A wave of bankruptcies in the cryptocurrency industry has raised concerns about the future of digital assets in general, and whether the industry will survive this market crash. First, consider the scope of the carnage: The list of bankruptcies in the cryptocurrency market related to liquidity problems has increased significantly this year. To date, Three Arrows Capital, Alameda Research, Voyager Digital, FTX, Genesis BlockFi and Celsius Network have either stopped withdrawing customers or filed for bankruptcy after being unable to continue operations. FTX, which is one of the largest crypto exchanges in the world, collapsed after a lack of assets on its balance sheet. Rumors that the exchange might not be liquid enough led to customers pulling out $650 million in assets on November 7. This led to the revelation that FTX was tapping customer accounts to fund risky transactions. bet with fellow trading firm Alameda Research. The exchange held just $900 million (opens in a new tab) in marketable assets against $9 billion in liabilities the day before it collapsed. FTX is a leader in crypto markets and its collapse has come as a huge surprise that has undermined confidence in digital assets.
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Crypto holders have taken a big hit: More than $2 trillion in market cap has disappeared – the toll when you add in the decline in the value of bitcoin, ether and all other digital currencies since they were at or near their peak last year. Most of the recent problems are concentrated around crypto lenders – a corner of the crypto market that has flourished in the last two years. Just as customers of traditional banks earn interest rates on their savings, crypto users who deposit their digital assets with a crypto lender or digital exchange also earn money. While savings accounts in banks have offered low returns over the past two years due to historically low interest rates, some crypto lenders and exchanges are offering higher returns … often in the double digits, and sometimes as high as 20%. the returns offered by some crypto exchanges and lenders are leading. Like banks, these crypto firms generate profits from deposits through lending. Borrowers pay a percentage of the fees for the loan, and crypto lenders profit from the spread between interest payments paid to depositors and fees paid to borrowers. Unlike traditional regulated lenders, however, crypto companies are not governed by banking regulators – so there are some capital rules they must maintain and some restrictions on what they can do digitally assets of their customers. The collapse of these crypto lenders also shows how interconnected most of these companies are. FTX has loaned billions (opens new tab) of dollars to fellow trading arm Alameda Research, money used to fund risky bets. BlockFi, a crypto lender, has among its list of borrowers (opens in a new tab) Alameda Research and Three Arrows Capital. More crypto company failures seem likely. Also, as customers worry about the safety of their digital currency deposits and demand their money back, it may be revealed that other exchanges besides FTX are engaged in sketchy trading using depositors’ funds. safe, fortunately. Combined, they hold about $9 billion in crypto. Regulators have been warning them for years now to be careful about investing in the asset class, and it appears the banks are listening. A surprising number of retail investors own crypto and face some losses. But that exposure, while widespread, looks pretty shallow. About 10% of households in the US and Europe own some cryptocurrency. In the US, the average holding is worth $1,000. Most investors in Europe have less than $5,000. The real owners of the bag are venture capital firms, which are betting heavily on the crypto industry. Of the nearly 10,000 companies involved in the crypto business, only two hundred of them are publicly traded. Most of the rest were bankrolled by venture capitalists, who are now facing huge (and in some cases near total) losses. So, is this the end of a booming industry? Not much. Some of the major currencies, such as bitcoin and ether, seem to be enduring. Bitcoin, for example, is down 75% from its peak in November 2021 but is still four times higher than in December 2018. Ether, the number two token, is up more than 1,000% in the same period . But a massive downgrade is clearly underway. Many tokens will not survive. Many crypto exchanges and lenders don’t either, because their customers choose to keep their crypto in “digital wallets,” which usually don’t allow holders to get a return on their crypto, but ensure that their assets will remain safe. Exchanges that survive must work hard to convince users that they are not the next FTX waiting to crash – by certifying that customer funds are safe and liquid. unavoidable. To survive, the industry needs this shakeout, to clean up the currencies and companies that are pure hype and to consolidate around the few that have potential. Proving their practical value and utility may be more difficult now…
