lenders offered much more higher returns … often in the double, and sometimes as high as 20 percent.
The truth of unsustainable returns provided by some crypto lender and exchangers have come to the lead. Just like banks , these exchanges generate their profits from the amount deposited by customers. The slump of these crypto exchanges has also shown how interlinked many of these organisation are. FTX lent millions of dollars to allied trading arm Alameda Research, the money that was used to fund stake.
Who are most exposed to the crypto downfall?
Fortunately conventional banks appear to be relatively safer option than crypto exchanges as altogether, they hold around $9 billion in crypto. Authorities have been warning them for few years now to stay careful about investment in the asset class, and it seems like banks listened. A huge number of retail stakeholders own crypto and have faced some significant losses.
The real institutions which have wagered heavily on the crypto market are venture capital firms. Only a few hundreds of companies from roughly around 10,000 companies are publicly traded. Most of the remaining companies are bankrolled by venture capitalists, who now face significant losses overall.
So, is this the end for crypto industry?
Not Really. Some of the major “crypto currencies, such as bitcoin and ether, look likely to get through this fallback. Bitcoin, however is comparatively down to 75% from its November 2021 high but is still 5 times higher than it was in November 2018. Ether, considering being on number 2 after bitcoin, is up more than 1,000% over the last 4 years of span. But a major fallback is clearly on its way for all the crypto currencies. It clearly seems like many tokens won’t e able to survive this downsizing. Many exchanges and crypto lenders also seem to be in great danger, as their customers try to keep their crypto assets in “digital wallets,” which usually don’t allow them to earn any profit on their crypto, but ensure their assets are fully secure and safe. The only chance for exchanges to survive this downfall is to work hard to convince users that they are not going to setback.
Even with all this downfall and crypto crash rumours, a lot of technology investments and entrepreneurship in crypto industry are still going on. We can see this with previous crypto patterns as well from the last few years. In 2017-2018, there was a significant downfall but it is said that many of today’s top crypto exchanges emerged out of that fallback. So, if we make an analysis from an entrepreneurial perspective, there are a lot of teams that are still building, and that could possibly be an opportunity here when things are a little bit less lunatic, when there’s less concentration and especially energy around theorising and trading—this gives a crypto businessman more time to focus and actually evolve his product carefully without continuously having to face the market.
According to CoinMarketCap, in November the global crypto market capitalization was recorded unto $2.9 trillion but today it is only $870 billion. It was further noticed that Bitcoin, the most oldest and established cryptocurrency, has fallen over 70% in its total value during the past few years.
Harvard Business School Professor Scott Duke Kominers stated that even with all these factor there is still an uncertainty. We were just in much of a financial boom, specially a Crypto boom. Even in that time, the market prices of many cryptocurrencies were fluctuating up and down, as of 30% would swing within a week. He advised a bunch of entrepreneurs to build up in that environment because things were changing so rapidly, and there was so much concentration and pressure from the boom pattern. When all of that is un-rushed, it will wash out a lot of the projects that are not sustainable one way or the other.
What are the possible reasons for this crypto crash?
The prices of cryptocurrencies such as Bitcoin and Ethereum have been significantly dropping. While this set off was changing economic conditions through out the world, the root cause of such crypto crash lies in the evolvement of crypto investments since these currencies lack independent values and constantly require a stream of new investors to sustain their market prices.
When considered as an investment, cryptocurrencies are negatively unique in their own way. In majority of cases, they do not authorise the holder to any cash flows; their price does not seem to increase when other investments are dropping; and they have no value beyond the inclination of another person to pay for them. This could mean that the crypto ecosystem requires a continual in-flow of new investments just to keep the rates at the same level. Hence profits can only come from future investments on significantly higher rates.
Another way to grow the cash flow into the system is through the use of debt. For instance, rather than buying $1,000 worth of crypto, an investor could use that $1,000 as guarantee for a loan of $10,000 and then buy $10,000 worth of crypto (this is usually referred to as margin trading).
Since this results in ten times more demand, margin trading will make rates to rise more speedily in a bull market – a period when an asset’s rate is rising constantly. But exchange lender always keeps the ability to force the borrower to sell their expenditures is it falls below a particular level – this is called as the dreaded ‘margin call’. These forced sales could also mean that rates will fall more quickly on the way down.
Most importantly, the foundational negative-sum nature of cryptos is not changed by all of this debt. More grasp can defer the crash, but it cannot completely prevent it, and it is most likely to make it more unforeseen and excruciating. Few researches shows that debt-fuelled globules tend to be much more financially devastating than other bubbles.
The current downfall in the price of crypto market is simply the result of this debt-fuelled investments, negative-sum system unrolled. As a result of the increased cost of living, growing interest rates and post-epidemic return to normal life, the drift of new money getting into the system has dried up.
These decreasing prices are leading to margin trader dissolutions, financial problems at major crypto firms and stablecoin disintegrates. These events foist losses on other candidates in the crypto market, who might default on debt, creating a vicious fallback spiral. This pattern can only be put to an end by finding a way to create a new incursion of dollars or to boom up prices for the time being with more debt.
The stimulation for the crash was a change in the crypto economic environment, but its root cause is that digital currencies who have no real time value, have always been structurally unstable long-term investments. We can see it clearly from the past experiences and market trends that negative sum assets with no use of value cannot hold their value. The question arises here for policy-makers now is whether this poses a threat to the over all financial stability. Fortunately, the stretch of institutional expenditure in crypto market has been heavily overstated, and systemically important banks are not likely to have much direct exposure to the crash.
The only bad news while investing in crypto is that money lost in such investments is almost certainly gone forever due to its non traditional value. Investments with controlled UK financial services agencies are often sometimes covered by the FSCS, but deposits at traditional banks are always covered by deposit insurance. But since crypto is considered to be largely unregulated, money stored at crypto exchanges or investment platforms is never safely covered. Although the crypto market crash is not likely to cause the next great economic downfall, the losses to independent investors could be severe.
FAQS
The crypto crash can be attributed to various factors, including regulatory concerns, market speculation, and external economic events. Recent crackdowns by governments on cryptocurrency exchanges and uncertainties surrounding digital assets have contributed to the market downturn.
Investing in cryptocurrencies during a crash can be risky, but it also presents opportunities for long-term investors. It’s crucial to conduct thorough research, diversify your investment portfolio, and only invest what you can afford to lose. Additionally, consider consulting with a financial advisor to assess your risk tolerance and investment goals.
To safeguard your investments during a crypto crash, consider implementing risk management strategies such as setting stop-loss orders, diversifying across different cryptocurrencies, and allocating a portion of your portfolio to less volatile assets. Additionally, staying informed about market trends and regulatory developments can help you make informed investment decisions.
Deciding whether to sell your cryptocurrencies during a crash depends on your investment strategy and risk tolerance. While selling during a downturn may minimize losses, it could also result in missing out on potential gains when the market rebounds. Evaluate your investment objectives, assess the market conditions, and consider consulting with a financial advisor before making any decisions.
Despite short-term fluctuations, many experts believe in the long-term potential of cryptocurrencies and blockchain technology. As the adoption of digital assets continues to grow and innovative projects emerge, cryptocurrencies may become an integral part of the global financial ecosystem. However, it’s essential to remain cautious and stay updated on market developments to navigate future challenges effectively.