Crypto contagion deters investors in near term, but fundamentals stay strong

The cryptocurrency market has been a drama-filled six-months. Every day seems to bring more drama. Since May’s start, major crypto entities have been falling like dominoes. This trend is likely to continue in near future.

For lack of a better term, the contagion was caused by the May collapse of Terra’s ecosystem. The project’s digital currencies were rendered worthless within a matter of hours. After the event, Celsius, a crypto lending platform was forced to declare bankruptcy. Zipmex, a Singapore-based cryptocurrency trading platform, then frozen all customer withdrawals. This was followed by Babel Finance, a crypto financial services provider, late last month.

It is important to note that nearly $2 trillion has been taken out of the digital asset market since December 2021. Markets across all sectors, including commodities and equities, have been adversely affected by the current macro-economic climate. However, the above-mentioned series of collapses has definitely played a part in the crypto drain. Ben Caselin (head of research and strategy at crypto exchange AAX) said this to Cointelegraph:

While contagion is a major factor in the current downturn, we can’t ignore the larger market conditions and the changes in fiscal policy as important factors that impact price. The situation involving Celcius, Three Arrows Capital and Terra are indicative of an over-leveraged system that is unable to withstand severe markets stress. This should at least be a wake-up call for the industry.

He continued by saying that digital currencies should be adopted more widely than ever before. This would require expanding the definition of crypto beyond the current “sound money” narrative. Caselin also stated that the market must now consider and implement sound financial practices that will last the long-term.

What does the recent insolvency mean for the industry

Cointelegraph was told by Felix Xu (CEO of Decentralized Finance (DeFi), project Bella Protocol, and cofounder of ZX Squared Capital) that the crypto market has experienced a “Lehman Moment” in the past month. This industry witnessed for the first time, in a matter of months, the insolvency major asset managers like Celsius, Voyager, and Babel Finance.

His personal research data shows that Voyager and Genesis were the most exposed to Three Arrows Capital (3AC) and their collapse was due to this exposure. However, the collapse of 3AC and Celsius, Celsius, and Babel Finance resulted from poor management practices associated to the assets of their users. Xu also added:

“I believe that the panic selling and forced liquidation are over. It will take time for crypto collaterals to be liquidated as asset managers and funds file bankruptcies. DeFi lending platforms like MakerDAO and Aave, on the other hand, performed well in this downturn because they have over-collateralized their smart contracts with strict liquidation rules.

He believes the crypto market will move in correlation to other asset classes, including equities. However, the industry may need to take some time to rebuild investor confidence. Xu believes that what happened to the crypto market last month is not unusual in traditional finance. He pointed out that it was evident in the 2008 financial crisis as well as the 1997 Asian financial crises.

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Cointelegraph spoke with Hatu Sheikh, cofounder of DAO Maker, a provider of growth technologies for growing crypto startups. He said that although the consequences of the contagion have been very negative, it has not been for the reasons many would think.

“The key point here is that many of these cenrtalized financing platforms that were bankrupted due to contagion were active onramps into the industry. Millions of people were attracted to their unsustainable and sometimes deceptive ways of attracting new participants in the industry.

Sheikh believes that while DeFi onboarding might slow down or stop in the short term, venture capital firms operating in his space have raised billions of dollars and can continue to inject funds into many new startups. He said that he would have a new list of companies to replace the ones that had been removed from the industry’s onramp.

The market’s reputation has been irreparably damaged

Misha Lederman (director of communications for decentralized peer to peer and self-custody cryptocurrency wallet Klever), told Cointelegraph that while the crash has certainly damaged the industry’s reputation, she believes that the insolvencies that preceded it have helped rid the industry of bad actors.

“This presents a huge opportunity for blockchain platforms and crypto communities with a responsibility-driven approach to innovation, in which user funds are protected at all costs. We as an industry must be better than the fiat system we want to replace.

Shyla Bashyr (public relations and communications leader for UpLift DAO), who shared a similar opinion with Cointelegraph, stating that the industry is in a difficult spot and is now surrounded by more negativity than ever.

She believes that such scenarios are sometimes necessary because they offer new opportunities to create transparent products that provide additional protection, hedging, and security for people’s investments.

Sheikh noted that, while DeFi apps are being criticized for losing billions of dollars, it’s worth noting that CeFi lenders have suffered much greater losses.

The fact is that DeFi’s blue chips have been mostly unaffected, but CeFi’s losses are attributed to industry leaders. The industry’s adoption of crypto CeFi will be severely hurt as it is a stepstone in people’s journey towards DeFi.

He concluded that the “CeFi Contagion” could be a powerful catalyst to the growth of its decentralized counterpart and a validation for crypto’s core use case of being self-sovereign, wealth.

The future might not be all bad

Narek Gevorgyan (CEO at CoinStats) answered Cointelegraph’s question about the future of the crypto market. He stated that although the market is still experiencing a lot of volatility, it has begun to show signs that it is on the verge of recovering. He said that institutional investors have returned to the game and that there are more inflows into the market.

Citigroup, a banking giant, recently published a report that stated that the market slide is now under way. Researchers also noted that the “acute leveraging phase” that was in play recently has ended. This is especially true given the fact that large brokers and market makers within the industry have publicly disclosed their exposures.

The study shows that outflows of stablecoin have been halted, while outflows to crypto exchange-traded fund (ETF) have stabilized.

Gevorgyan believes the trust investors have built over the past couple of years is somewhat disintegrated due to recent events. However, the blockchain community is more financially well-funded than ever before, and development is likely to continue. He added:

“The Terra implosion caused a meltdown, bringing several CeDeFi platforms with it. The CeDeFi model’s shortcomings have been exposed to the community. The string of insolvencies have given the crypto market a chance to re-start, with Web3 and DeFi2 continuing to gain more importance. Perhaps the Metaverse will be at the center of this new arrangement.”

CeFi vs DeFi

Sheikh believes the best CeFi has lost more money than the worst DeFi. He also points out that Bitcoin (BTC), has remained one of the most liquid assets worldwide. He believes that the next wave retail adopters will make glaring reference to the problem with skipping self custody, opening the way for more focus on decentralized apps as the market matures.

Bashyr, on the other hand sees a lot more protected projects like insurance protocols and hedged product flourishing from now on. Bashyr believes that decentralized autonomous organisations (DAOs), will be more prominent and functional. They will provide real governance and allow users to vote on the best proposals.

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Xu believes that the insolvencies have led to millions of users calling on regulations similar to those governing traditional finance in the global crypto market. This would allow for transparency in the investment of user assets. Xu said that DeFi has the potential to take over crypto asset management because it is independent and transparent, as well as offering autonomous rules and transparency.

It will be fascinating to see how the future unfolds for the crypto market as we move into an uncertain economic future. Because more people look for ways to protect their wealth, due in large part to the recession fears that are looming large, and crypto is their way out of this madness.

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Eileen Wilson

Eileen Wilson –Technology and Energy My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.

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