Even as reverberations of FTX’s collapse continue to echo through the crypto ecosystem, it seems to be having less of an effect on crypto prices. Many expected bitcoin price to bottom out in the aftermath of a crash of a major crypto institution.
That didn’t happen.
There was a blip in crypto markets after news of FTX’s troubles came out. But they avoided a steep drop off in value even as successive revelations have demonstrated the extent to which FTX played with customer funds. The biggest casualty, possibly, of the news cycle was the overall market cap of crypto markets, which has fallen by 8% to $828 billion from its peak last Thursday.
Bitcoin and Ether Fall, But Not So Much
Bitcoin price fell by 22% last week. While it may sound substantial, that percentage figure is not an anomaly for crypto traders used to wild swings in the cryptocurrency’s price.
It also does not look so bad when you compare it to previous seismic events in crypto history. For example, bitcoin price fell by roughly 30 percent in June this year after the Celsius scandal came to light. It crashed by 23 percent within a couple of hours after the Mt. Gox hack in 2014. As of this writing, bitcoin price is trading at $16,562.66, down 2% in the last 24 hours.
Ether, the world’s second-biggest cryptocurrency, also had a rough time but has recovered. It fell by 12% from a peak of $1,336.29 on 10th November before reversing its price trajectory. A contributing factor to its price boost may have been a hacker who drained $600 million worth of cryptocurrency from FTX’s wallets and converted them to ether. As of this writing, ether is trading at $1206.86, down 2% in the last 24 hours. Other indicators of crypto health – such as number of transactions on prominent blockchains – have also remained fairly constant during the current crypto churn.
It would be a mistake to frame recent price movements as a sign of crypto resiliency. After more than a decade of whipsawing price volatility and a seemingly endless string of scandals, traders have likely become numb to the asset class’s drama.
That said, recent events might have a bearing on future crypto developments. The hacker’s decision to convert their crypto to ether is another sign of the realignments occurring within the crypto ecosystem.
An Alameda Gap in Liquidity for Altcoins
Those realignments mean that liquidity for altcoins is drying up. In its latest piece, Kaiko Research says crypto markets will experience an “Alameda Gap” after the trading firm wound down its operations. Along with Wintermute, Amber Group, B2C2 and Genesis trading, Alameda dominated market making operations in trading.
“Alameda invested in dozens of projects and held millions of dollars worth of low liquidity tokens…we can also assume they were also a primary provider of liquidity for these same tokens,” the report states. It is safe to assume that survival of these tokens – such as Solana’s SRM and SOL, MAPS – is in jeopardy due to Alameda’s collapse.
Even some stablecoins will feel the pinch of Alameda’s woes, according to Kaiko. The trading firm held $46 million worth of stablecoins on its balance sheet, when it went under. Prominent among these are TrueUSD – a fairly illiquid stablecoin, Circle’s USDC, and Tether. The juicy bit in Kaiko’s research is that Alameda was actively using USDC to short Tether. Consequently, its holdings of USDC were in a downswing as it went under.
Tether, of course, is in a different league of its own. The stablecoin seems to have run its course and is generally among the first ones to be affected, when a mishap or bankruptcy occurs in cryptocurrencies. in the latest drama, the stablecoin claims to have processed redemptions worth $3.5 billion after FTX’s collapse. According to the latest snapshot of Alameda’s wallets from Dune Analytics, USDC was its biggest holding.
Decentralized Finance Again
As the latest crisis has unfolded, crypto proponents are back with their familiar criticism of centralized finance or CeFi, as they like to call it, and espouse the benefits of decentralized finance or DeFi.
That is, of course, a matter of perspective and I was planning to write about it but the Wall Street Journal beat me to it. Many of their points – about the honeypots of CeFi that feed DeFi development – are valid.
But, really, DeFi, in its current form, is hardly a reinvention of traditional finance; rather, it is an automation of tasks associated with transactions. For example, it has smart contracts that liquidate loan collaterals when margin calls are not met and liquidity pools that automate tasks related to purchasing or lending a token.
DeFi loans are overcollateralized because they are used for speculation. DeFi products like Flash loans also encourage risky behavior by using lending practices that do not involve collateral. DeFi products are also prone to hacks.
This, of course, does not mean that DeFi is worthless. There is value to automation and development of new risk management products. But it comes with a flipside. Technology adds scale and speed to such transactions, magnifying the effect of a collapse. In short, there is no philosophical or technical argument for the merits of DeFi over CeFi or any other acronym invented by crypto.