Fear not, bitcoin bulls — the current rout will weed out the solid crypto operators from the weak ones. 3 experts explain how

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  • Cryp­to crash­es are actu­al­ly ben­e­fi­cial for the mar­ket, indus­try experts believe.
  • Specif­i­cal­ly, a crash helps “stress test” new­ly built cryp­to infra­struc­ture, lead­ing to greater efficiency.

The cryp­tocur­ren­cy mar­ket has been on a bumpy ride this year, as intense volatil­i­ty has put pres­sure on some lenders, exchanges and oth­er oper­a­tors, which in turn led to even deep­er loss­es for investors. 

But cryp­to own­ers have rea­son to keep their nerve, accord­ing to three indus­try experts.

It’s large­ly because cryp­to routs and com­pa­ny fail­ures shake out the busi­ness­es and coins that don’t have sol­id under­pin­nings, or real-uses cas­es, as well as the “bad actors”.

“There are hun­dreds of firms that are built on hype and not sub­stance. It will be good for the indus­try to have them go away,” Char­lie Sil­ver, founder of Permission.io told Insider. 

Bear market shakeout 

Bit­coin enjoyed a boom through­out the pan­dem­ic. But it has fall­en about 70% in 2022 from the record of $69,000 last Novem­ber. Ris­ing inter­est rates and high infla­tion, cou­pled with Rus­si­a’s war in Ukraine, have made investors shun risky assets like tech stocks and cryp­to, as con­cern mounts about recession.

The mar­ket has also recent­ly seen two events that have cast doubt on its long-term resilience. In May, major sta­ble­coin Ter­ra lost its peg to the dol­lar. The decou­pling trig­gered a wave of liq­ui­da­tions that rat­tled the broad­er mar­ket and raised ques­tions around the role of sta­ble­coins — thus named as they are backed by real assets and there­fore, less volatile than a tra­di­tion­al cryp­tocur­ren­cy, at least in theory. 

Then, cryp­to lender Cel­sius said “mar­ket con­di­tions” forced it to freeze all trans­ac­tions on its plat­form, which drove a sec­ond bru­tal sell-off that stripped bil­lions in val­ue from the dig­i­tal-asset mar­ket, which fell below $1 tril­lion for the first time in 16 months, as bit­coin fell to an 18-month low.

“Bear mar­kets are healthy because it resets val­u­a­tions to real­i­ty and flush­es out the bad actors. There are many cryp­tos that are true Ponzi schemes, that pay investors only with new investor mon­ey. When the new mon­ey dries up the project falls apart,” Sil­ver added.

Cryp­to crash­es give reg­u­la­tors scope to pro­tect investors and reduce risk, which in turn leads to inno­va­tion and bet­ter prod­ucts and ser­vices, accord­ing to Lucy Gaz­marar­i­an, founder and man­ag­ing part­ner of Token Bay Capital.

“In a bear mar­ket, irra­tional exu­ber­ance and reck­less behav­ior is no longer reward­ed, and entre­pre­neurs can focus on the longer term and build sus­tain­able busi­ness­es which are more robust and bet­ter able to scale once the mar­kets turn again and as user adop­tion con­tin­ues to grow,” Gaz­marar­i­an said. 

Contagion

One big hitch is if a cryp­to lender runs into prob­lems, there’s no lender of last resort, like a cen­tral bank, to step in, Gaz­marar­i­an said. 

“In this sce­nario, when a liq­uid­i­ty crunch hap­pens, cryp­to busi­ness­es that are not pru­dent­ly man­aged have a high­er chance of going bankrupt.”

This was pre­cise­ly what hap­pened dur­ing the sub­prime cri­sis, when even big banks grew so wary of lend­ing to one anoth­er the entire finan­cial sys­tem froze until cen­tral banks intervened. 

Lenders Block­Fi and Voy­ager Dig­i­tal, as well as cryp­to fund Three Arrows — “3AC” — have also been hit by the mar­ket tur­moil. 3AC failed to meet mar­gin calls from sev­er­al lenders ear­li­er this month, accord­ing to the Finan­cial Times, expos­ing Voy­ager, which had lent the fund $660 mil­lion, to the problem.

Mean­while, cryp­to trad­ing plat­form Block­Fi received a $250 mil­lion bailout from FTX boss Sam Bankman-Fried fol­low­ing a 20% cut to its 850-strong work­force as it nav­i­gates a “cryp­to winter.” 

Glob­al­Block­’s Mar­cus Sotiri­ou told Insid­er: “Despite this short-term deba­cle, I think the cryp­to indus­try will become more effi­cient in the long term as irre­spon­si­ble com­pa­nies are removed from the space so we don’t have these sys­temic issues like we are see­ing currently.”

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