Is Crypto Dead After FTX Collapse?
Millions are searching for the answer to the question, 'is crypto dead?'. This key phrase brings forth millions of results in articles covered by reputable financial news outlets across the globe because of the liquidity issues that have mired the crypto finance industry in November 2022.
The second-largest cryptocurrency exchange, FTX, which recorded at least $1 billion in daily volume and trailed only Binance in exchange rankings, filed for Chapter 11 bankruptcy protection in the US on 11 November. Filing for Chapter 11 bankruptcy means that FTX has many creditors who have poured liquidity into the company, but it has taken this step so that it can propose a reorganization plan to keep the business alive and pay creditors over a given period. The Sam Bankman-Fried-led company has seen the freezing of its assets by the Bahamas government, while provisional liquidators chosen by the country's securities have agreed to continue the bankruptcy proceedings in Delaware, US.
Following the collapse of FTX and its bankruptcy filing on 11 November, the total market capitalization of the entire crypto industry plunged by more than $100 billion in 10 days. There was a 13% decrease from 11 November's $840 billion to approximately $728 billion on 21 November. Due to interest in tokens such as Trust Wallet Token (TWT) - which has risen by more than 100% in the last two months due to increased demand for crypto wallets as a result of its self-custody purposes - the markets have made some gains.
It recouped more than $50 billion in the three days towards the close of 24 November, which saw capitalization climb up to $791 billion, data from Trading View showed.
Despite the billions of dollars of liquidity that poured into the market from 21 November to 24 November, the industry had not accounted for the remaining $50 billion that had left the market.
These metrics have become a major cause for concern for many stakeholders in the industry, prompting the question, 'is crypto dead?'. But the roots of FTX's demise were sown 12 months ago.
Terra Luna's collapse
The seeds for the contemplation of the question 'is crypto dead?' were sown in 2021. This was a period where sophisticated (traders and investors who conduct fundamental and technical analysis before making decisions) and unsophisticated (those who do NOT) saw multiple percentage gains within a short time.
Cryptocurrencies such as SAFEMOON and meme-inspired digital currencies such as Shiba Inu (SHIB) and Dogecoin (DOGE) brought more than 10,000% gains to their holders. Low-cap digital assets by market capitalization (coins with less than $2 billion in value) were not the only assets to see gains. Medium (digital assets with more than $2 billion but less than $10 billion in market cap) and large (coins and tokens with more than $10 billion in market value) such as Bitcoin (BTC), Ethereum (ETH),
Cardano (ADA), Ripple (XRP), Solana (SOL), Polkadot (DOT), Litecoin (LTC), and Dash (DASH) also brought triple-digital percentage gains to investors.
After the industry reached a peak of $3 trillion in November 2021, the fear of missing out (FOMO) set in. With reports of millions of dollars being made within a short time circulating on pro-crypto news forums and websites across the globe, millions more joined to milk the cow. Unfortunately, whatever goes up also comes down. During the pandemic's peak in March and April, the financial markets were brought to their knees, with BTC trading below $4,000. What followed was a bullish market that saw decentralized finance (DeFi) tokens such as Compound (COMP), Aave (AAVE),
Uniswap (UNI), and Yearn Finance (YFI) lead a turnaround towards the end of 2020. It was that turnaround that led to the record highs achieved by the crypto market in 2021.
At the beginning of 2022, there was the invasion of Ukraine by Russia, and this led to a rise in commodity prices. Industry-wide reports of inflation began circulating online in February and March. This was a time when the roots of bearishness which commenced after the highs in November started showing their branches.
What followed was the increase of interest rates by the Federal Reserve in the US. Millions of people jumped onto the crypto bandwagon, and DeFi especially, because of the above-average returns it promised. Since the US is the financial capital of the world, a rise in interest rates in the country led to a significant spike in interest rates in many developing countries whose citizens rely on crypto for passive income. Many of these residents and some crypto holders in developed economies began dumping the highly volatile asset class for safe and risk-free government bills and bonds that can add three, six, nine, and 12 months of passive income to their regular salaries.
In the middle of May, the shaky market saw the collapse of one of its new major assets in the form of TerraUSD (UST), an algorithmic stablecoin that supported the Terra project. As one of the major projects in the industry with more than $30 billion in total value locked (TVL), the collapse of the token wiped more than $40 billion off the market within two weeks.
As of 24 November, around $2.2 trillion had been wiped off the market since November 2021's highs. Holders of BTC, ETH, ADA, the old Terra (LUNA), and now FTX Token (FTT) have taken the biggest hit. The industry-wide bloodbath was captured by TradingView.
So, is Crypto Dead in 2022?
To outsiders of this broad industry, crypto is on its knees in 2022. Unfortunately for the same outsiders, crypto is more than some virtual assets on screen being traded by millions of people daily. Its underlying infrastructure, blockchain technology, has been tapped by many financial institutions to improve their systems.
A cryptocurrency like Ripple's XRP is used in the company's on-demand liquidity (ODL) feature during cross-border payments. This has helped millions of remittance companies that have partnered with Ripple meet their customers' demands.
One of the emerging sectors of the crypto industry is non-fungible tokens (NFTs). As of 24 November, NFT global market sales had surpassed $40 billion with projects such as Axie Infinity, Bored Ape Yacht Club (BAYC), CryptoPunks, and NBA Top Shots among highest selling collections. Blockchains such as Ethereum, Avalanche, Binance, and Solana continue to play an integral part in NFT creation and sales.
Aside from that, sports clubs have also tapped into the industry to improve fan engagement. Global Fan Tokens have surpassed more than $100 billion, with football clubs such as Paris Saint Germain, Lazio, AC Milan, AS Roma, and FC Barcelona among the top teams whose tokens lead the ranks of the most purchased.
Is crypto dead? In a nutshell, no. The market is going through a phase where shady projects are being thrown out, while others are being restructured to protect investors from losing billions of dollars of their hard-earned money.
Author: Raphael Minter
Raphael Minter/ Albert Zuhnden (preferred pen name) is a crypto finance writer, data miner, and fundamental analyst. Raphael has written hundreds of articles about centralized and decentralized financial instruments such as precious metals, commodities, stocks, and cryptocurrencies. He broke into digital finance in 2016 and believes digital assets and blockchain technology is the future of finance.