Are We Seeing the End of Crypto?

By Louis H-P on January 29, 2023

With multiple Crypto focused businesses going bankrupt then it is possible to ask if we are seeing the end of Crypto as we know it. It doesn’t help, when an authoritative body such as the ECB  writes a surprisingly direct piece trashing Bitcoin’s future. It also really doesn’t help when founders of bankrupted firms try and set up a firm to help creditors recover losses! Will the madness ever end?

Key Takeaways

Which respected supranational has predicted the end of Bitcoin?

How did it all go south?

Which major players have gone bankrupt?

How did we get here?

Cryptocurrencies have been synonymous with volatility from the day they were invented. Yet when cryptocurrencies which were perceived as being stable crashed in value, this caused knock-on effects. These ‘stablecoins‘ were Terra  and Luna and both lost considerable value in spring 2022.

Terra was a stablecoin. It’s value was theoretically pegged or tied to the value of another asset. This meant it theoretically always had some value. Many market participants failed to realise that a computer-algorithm was actually responsible for it stability. When this computer algorithm failed to keep up with redemptions, the value of Terra plunged.

Plunge in Bitcoin and other cryptocurrencies

The fall in stablecoins made participants bolt for the exits, leading to indiscriminate selling of multiple Crypto currencies and the simultaneous withdrawals by clients of their holdings from Crypto platforms.

The loss in value of Crypto currencies meant many Crypto trading funds lost large amounts of capital. This resulted in a spate of bankruptcies. It also revealed how weak the entire system was: One crash has knocked out the majority of the major players.

The dominoes start falling… drawing end of Crypto ever nearer…

The number of firms which subsequently went bankrupt over the coming months were a whose who of the cyrpto world. These were seen as the pillars of the ‘ecosystem’. A house without pillars falls down.

Three Arrows capital

With near $10billion in assets, three arrows capital was a large cryptocurrency hedge fund. Much of the money it traded was borrowed, meaning creditors lost out when it filed for bankruptcy in June 2022. It seems three arrows was betting that crypto currencies would keep going up.

Three Arrows was seen by many other participants as the main player in the space. It provided substantial liquidity for other trader’s operations. When they failed this was a huge warning sign to those who were ‘in’ the Crypto currency trading space.

Voyager Digital

Was a cryptocurrency broker which went bankrupt in July 2022 when Three Arrows capital failed to repay loans totaling $666 Million. Later in that same month, Voyager Digital was warned about making mislead statements about investor protection from the Federal Reserve and FDIC no less!

Celsius

Is as of July 2022 a bankrupt cryptocurrency lending company. It functioned  like a bank. You lent your Crypto currency in return for a high interest and in return Celsius issued loans to all-comers. The crash in value of the Luna token contributed to the collapse of Celsius.

FTX

Probably the most famous Cryptocurrency firm of any was FTX. It was seen as the ‘white night’ in the Crypto space. It either bought or provided loans for struggling Crypto firms. Bankruptcy came in November 2022 amid accusations of widespread fraud. FTX was a cryptocurrency exchange which lost significant sums of money trading through a sister firm called Alameda research.

It will get worse before getting better

Many people suffered from the bankruptcy of Arrows capital. Indeed another important player in the Crypto space, Genesis, went into bankruptcy in January 2023.

Firms are still going bankrupt at an alarming rate and spreading to other parts of the Crypto ecosystem. The problems are now spreading to other parts of the Crypto ecosystem such as Core scientific and Silvergate. The latter is loosing clients at an alarming rate.

How you could of protected yourself

Start small by giving yourself a margin of safety. If you get it wrong, you only lose a little. You will also have a lesson to learn which you can apply to other parts of your investment strategy.

Read around the subject. I appreciate this is not obvious when so many people were saying positive things around Crypto. Indeed it does not help when celebrities endorse Crypto and in a controversial manner. Yet if you read around, and have experience of other assets classes you will develop an ability to sense that something is simply too risky.

Conclusion

Even if the end of Crypto has been called, it is possible some parts of the Crypto world may survive, such as block chain. Yet the rise of interest rates and the increased saving rates now available means the risks involved in Crypto are not worth the prospective return.

The way in which so many major players fell over when one of their brethren went bankrupt has the hallmarks of a house of cards, literally.

Of the major players, only Binance is left (now seen as largest player in the space). Unfortunately, Binance itself is far from being reproach from a regulatory perspective. If Binance was to go under it really would be the end of Crypto as we know it.

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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