Whether their bitcoin, dogecoin, and other digital currencies are safe should be the first thing cryptocurrency owners should be asking themselves right now. If you hold them with the incorrect broker or custodian, they might disappear through a protracted bankruptcy procedure and possibly never reappear.
Has there been a significant enough price decline to warrant reinvesting? Naturally, there is no conclusive response because these speculative assets lack a foundation for pricing. However, it is important to consider how much investors are prepared for a systemic collapse, for both the surviving speculators and the genuine believers who believe that someday we will all utilize a crypto financial system. The rest of us find it entertaining to observe from the sidelines.
The easiest strategy is to focus on price declines. Bitcoin has suffered a terrible decline versus the dollar, falling 77% from its November peak. Bitcoin has practically halved only since the initial crypto-related issues in May when Sam Bankman-FTX Fried’s intervened to restore order. The price of FTX is down more than 20% since the run started with a CoinDesk article exposing its interconnected hedge fund earlier this month, which caused it to file for bankruptcy.
It’s impossible to determine with certainty how much the cascading wave of failures damaged investors’ faith in the crypto ecosystem. However, at the extreme, the 77% price decline isn’t that different from the 85% decline in U.S. bank equities from the top to the bottom during the financial crisis of 2007–2009. Even if the exchanges that allow for its trading look to be collapsing like dominoes (and unlike banks, don’t have the Federal Reserve to support them), Bitcoin is still superior to banks since it cannot fail on its own. If you adopt this viewpoint, perhaps a large portion of the system’s loss of confidence has already been factored in.
The exodus of speculators provides more proof of that. Due to the fact that certain cryptocurrency hedge funds’ money was trapped on collapsed exchanges, they were forced to halt trading. Since fewer people are taking risks, there is less actual money to sustain the value of cryptocurrencies.
The first piece of evidence is that there is less demand for borrowing cryptocurrency assets because investors are no longer willing to take on further risk. Tether is a “stablecoin” that is linked to the value of the dollar, but the interest that can be generated by lending it out has fallen to just 2-3%—less than can be paid on risk-free dollars itself. With loan rates on Aave and Compound, two decentralized finance platforms for matching borrowers and lenders, close to zero, there is essentially no demand for borrowing bitcoin.
Second, spreads on well-known arbitrage transactions have drastically expanded. These trades thrive when investors are willing to take a risk because the gains are straightforward to calculate. Examples include profiting from the difference in prices for the exact same cryptocurrency on various exchanges or purchasing stock in companies with cryptocurrency holdings at a discount. Because they require high levels of leverage and carry the risk of the counterparty, the exchange, or the listed company collapsing, these and other arbitrage trades are not popular.
Third, as debt is repaid, the number of stablecoins in circulation has decreased. Tether is now only worth $65 billion, down from a peak of $83 billion in May.
