Crypto Exchanges Imploding - What it All Means
Is This the End for Cryptocurrencies?
It had to happen. Like the dot-com bubble bursting in 2001.
There are nearly 600 cryptocurrency exchanges in the world. That’s a few too many, apparently. Several have recently filed for bankruptcy protection, and several more are facing a liquidity crisis. Account holder withdrawals have been suspended or severely limited at several exchanges, most notably at Celsius. Just last year, the company raised $400 million in funding at a $3 billion valuation.
Last week, FTX, the world’s third largest exchange, made a deal to acquire BlockFi, a major player in crypto lending. BlockFi also was given a massive valuation last year of $4.8 billion, as it raised more capital. FTX is reportedly buying the struggling company for just $25 million, or 99% below its recent valuation. This leaves BlockFi’s equity holders essentially wiped out.
New Jersey-based Voyager Digital announced on Wednesday that it had filed for Chapter 11 bankruptcy protection. The company was especially burned by Singapore-based hedge fund Three Arrows Capital (3AC), which defaulted to Voyager on a $650 million crypto loan. 3AC was highly leveraged and has filed for bankruptcy as well.
What Caused These Exchanges to Implode?
Falling Crypto Prices. Nearly every cryptocurrency has fallen in price by 50-80% since last fall. This includes Bitcoin, down from a high of over $69,000 to around $22,000 today. None have been spared. Not even stablecoins. Stablecoins, which were supposed to keep their price pegged to one US dollar and be fully supported by cash. Didn’t work out that way. With prices in free-fall, no one wants to invest on a crypto exchange.
Macroeconomic Conditions. What caused crypto prices to fall in the first place, you ask? A number of factors contributed. Inflation, for sure. The world got flooded with $10 trillion new dollars from the pandemic, and demand for goods soared. The chain reaction continued, as workers stayed home and supply chains were interrupted, to put it mildly. Governments were forced to raise interest rates dramatically. Stocks reacted as expected, with major market indices falling 20-30% this year. Bitcoin followed suit, acting in near-perfect correlation with equities, lumped in as “risk on” assets. Most cryptos certainly fit the bill, but Bitcoin is terribly misunderstood in that regard. (See my earlier rants about this.)
Fraud and Mismanagement. Look no further than the whole Terra/Luna meltdown. Terra USD had been offering 20% interest rates, too good to be true of course. When this rate dropped, Luna coins were drawn and more Terra were created, as they were tied together in some algorithmic fashion. The quantity of Terra soared and it of course couldn’t hold its $1 peg. Massive mismanagement, and it rippled through the crypto world. Investors lost confidence in many stablecoins and most other coins. Founder Do Kwon is alleged to have made withdrawals of around $80 million leading up the meltdown.
Leverage. Excessive leverage has caused the demise of some major financial institutions over the years. Famously, the hedge fund Long Term Capital Management imploded in 1998, as it had leveraged its assets at a 25 to 1 margin. Just reckless. Several investment banks were destroyed in 2008 due to the same strategy, most notably Lehman Bros. Bear, Stearns was leveraged up to 38 to 1. It’s been no different in the crypto world. Offering high yields to their customers, exchanges went looking for returns, and in the process took on excessive risk. Falling crypto prices just exacerbated the situation, causing massive liquidity shortfalls.
So Is There Good News For Bitcoiners?
Yes, there is. But you knew I would say that. Here’s where things stand:
The tourists have left the building. Short-term traders, the paper hands, have mostly been flushed out. And that had to happen. Volatility should decrease over time. The longer-term holders will have conviction and will better understand Bitcoin.
Bitcoin’s network keeps chugging along. No downtime for the network. No flaws, no cracks in security. The strongest network in the world has not changed. All the noise doesn’t affect Bitcoin, the totally decentralized currency. As they say, “Honey Badger don’t care.”
Distractive Altcoins will fade away, most of them. Once the useless platforms and scams go the way of most dot-coms, the focus can be on the stronger coins and projects. And Bitcoin is the king in that regard.
Bitcoin will decouple from stocks. This may be starting now. With stock investors focused on earnings, sales growth, buyouts and more, people should realize that none of this affects Bitcoin. The shakeout of the altcoins should help this process along, as investors see the unshakeable construction of Bitcoin.
Large Exchanges are OK so far. Binance, FTX, Coinbase, and Kraken, the world’s four largest, have reported none of the problems discussed above. No liquidity issues, no excessive leverage, no issues of fraud, mismanagement or security issues. Investors have been pulling their Bitcoin off of exchanges and taking self-custody, however. It’s always a smart move, if you can learn the process and get comfortable with it.
I believe in the technology of Bitcoin and I believe in its future. I’ll continue to use Bitcoin as my savings account and dollar-cost-average at regular intervals. Maybe some of the tourists will visit again, and maybe they’ll stay longer this time.
Thanks, as always, for reading. HODL on.
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Twitter - Follow The Bitcoin Files on Twitter at @BitcoinNewslet1 for all of my articles, commentary and links to my contributions to Bitcoin Magazine.
Medium - Check out my writings on Medium, including articles not featured in the newsletter. Join my 500 other followers who read and write about crypto. medium.com/@rickmulvey
Podcasts - To hear the top names in Bitcoin, and learn more than you could imagine, check out The Pomp Podcast with Anthony Pompliano, What Bitcoin Did with Peter McCormack, and The Wolf of All Streets Podcast with Scott Melker.
Issue No. 64, July 8, 2022
Rick Mulvey is a CPA, crypto consultant, and frequent contributor to Bitcoin Magazine. He writes about all things Bitcoin, and yells at the Yankees and Giants. He also runs marathons and makes wine, neither professionally.