Analysis: The current crypto winter could have more “heavy consequences” than the previous one

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2022-07-20 07:08:41

Compared to the period of the crypto winter in 2017, experts say that what the market has to go through during this period is risky and potentially has many heavy consequences for investors.

The second half of 2022 has been witnessing a decline in the market, with about $ 2 trillion “evaporated” since the peak in November 2021.

Bitcoin, the world’s largest cryptocurrency, has lost nearly 70% of its value from its record $69,000 per coin last year. With current predictions, experts say that “this winter” will not be like “the old winter”.

Impact due to many other factors appear

“Crypto Winter” is different now…

Between 2017 and 2018, Bitcoin and other cryptocurrencies continuously plummeted after reaching a peak in 2017. The lowest bottom BTC ever reached in 2018 was $3,122. This situation plays out when the market is flooded with ICO projects but in the end up to 70% of them “die prematurely”.

“The 2017 market crash was largely due to the collapse of the crypto bubble after peaking.” — Clara Medalie, Research Director at crypto firm Kaiko.

However, what has happened to the crypto market recently is rooted in the influence of macroeconomic factors, typically due to high economic inflation, central banks raising interest rates. These are elements that did not appear in the “winter” of 2017 – 2018.

According to professor Carol Alexander of the University of Sussex, the previous “crypto winter” also did not include the participation of major Wall Street investors. Meanwhile, currently, Bitcoin and other coins have a strong correlation with other risky assets, especially stocks.

Chain effect on the market

The liquidity crisis that started with the stalwart investment fund Three Arrows Capital (3AC) has opened up a series of painful days for the entire cryptocurrency industry. After suffering damage when “exposed” to the Terra ecosystem from the LUNA – UST collapse, 3AC was forced to file for bankruptcy.

Of course, the disaster has not stopped, when companies are all connected. The demise of 3AC included Voyager Digital – a company based in Canada. The company ceased operations after 3AC declared default on a $650 million loan. A series of investors have been implicated, their accounts have been frozen and they have been unable to withdraw their money.

Next, the emergence of centralized lending institutions (CeFi) and decentralized finance (DeFi) makes it easy for investors to use financial leverage. But, now, the leverage ecosystem is not what it used to be.

"Domino effect" causing the market to fall into crisis in recent times
“Domino effect” caused the market to fall into crisis recently

Martin Green, CEO of Cambrian Asset Management commented that the way for small companies to borrow money is often through cryptocurrency derivatives transactions. If the situation goes downhill in 2018, these transactions will be removed from the exchange due to insufficient margin requirements.

“Meanwhile, crypto funds and lending institutions are the ones using leverage, and retail investors will invest in these companies to make money,” Green said.

Besides, Green also said that the presence of many unsecured loan funds like the present increases investment risk. This has been demonstrated recently when the market fell into the fund in February 2022, lending institutions had to sell off their shares due to the lack of margin requirements.

Increased pressure

According to professor Carol Alexander, he emphasized that the next factor that makes the difference of this crypto winter lies in the risk of crypto companies. The defiance of TerraUSD (or Terraform Labs) has created serious consequences.

Celsius is one of the biggest victims of this drop, as it was once one of the major crypto lenders in the world. This company has recently declared bankruptcy.

Celsius’s way of operating lies in paying “heavenly” interest for customers depositing with cryptocurrencies. The company then lends money to other traders to profit from the difference in interest rates. Cryptocurrency investors are willing to pay high interest to borrow money.

However, this business model has a liquidity problem. As soon as “crypto winter” hits, they even close trading to prevent mass withdrawals.

“The second quarter of 2022 and June are difficult times for the crypto market when it has to witness the collapse of a series of large companies due to poor risk management and the bankruptcy of 3AC fund,” said the expert. Medalie family confirmed.

It is not clear when the market turbulence will subside.
It is not clear when the market turbulence will subside.

Analysts predict that crypto companies will continue to struggle with their debts and process customer withdrawals. James Butterfill, head of research at CoinShares predicts that the next victim could be cryptocurrency exchanges and miners.

Even established crypto players like Coinbase have been hit by the bear market. Last month, Coinbase laid off more than 18 percent of employees to cut costs. The company also recently saw trading volume collapse along with a drop in digital currency prices. The recent move to stop the affiliate program even fueled rumors that Coinbase was on the verge of default.

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