The cryptocurrency market has recently witnessed a rebound, with market cap exceeding $1 trillion. Yet, within a fortnight, the FTX collapse wiped away $200 million of market value. Where is the industry heading?
The crypto industry is having rough times. Since the stablecoin meltdown of early May, it became apparent that crypto winter had started. The market bellwether BTC had been struggling to remain near the psychological threshold of $20,000. Meanwhile, all major altcoins lost more than 60% year to date.
A short-lived upturn has made the crypto market worth $1 trillion again, but it all fell apart in a few weeks. What are the reasons for all the turmoil and is crypto still worth your investments? Let’s analyse.
A surge amid the crypto winter
The prolonged and steady crypto decline was interrupted by a sudden upheaval late October. Overall, the market was up 6% in a day. Therefore, the total market cap reached $1.03 trillion, crossing the threshold for the first time since October 4.
Meanwhile, both Bitcoin and Ethereum rose to levels unseen in weeks. On Oct. 26, BTC saw its second day of gains. It briefly crossed the $21,000 mark before getting back to support near $20,700. In its turn, ETH hit $1,500 for the first time since the short-lived boost caused by September’s Merge.
All other notable altcoins went up too. For instance, Solana grew by 12% to reach nearly $32, Cardano rose 14% to $0.41, while Polkadot climbed almost 11% to $6.50 per token. Besides, the popular meme token Dogecoin saw an increase of 15.03%, landing at $0.072.
A significant surge was in line with the macroeconomic trends. In particular, the stock market also had moderate gains a few days before the event. The boost was partly stimulated by expectations of a slowdown in the Fed’s aggressive interest rate hikes. Besides, a few major public companies reported positive earnings, driving investors’ confidence up.
Nevertheless, quarterly reports from Alphabet and Microsoft appeared weaker than expected. Thus, traditional markets fell again under mounting concerns that the economy may continue to slow down in the coming months.
Even given the October uptick, BTC still remained in its historical bottoming area. To call it a real breakthrough, the pioneer cryptocurrency should have reached about $23450 to see stronger trend acceleration. Furthermore, crypto exchanges faced a lot of liquidations that day. Analysts warned traders about the possibility of a short squeeze that could quickly reverse the bullish course.
At the same time, the crypto market managed to maintain sustainable growth levels for a week. Thus, the aggregate value of 20,000 listed tokens increased by 8.5% between Oct. 24 and 31. Some coins even rallied 20% or more over the period.
In addition, a record high of 55,000 BTC was withdrawn from Binance on Oct. 26. As a rule, the reduced number of coins deposited on exchanges is a bullish indicator, as the immediate selling pressure abates.
Finally, the crypto market cap benefited from Elon Musk’s acquisition of Twitter. DOGE rallied 112% as crypto fans hoped the billionaire, known as a supporter of the meme coin, could integrate it into the social platform.
FTX bankruptcy brought up market contagion
Despite the bullish predictions of some experts, an unexpected collapse of the major cryptocurrency exchange FTX brought all hopes back to earth.
The FTX bankruptcy saga hit the market hard. Questions arose about the transparency of crypto exchanges’ funds and their liquidity. Even stablecoins de-pegged for a while. Moreover, US legislators responded to an event with concerns and a stronger push for legal protection regarding crypto customers.
Along with the previous collapses of the crypto lender Celsius and the crash of TerraUST stablecoin from TerraForm Labs, the FTX bankruptcy undermined public trust in crypto projects. Exchange outflows have increased across all BTC wallet sizes as users rushed to withdraw their assets to self-custody wallets.
The total cryptocurrency market capitalization dropped by 24% between Nov. 8 and Nov. 10, reaching a $770 billion low. That was the lowest value indicator registered since December 2020. Despite a 16% recovery in a day, the market prospects remain subdued. Judging by multiple market trends, analysts concluded that negative investor sentiment would not let the $850 billion market capitalization support hold in the near term.
Truly, as of Nov. 25, the global crypto market cap was $829.85B, a 0.59% decline over the last day. Besides, the crypto market volume got down to $30.42B, which marked a 45.95% decrease.
Furthermore, the situation may deteriorate as other market players are affected by the liquidity crunch. For example, the crypto brokerage Genesis currently is looking to raise fresh capital for its lending unit, with analysts suggesting that the firm may face bankruptcy without funding.
In addition, cryptocurrency lender BlockFi, financially intertwined with the now-bankrupt FTX, is also reportedly planning to lay off workers and explore a bankruptcy filing scenario.
What may happen next?
Although the current lack of investors’ trust paints gloomy pictures for the crypto market’s future, there are also signs of possible recovery. Firstly, legislators across the globe are turning their attention to industry regulation. If clear guidelines address the audit of crypto companies’ reserves, customers may feel better protected while trading.
In addition, crypto exchanges themselves realise the need for transparent mechanisms regarding their financial operations. Thus, Binance officially launched a Proof-of-Reserves audit system to allow verification of its digital asset holdings. Although it currently works only for Bitcoin, additional coins will be added in the coming weeks. The announcement has already brought forth a positive response from the community, suggesting future transparency solutions from other market players will be welcomed.
However, it would be too early to anticipate bullish trends any time soon, as the ongoing economic crisis will not encourage risky crypto investments. While cryptocurrencies are struggling to stay afloat, customers are struggling with surging inflation and rising living costs. Therefore, the demand for digital assets among individuals will remain low until they get more spare funds to experiment with.
At the same time, institutional investors still have faith in the crypto market. For example, Cathie Wood’s Ark Invest has recently bought $1.5M in Grayscale Bitcoin Trust shares at a record discount to their net asset value. Overall, the high-profile stock picker had doubled down on the struggling sector, buying more than $60 million in crypto-related stocks since the FTX fall caused a significant price decline. The firm insists its “conviction in decentralised and transparent public blockchains is as strong as ever.”
Although it’s difficult to predict where the crypto market is headed in the long term, positive changes like regulation and institutional adoption of crypto payments may give crypto a chance to rise again in 2023.
The crypto market is heavily dependent on the liquidity of major players and public trust. Although it’s hard to imagine the industry in full bloom amid the global economic crisis, the increased efforts to regulate the market and bring transparency to crypto firms’ holdings will boost investors’ confidence. In addition, institutional adoption of crypto payments and non-abating interest from institutional investors will help the industry stay afloat.
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