Crypto feels the shock waves of his own credit crisis
Crypto feels the shock waves of his own credit crisis
The deflationing bladder in digital assets has uncovered a fragile system of loans and leverage in cryptography, which resembles the credit crisis that recorded the traditional financial sector in 2008.
Since its foundation, crypto enthusiasts have promised a future with enormous personal assets and the basics for a new and better financial system and critics who questioned its value and benefits rejected as a spread of "fud"-fear, uncertainty and doubt.
But these emotions are now pursuing the crypto industry, since one after the other, often connected projects that have locked up the money of the customers are faced with losses of millions of dollars and turn to the heavyweights of the industry to get rescue packages.
"Fear is contagious. This applies to every financial market.. Nobody wants to be the last person without a chair if the music stops, so everyone canceling money," said Brett Harrison, President of the crypto exchange FTX US.
The price of Bitcoin, the largest cryptocurrency, has fallen by more than 70 percent since its high in November, and the total value of the crypto tokens has fallen from over $ 3 trillion to less than $ 900 billion.
The industry creaks. A token named Luna and his sister Terra, a stable coin that tried to use computer algorithms to keep their price stable, collapsed in May; The crypto loan Celsius stopped the withdrawals at the beginning of this month; And the hedge fund Three Arrows Capital faced Margin Calls.In the past few days, another lender, Voyager, has limited the withdrawals, while the Coinflex stock exchange has frozen customer funds. Trades and investments that seemed safe, liquid and profitable a few weeks ago are dangerous and impossible to end. Investors fear that further domino stones could fall.
The focus of the boom was the growth of decentralized finances, known as Defi, a corner of the crypto world, which claims to offer an alternative financial system without central decision -making instances such as banks or stock exchanges. Instead, users can transfer, lend and borrow assets by using contracts that are defined in the computer code. Changes are not made by managing directors, but of those who have special governance tokens often by development teams and early investors.According to CryptoCCOMPARE data, the amount of capital circulating in Defi projects had risen to almost $ 230 billion by the end of 2021.
At the last crypto boom in 2017, buyers simply speculated on token prices. This time, small investors and some funds also searched for high returns by lending and borrowing crypto-assets.
This addressed both sophisticated crypto retailers and publicly accessible loan platforms such as Celsius, who received customer deposits and issued interest rates of up to 17 percent.
Investors could increase their returns by taking several loans against the same security, a process that is called "recursive borrowing". This freedom to recycle capital with little reluctance led investors to stack more returns in various defi projects and earned several interest rates at once.
"As with the subprime crisis, it is something really attractive in terms of return, and it looks like a risk-free financial product for normal people," said Lennix Lai, director of financial markets at the OKX crypto.
Financial gymnastics left huge towers of borrowings and theoretical values that fluctuated on the same assets. This continued while the crypto prices sailed higher. But then inflation, aggressive interest rate increases and geopolitical shock waves swept through the war in Ukraine over the financial markets.
"Everything worked during the bull run when the prices of all assets only increased. When prices started to decrease, many people wanted to withdraw their fortune," said Marcin Miłosierny, head of market research at the ARK36 crypto hedge fund.
When the token values crashed, the lenders terminated their loans. According to the research company Glassnode, the process has led to more than 60 percent or 124 billion
since mid -MayThe first domino fell in May when Terra failed and the trust of the investors shook. Next came the lender Celsius, the customer account, when he got into a serious liquidity incongruz in his books.
Last week Three Arrows Capital, a large crypto hedge fund based in Singapore, got into skid after he could not meet Margin Calls. Voyager has confirmed that Three Arrow's failures could be affected. Blockfi and Genesis also liquidated at least some of the positions of Three Arrows with the matter.
The situation was tightened by the strong use of loans by crypto retailers to increase the upward potential of their market bets. In a falling market, traders are faced with more funds to support their positions.
"There is a snowball effect. Whenever the price of Bitcoin sinks, more people are forced to sell Bitcoin, which exaggerates the sale," said Yves Choueifaty, Chief Investment Officer of the asset management company Tobam.
But some managers wonder whether crypto has already experienced his own “Lehman” moment, with Celsius being the biggest name that becomes falling. They hope that the mood towards measures to stabilize the market will shift.
Without a central bank in crypto, you are putting your optimism on the intervention of the leading heads of the industry, in particular Sam Bankman-Fried, the 30-year-old billionaire and founder of the FTX.
In the past nine days, Bankman-Fried has given loans worth the hundreds of million dollars to Blockfi and the crypto loan Voyager in order to stabilize both companies and strengthen trust in the system.
Bankman-Fried's steps to act as a lender of the last instance, include an element of self-interest. His trading company Alameda Research is the largest shareholder from Voyager, with a participation of 11 percent after buying shares last month. It will also be the "preferred borrower" for all future voyager loans.
In the past week, the Bitcoin price kept stable at around $ 20,000. But many are wondering whether the breathing space is only temporary.
"The risk of infection on the cryptoma markets remains increased," said Marion Laboure, Senior Strategist at Deutsche Bank. "A tightening of the FED will suspend more crypto companies excessive credit risks by depriving liquidity and increases interest rates, which will press the value of the coins, many of which depend on," she added.
At the height of the financial crisis in 2008,Bitcoin was invented as an alternative to the financial system, which fans often praised as immune to the effects of inflation and politically colored monetary policy.
Many managers now come to the conclusion that the crypto industry can be subject to the same booms and buss as other markets.
The global central banks kept the interest rates extremely low for a decade to boost economic growth and drove this policy even more in pandemic. Much of this cheap central bank money flowed in crypto.
According to the dealroom data, sole venture capital companies have put $ 38 billion in blockchain start-ups since 2020. Now the flood is moving because the Federal Reserve and other central banks pass to fight the strong inflation."In an environment with higher interest rates, the emperor has to wear some clothes to survive," said Taimur Hyat, Chief Operating Officer of the $ 1.5 trillion, heavy asset manager PGIM.
This can cause consumers with little legal protection or transparency about the economic health of companies behind crypto projects to withdraw funds or to show greater caution.
"Anyone who will come to space in the next few years. Will have a natural aversion to perpetuum motion machines and things that sound too good to be true," said Sidney Powell, Chief Executive of the Defi Protocol Maple.
"When people go through a big tapping in assets and breaches of confidence, I think that it is immunized for the next few years, so in this sense it is like the year 2008 by crypto."
Source: Financial Times
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