Cryptoassets are not in their first major market correction, but the current crash should be the worst in their young history.
The destruction of capital in the cryptosphere is exploding at breakneck speed. And the bloodshed increasingly takes the form of materialized losses, and not just on paper. With “stablecoins” taking up most of the volume traded in recent sessions, investors are liquidating their positions in large numbers, causing a wave spreading across the chain. The specialized analysis site Glassnode Insights sees a bear market history, the largest bear market in the history of cryptoassets, by far more severe than those of 2018-2019 and 2015.
We were talking about it earlier this month. Their defenders like to recall that these digital currencies were born in the wake of the 2008 financial crisis. They saw in them an asset uncorrelated to the traditional market and conferred on it both the role of safe haven and that of diversification. The 60% collapse of the cryptocurrency market since November strips them of all these presumed attributes, it was written. This collapse has now reached 70%.
Cryptocurrency market capitalization fell below US$900 billion on Wednesday, compared to over US$3 trillion at its peak in November. The star value, bitcoin, is now trying to cling to around US$20,000 after breaking below this threshold, considered representative by technical analysts, at least three times on Wednesday. There is talk of a drop of 70%, or some US$47,000, from its peak in November 2021.
We can easily describe this fall as carnage in an ecosystem with strong leverage, subject to massive buyback movements forcing the platforms to multiply the refinancing of collateral. We are also talking about an ecosystem suffering from a double absence, unable to rely either on real, tangible and stable values or on a regulatory framework. All of this is amplified by the lack of liquidity in a market dominated by risk aversion.
The shock wave caused by the collapse in May of the rating of terra luna, a stable cryptocurrency supposed to have the US dollar as its base, has accelerated the race to exit. The virtual currency has lost almost all of its value in a short time, evaporating some $50 billion in capitalization in a click or two, after dropping from parity with the US dollar. The question of the stability of these “stablecoins” in times of crisis was suddenly on everyone’s lips.
Liquidation of Three Arrows Capital
Then, in June, tremors hit cryptocurrency exchanges and lenders, culminating in Celsius’ announcement suspending withdrawals and account transfers. Crypto exchange CoinFlex echoed this. Global Block Digital Asset Trading is also pointing in the direction of issuing a notice of default on a loan made by crypto broker Voyager Digital to Three Arrows Capital. Already reeling from the crash of the algorithmic stablecoin terraUSD and luna and struggling to meet withdrawal requests, the hedge fund has begun liquidating, multiple media outlets including Reuters news agency reported on Wednesday.
For its part, Voyager wanted to reassure its own clients, stating that the default of the hedge fund did not put it in difficulty for the moment. This does not prevent large lenders such as BlockFi, Celsius, Voyager and Genesis from being challenged, raising fears of a contagion effect in the cryptosphere likely to go back to mining.
Regulations
For many, this crisis will accelerate the emergence of regulations that will, in particular, build confidence in the industry and attract more institutional investors. This crisis shines the spotlight on a number of risks making up a long list associated with investing in crypto-assets. First, the extreme volatility of prices. We also speak of an underlying value that is too often subjective, unrelated to reality. For “stablecoins”, we see that the value of the underlying is quickly put to the test in a context of market setbacks. It has already been written that, despite its name, there is no guarantee that this type of virtual currency provides protection against loss of value and that the nature and quality of the underlying asset can vary greatly.
We can also see that these assets suffer from a lack of liquidity, making them difficult to sell in a context of adversity. They may suffer from the absence of guarantees of finding a taker and the absence of mechanisms for stopping transactions in times of high stress.
What can be said, too, of the surveillance of this market, which is rather limited with the absence of a regulated trading venue? The platforms are operated here and there on the planet, many of which are not accessible to any form of oversight and regulatory control. And many cryptocurrency issuers are unregulated, escaping any audit and capital requirement.