Crypto contagion deters investors in near term, but fundamentals stay strong

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The past six-odd months have been noth­ing short of a finan­cial soap opera for the cryp­tocur­ren­cy mar­ket, with more dra­ma seem­ing­ly unfold­ing every oth­er day. To this point, since the start of May, a grow­ing num­ber of major cryp­to enti­ties have been tum­bling like domi­noes, with the trend like­ly to con­tin­ue in the near term.

The con­ta­gion, for the lack of a bet­ter word, was sparked by the col­lapse of the Ter­ra ecosys­tem back in May, where­in the project’s asso­ci­at­ed dig­i­tal cur­ren­cies became worth­less almost overnight. Fol­low­ing the event, cryp­to lend­ing plat­form Cel­sius faced bank­rupt­cy. Then Zip­mex, a Sin­ga­pore-based cryp­tocur­ren­cy exchange, froze all cus­tomer with­drawals, a move that was mir­rored by cryp­to finan­cial ser­vice provider Babel Finance late last month.

It is worth not­ing that since Decem­ber 2021, near­ly $2 tril­lion has been wiped out from the dig­i­tal asset indus­try. And, while mar­kets across the board — includ­ing equi­ties and com­modi­ties — have been severe­ly affect­ed by the pre­vail­ing macro-eco­nom­ic cli­mate, the above-stat­ed slew of col­laps­es have def­i­nite­ly had a role to play in the ongo­ing cryp­to drain. To this point, Ben Caselin, head of research and strat­e­gy for cryp­to exchange AAX, told Cointelegraph:

“The con­ta­gion has played a big part in the recent down­turn, but we can­not ignore the wider mar­ket con­di­tions and the change in fis­cal pol­i­cy as impor­tant fac­tors play­ing into price. The sit­u­a­tion con­cern­ing Cel­sius, Three Arrows Cap­i­tal but also Ter­ra is expres­sive of an over-lever­aged sys­tem unable to with­stand severe mar­ket stress. This should in the least serve as a wake-up call for the industry.”

He went on to add that increas­ing mass adop­tion of dig­i­tal cur­ren­cies in the future should be done by expand­ing the scope of cryp­to beyond its pre­vail­ing “sound mon­ey nar­ra­tive.” Caselin high­light­ed that the mar­ket as a whole now needs to take into account and imple­ment finan­cial prac­tices that are sound and sus­tain­able in the long run.

What do the recent insolvencies mean for the industry?

Felix Xu, CEO of decen­tral­ized finance (DeFi) project Bel­la Pro­to­col and co-founder of ZX Squared Cap­i­tal, told Coin­tele­graph that the past month has been a “Lehman moment” of sorts for the cryp­to mar­ket. For the first time in his­to­ry, this indus­try has wit­nessed the insol­ven­cy of major asset man­agers such as Cel­sius, Voy­ager and Babel Finance with­in a mat­ter of months. 

Accord­ing to his per­son­al research data, while ail­ing projects like Voy­ager and Gen­e­sis col­lapsed due to the fact that they had the most expo­sure to Three Arrows Cap­i­tal (3AC), the col­lapse of 3AC, Cel­sius and Babel Finance emanat­ed due to rogue man­age­ment prac­tices asso­ci­at­ed with 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 bank­rupt­cies, their cryp­to col­lat­er­als will take a long time to be liq­ui­dat­ed. On the oth­er hand, DeFi lend­ing plat­forms such as Mak­er­DAO, Aave and Com­pound Finance per­formed well dur­ing this down­turn, as they are over-col­lat­er­al­ized with strict liq­ui­da­tion rules writ­ten into their smart contracts.”

Going for­ward, he believes that the cryp­to mar­ket is like­ly to move in cor­re­la­tion with oth­er asset class­es includ­ing equi­ties, with the indus­try poten­tial­ly tak­ing some time to rebuild its lost investor con­fi­dence. That said, in Xu’s opin­ion, what hap­pened last month with the cryp­to mar­ket is noth­ing new when it comes to the tra­di­tion­al finance space. “We’ve seen it in the 2008 finan­cial cri­sis and the 1997 Asian finan­cial cri­sis,” he point­ed out.

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Hatu Sheikh, co-founder of DAO Mak­er — a growth tech­nolo­gies provider for nascent and grow­ing cryp­to star­tups — told Coin­tele­graph that the after­math of this con­ta­gion has been strong­ly neg­a­tive but not for the rea­son many peo­ple would imagine:

“A key loss here is that many of the cen­tral­ized finance plat­forms that went bank­rupt due to the con­ta­gion were active onramps to the indus­try. Their unsus­tain­able and often decep­tive means of attract­ing new indus­try par­tic­i­pants brought mil­lions of peo­ple to trick­le deep into non­fun­gi­ble tokens and DeFi.”

In Sheikh’s view, while DeFi onboard­ing may come to a halt or at least slow down in the near term, many ven­ture cap­i­tal firms oper­at­ing with­in his space have already raised bil­lions and are thus capa­ble of con­tin­u­ing to inject funds into many upcom­ing star­tups. “We’ll have a new ros­ter of com­pa­nies that’ll replace the lost ones’ role of being an on-ramp to the indus­try,” he said.

Undisputed damaged to the market’s reputation 

Misha Led­er­man, direc­tor of com­mu­ni­ca­tions for decen­tral­ized peer-to-peer and self-cus­tody cryp­to wal­let Klever, told Coin­tele­graph that the recent crash has def­i­nite­ly dam­aged the rep­u­ta­tion of the indus­try but believes that the afore­men­tioned insol­ven­cies have helped cleanse the indus­try of bad play­ers, adding:

“This presents a huge oppor­tu­ni­ty for blockchain plat­forms and cryp­to com­mu­ni­ties with a respon­si­bil­i­ty-dri­ven approach to inno­va­tion, in which user funds are pro­tect­ed at all costs. As an indus­try, we have to be bet­ter than the fiat debt sys­tem we aim to replace.”

A sim­i­lar opin­ion is shared by Shy­la Bashyr, pub­lic rela­tions and com­mu­ni­ca­tions lead for UpLift DAO — a per­mis­sion­less and decen­tral­ized plat­form for token sales and swaps — who told Coin­tele­graph that the indus­try has been hit hard and is cur­rent­ly shroud­ed with more neg­a­tiv­i­ty than ever before. 

How­ev­er, she believes such sce­nar­ios are some­times need­ed since they present new oppor­tu­ni­ties to build trans­par­ent prod­ucts that pro­vide addi­tion­al insur­ance, hedg­ing and secu­ri­ty for peo­ples’ investments. 

Sheikh point­ed out that while there’s ram­pant crit­i­cism that DeFi apps have lost bil­lions, it is worth not­ing that the loss­es accu­mu­lat­ed by CeFi lenders are notably higher:

“The fact remains that the notable blue chips of DeFi have remained most­ly unscathed, yet the loss­es in CeFi are from indus­try lead­ers. How­ev­er, as cryp­to CeFi is a step­ping stone in people’s jour­ney to DeFi, the industry’s adop­tion will be steeply hurt in the short 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 core use case, such as being self-sov­er­eign wealth. 

The future may not be all bad

When asked about what lies ahead for the cryp­to mar­ket, Narek Gevor­gyan, CEO of Coin­Stats, told Coin­tele­graph that despite the pre­vail­ing con­di­tions, the mar­ket has already start­ed show­ing promis­ing signs of recov­ery, stat­ing that insti­tu­tion­al investors are back on the play­ing field and exchange inflows are on the rise. 

In this regard, bank­ing titan Cit­i­group recent­ly released a report stat­ing that the mar­ket slide is now in reces­sion, with researchers not­ing that the “acute delever­ag­ing phase” that was recent­ly in play has end­ed, espe­cial­ly giv­en that a vast major­i­ty of large bro­kers and mar­ket mak­ers in with­in the indus­try have come forth and dis­closed their exposures. 

Not only that, but the study also shows that sta­ble­coin out­flows have been stemmed while out­flows from cryp­to exchange-trad­ed funds have also stabilized.

Gevor­gyan believes that the trust investors had built up over the last cou­ple of years has been some­what dis­solved due to recent events. Nev­er­the­less, the blockchain com­mu­ni­ty is still bet­ter fund­ed than at any point in its short his­to­ry, with devel­op­ment most like­ly to con­tin­ue. He then went on to add:

“The Ter­ra implo­sion trig­gered a melt­down that brought sev­er­al CeDe­Fi plat­forms down with it. The com­mu­ni­ty has become more aware of the short­com­ings of the CeDe­Fi mod­el. Over­all, the string of insol­ven­cies has pro­vid­ed the cryp­to mar­ket with a chance to start afresh, as DeFi2 and Web3 are con­tin­u­ing to become more sig­nif­i­cant. Maybe the Meta­verse will take cen­ter stage in this new configuration.”

CeFi vs. DeFi

Sheikh believes that the best of CeFi has lost more than the worst of DeFi, high­light­ing that Bit­coin (BTC) has con­tin­ued to remain one of the most liq­uid assets in the world. In his view, the next wave of retail adopters will have glar­ing ref­er­ences to the prob­lem of skip­ping self-cus­tody, thus paving the path for greater focus on decen­tral­ized apps, espe­cial­ly as the mar­ket con­tin­ues to mature.

On the oth­er hand, Bashyr sees a lot of pro­tect­ed projects such as insur­ance pro­to­cols and hedged prod­ucts flour­ish­ing from here on out. In her opin­ion, decen­tral­ized autonomous orga­ni­za­tions (DAOs) will become more promi­nent and func­tion­al, pro­vid­ing real gov­er­nance and allow­ing users to par­tic­i­pate in instru­men­tal deci­sions by vot­ing on pro­pos­als that make a difference. 

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Last­ly, in Xu’s opin­ion, the insol­ven­cies have result­ed in mil­lions of users call­ing for reg­u­la­tions like those gov­ern­ing tra­di­tion­al finance with­in the glob­al cryp­to econ­o­my so as to increase trans­paren­cy on invest­ment of user assets. Xu added that since DeFi ben­e­fits from no sin­gle point of con­trol while offer­ing full trans­paren­cy and autonomous rules, it will even­tu­al­ly take over the cryp­to asset man­age­ment business.

There­fore, as we head into a future plagued by eco­nom­ic uncer­tain­ty, it will be inter­est­ing to see how the future of the cryp­to mar­ket plays out. This is because more and more peo­ple are con­tin­u­ing to look for ways to pre­serve their wealth — thanks, in large part, to the reces­sion fears that are loom­ing large on the hori­zon — and there­fore con­sid­er cryp­to to be their way out of the madness.

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