The recent scandals have caused unease among the crypto public, which is less and less confident in the decentralized system. Is it still worth investing in cryptocurrencies?
With the collapse of one of the world’s largest cryptocurrency exchanges, FTX, many investors are wondering about the distinct of the decentralized sector. It is difficult at the moment to be able to glimpse a glimmer of light from the tunnel of disasters that have characterized DeFi in recent months.
After the Luna case, the bankruptcy of Celsius and the probable bankruptcy of FTX, skepticism about the goodness of the sector has skyrocketed. Not only because current investors are losing a lot of money but also because, it seems, the risk from investing in cryptocurrencies could be much higher than what is transmitted by the main players in the sector.
That said, for the price of major cryptocurrencies, especially Bitcoin, there is no prospect of a bright future, at least in the short term.
Cryptocurrencies uncertain, FTX could trigger a chain reaction
Since the bankruptcy of Luna, the crypto sector has been enveloped by a strong aura of uncertainty regarding its future. This is because the decentralized economy has apparently grown tremendously over the past three years. Many DeFi companies, especially the larger ones, felt free to take more and more risks, supported by the fact that their assets continued to acquire large capital from the market, continuously increasing their value.
Compared to 2017, with the advent of the concept of "decentralized finance", the blockchain has been used to forge important financial relationships until the creation of an independent, autonomous and interconnected system. Basically, as long as the sector recorded record numbers, in conjunction with the strong expansionist push of the post-COVID-19 economy which also saw Western stock exchanges grow a lot, the crypto landscape seemed extraordinarily simple, genuine and profitable . What was not noticed and that was not highlighted by any expert in the sector was the semi-pyramidal structure behind which many leading companies in the crypto world were developing. With the collapse of prices, the reduction of positive flows for crypto platforms and increase of negative ones many companies have not been able to keep their finances stable. At the moment, the risk of a systemic collapse of the sector is worrying: Luna, Celsius and FTX had established important financial relations with internal and external realities over the years, which could at the moment have to suffer serious corporate problems, perhaps not yet disclosed to their investors. The first to fall could be Hedge Funds or in any case companies belonging to the cryptocurrency trading sector: this is the case of 3AC (Three Arrows Capital) and Alameda Reasearch.
Although it seems a remote hypothesis, the risk of a collapse of the crypto system lately seems to be becoming more and more real. Traditionalists often criticize the DeFi world for lack of regulation or a buffer system that can avoid systemic crises. For this reason, many analysts are concerned about the recent growth of the sector. They fear that the collapse of DeFi could impact in some way also on traditional financial markets. Currently it appears an unrealistic hypothesis since, on a dimensional level, the DeFi world is far too small, but it is not all that nonsense.
Some financial institutions have already established relationships with some realities in the cryptocurrency sector by exposing themselves to this risk, although currently in an extremely minimal way.
What is the real risk deriving from an investment in cryptocurrencies?
There are many ways to invest in cryptocurrencies and the quality of these methods varies depending on the context. For a blockchain purist, the use of synthetic instruments or derivatives of the cryptoasset price is a practice not recommended. For these individuals, the only way to invest in crypto is to acquire BTC via DEX and move it directly to a ledger: "Not your keys, not your coins".
If the user relies on centralized exchanges it is important to note that the risk deriving from asset holding on the trading platform is added, the FTX case is an example. Alternatively, it is possible to invest in crypto with the aid of regulated and tradable instruments through the banking system. Through ETFs, for example, it is possible to expose your portfolio to the trend of BTC while maintaining bank guarantees. Although banks are still subject to the risk of bankruptcy, the interbank fund deposit protection fund substantially limits the counterparty risk for a retail investor.
When an investor decides to invest in crypto, it must be taken into account that exchanges can represent a risk for their assets, not a guarantee.
What could be the future scenarios for the sector?
These are difficult times for the crypto public. Moments that historically have almost always shown themselves with a certain cyclicality punctuated by the halving cycle: euphoria, downsizing and finally panic. Observing the collapses of 2013 and 2017 we can see interesting parallels such as the failure of reality until recently considered the undisputed leader in the sector. Then follows a period of multi-year laterality in which interest in cryptocurrencies wanes. Many altcoins end up in oblivion and the phrase "to the moon" is read less and less on social networks.
At this point the huge question: "Will Bitcoin return to break its highs?"
If history were to repeat itself, the answer is yes. The cycle starts again with a breaking of the highs of the BTC price and with the birth of many other altcoins. This has historically depended on a plurality of factors, from the euphoria of investors for the halving to the deflationary process of the halving itself, to the growth of traditional markets.
It is therefore not exclusively the halving cycle that causes the price of BTC to rise but the whole context that is created around this event. It is mainly due to the increase in demand for BTC in the face of a stabilization of the supply.
Finally, traditional markets, like it or not, have empirically proven to be a fundamental variable for Bitcoin. An investor interested in buying the “lows” could therefore also use information from traditional finance to identify possible depth zones on BTC.
Original article published on Money.it Italy 2022-11-10 16:20:00.
Original title: Conviene ancora comprare criptovalute con il settore in crisi?
