Invest: Crypto swings

Posted by

Oh boy, crypto market is really unpredictable.

Large swings are hitting the cryptosphere as Bitcoin (BTC-USD) struggles to hold above the key $20,000 level. The popular token plunged 15% to $17,787 on Saturday, before rebounding above $20,000 with a surge of similar magnitude on Sunday (stock futures are also bouncing back from a brutal week). Currently changing hands at around $21,168, Bitcoin is still off about 70% from the all-time high of $67,802 seen in November, which preceded the Fed’s aggressive rate hike cycle that threatens to drain liquidity from markets.

Red flags of bigger crypto trouble emerged in May following the collapse of the Terra (UST-USD), a dollar-pegged algorithmic stablecoin project. Growing questions about insolvency ensued after major crypto lending firm Celsius shocked the market last week by pausing all withdrawals, swaps and transfers between accounts. Coinbase (COIN) and BlockFi then announced they would lay off nearly a fifth of their workforce, while crypto hedge fund Three Arrows Capital failed to meet margins calls from lenders amid a spate of bad bets.

“It’s very unfortunate that there was an inflation of financial innovation, which is the real story over here,” said Chad Cascarilla, CEO of blockchain infrastructure platform Paxos. “Instead, we had financial instability because of this opaque leverage. You just couldn’t tell where all these risks were building up. And really, in some ways, it’s just an age-old story: you’re borrowing short, and lending long. I think it’s really unfortunate that people lost money, and I think in some ways it will set back the space, because you will lose some early adopters. On the other hand, the fundamental technology here and the adoption curve of the institutions that are coming in – like how you can get your financial system to operate at the speed of the internet – those are things that need to happen.”

Where do crypto prices go from here? “If the market goes higher, everyone breathes a sigh of relief, things will get refinanced, people will raise equity, and all of the risk will dissipate. But if we move much lower from here, I think it could be a total shitstorm,” said Adam Farthing, chief risk officer at crypto liquidity provider B2C2. “There is a lot of credit being withdrawn from the system and if lenders have to absorb losses from Celsius and Three Arrows, they will reduce the size of their future loan books which means that the entire amount of credit available in the crypto ecosystem is much reduced. It feels very like 2008 to me in terms of how there could be a domino effect of bankruptcies and liquidations.”