The crypto market has now suffered two crashes in 2022.
- Crypto crashes are actually beneficial for the market, industry experts believe.
- Specifically, a crash helps “stress test” newly built crypto infrastructure, leading to greater efficiency.
- Market routs and insolvency worries around crypto funds have raised concerns about the sector.
The cryptocurrency market has been on a bumpy ride this year, as intense volatility has put pressure on some lenders, exchanges and other operators, which in turn led to even deeper losses for investors.
But crypto owners have reason to keep their nerve, according to three industry experts.
It’s largely because crypto routs and company failures shake out the businesses and coins that don’t have solid underpinnings, or real-uses cases, as well as the “bad actors”.
“There are hundreds of firms that are built on hype and not substance. It will be good for the industry to have them go away,” Charlie Silver, founder of Permission.io told Insider.
Bear market shakeout
Bitcoin enjoyed a boom throughout the pandemic. But it has fallen about 70% in 2022 from the record of $69,000 last November. Rising interest rates and high inflation, coupled with Russia’s war in Ukraine, have made investors shun risky assets like tech stocks and crypto, as concern mounts about recession.
The market has also recently seen two events that have cast doubt on its long-term resilience. In May, major stablecoin Terra lost its peg to the dollar. The decoupling triggered a wave of liquidations that rattled the broader market and raised questions around the role of stablecoins — thus named as they are backed by real assets and therefore, less volatile than a traditional cryptocurrency, at least in theory.
Then, crypto lender Celsius said “market conditions” forced it to freeze all transactions on its platform, which drove a second brutal sell-off that stripped billions in value from the digital-asset market, which fell below $1 trillion for the first time in 16 months, as bitcoin fell to an 18-month low.
“Bear markets are healthy because it resets valuations to reality and flushes out the bad actors. There are many cryptos that are true Ponzi schemes, that pay investors only with new investor money. When the new money dries up the project falls apart,” Silver added.
Crypto crashes give regulators scope to protect investors and reduce risk, which in turn leads to innovation and better products and services, according to Lucy Gazmararian, founder and managing partner of Token Bay Capital.
“In a bear market, irrational exuberance and reckless behavior is no longer rewarded, and entrepreneurs can focus on the longer term and build sustainable businesses which are more robust and better able to scale once the markets turn again and as user adoption continues to grow,” Gazmararian said.
One big hitch is if a crypto lender runs into problems, there’s no lender of last resort, like a central bank, to step in, Gazmararian said.
“In this scenario, when a liquidity crunch happens, crypto businesses that are not prudently managed have a higher chance of going bankrupt.”
This was precisely what happened during the subprime crisis, when even big banks grew so wary of lending to one another the entire financial system froze until central banks intervened.
Lenders BlockFi and Voyager Digital, as well as crypto fund Three Arrows — “3AC” — have also been hit by the market turmoil. 3AC failed to meet margin calls from several lenders earlier this month, according to the Financial Times, exposing Voyager, which had lent the fund $660 million, to the problem.
Meanwhile, crypto trading platform BlockFi received a $250 million bailout from FTX boss Sam Bankman-Fried following a 20% cut to its 850-strong workforce as it navigates a “crypto winter.”
GlobalBlock’s Marcus Sotiriou told Insider: “Despite this short-term debacle, I think the crypto industry will become more efficient in the long term as irresponsible companies are removed from the space so we don’t have these systemic issues like we are seeing currently.”