Investor Confidence in Crypto Market Continues to Crater

Investor Confidence in Crypto Market Continues to Crater

Steep losses are mounting, but the crypto shakeout is not necessarily a bad thing, some observers say

By Kathy Chu, TruthDAO

Crypto markets, from stablecoins to high-yield lending, are grappling with a loss of investor confidence that is challenging the weakest and most leveraged players.

The market cap of the crypto industry has sunk below $1 trillion after reaching a peak of $3 trillion in November 2021, according to CoinMarketCap. Bitcoin is about 70% off its all-time high and most of the more than 13,000 cryptocurrencies in existence have fallen at least 90% from their highs, according to CoinGecko.

In the latest development, one of the crypto world’s largest hedge funds, Singapore-based Three Arrows Capital, was ordered into liquidation this week by a British Virgin Islands court, according to the Wall Street Journal. Three Arrows didn't immediately respond to a request for comment.

Other signs of market jitters: High-yield lenders Celsius Network and Babel Finance have halted withdrawals over the past two weeks. Two other outfits – BlockFi and Voyager Digital – have received bailouts from crypto tycoon Sam Bankman-Fried, who heads exchange FTX and trading firm Alameda Research. Celsius and its competitors promised yields of up to 18% for crypto deposits. To meet their promises to investors, they sometimes invested in risky DeFi protocols.

The rapid pace of the meltdown has surprised some crypto veterans. “I always thought cefi-lender-as-Bitcoin-onramp was a doomed business model, but I truly didn’t see it falling apart completely by 2022," said Cory Klippsten, founder of crypto trading app Swan Bitcoin, on Twitter. "This is wild.”

The shakeout is not necessarily a bad thing though, says Marc-Thomas Arjoon, a research analyst at Coinshares, noting that some companies that are suffering the most right now accumulated too much debt and risk during the crypto boom. "I do think that it's healthy to flush out some of these over-leveraged positions,” Arjoon points out. “I see this bear market just trading within range. Every uptick will provide those trying to de-risk some breathing room.”

The downward slide of crypto come just one month after the $40 billion Luna/Terra stablecoin ecosystem collapsed. Developed by South Korean entrepreneur Do Kwon, the terraUSD stablecoin – whose peg to the U.S. dollar depended on an on-chain algorithm, not actual assets backing the stablecoin – imploded along with its sister currency Luna. The ensuing sell-off dragged down bitcoin and other cryptocurrencies.

A growing number of firms in crypto’s centralized finance space — where assets are managed by people rather than by smart contracts – are struggling. Singapore-based Hodlnaut, a small crypto lending platform, disclosed on Twitter that users had withdrawn more than a third of the firm's $500 million in assets under management by mid-June. Some analysts have attributed Hodlnaut's troubles to the collapse of Luna/Terra, but Hodlnaut said it has no direct exposure.

The rout's lesson for investors? Be wary of firms that offer sky-high interest rates but can't explain how they fulfill these guarantees: "These rates are impossible to be legitimate in the current economic environment," said Nicholas Weaver, a prominent crypto critic and chief executive of Skerry Technologies, a developer of autonomous drones.