Its reputation will likely never recover from this crash
After an epic drawdown in crypto markets, which resulted in Bitcoin losing more than half its value, it looked like the worst of the so-called “Crypto Winter” was over. Terra, the largest algorithmic stablecoin on the market, had collapsed and, for a brief moment, it looked as though the situation might have stabilised.
Then on Monday, disaster struck. Celsius Network, the largest crypto bank, froze customer withdrawals, citing “extreme” market conditions. The company suffered a series of severe setbacks, which included a $22 million loss in one of its exchanges. Now, the company is on the brink of insolvency.
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Contagion from plunging crypto prices has caused injury elsewhere too. Just as Hong Kong-based Finblox — a firm enabling its customers to earn up to 90% per year on crypto assets — announced that it had limited rewards and withdrawals, another prominent crypto “hedge fund,” Three Arrows, took a fatal hit, having to liquidate a $400 million position.
The fate of the crypto industry looks bleak. Its fate now lies in the hands of the Federal Reserve, which, due to soaring inflation and a dire geopolitical situation, hiked interest rates while winding down its gargantuan $9 trillion balance sheet to restore credibility.
The effects of this decision are being felt in traditional markets too. Tech stocks have plunged, with some losing more than their value in less than six months. Tesla, for instance, has seen half its market capitalisation evaporate, causing CEO Elon Musk to believe America is “probably” already “in a recession”. Other asset classes, meanwhile, such as high-yield corporate bonds and MBS (mortgage-backed securities) have also experienced violent sell-offs.
As inflation continues to grow, the Fed has entered full-on “Draghi mode,” doing “whatever it takes” to try and tame it. This means that risk assets will continue to plunge in the near future, spelling disaster for crypto. That’s because the “smart money” class always liquidates its most risky holdings first, and crypto will likely be the premier asset class to liquidate when raising emergency cash.
What was once dubbed ‘the future of finance’ will now be the fall guy in this crash. But it will only be the start of it. For the assets that most people really care about — real estate, stocks, and even bonds this time — will also take a significant hit. Unfortunately, this is a necessary sacrifice taken by central banks to rescue the western world from an inflationary doom loop. And by the time they have regained control, the demise of crypto will be the last thing on our minds.
Greg Barker is an independent journalist and quant, who also writes under the name Concoda. You can find him on Substack and Twitter at @concodanomics.