The great crypto crash: the fallout, and what happens next
The collapse in the price of cryptocurrencies in recent weeks has been brutal, but the CEOs of two of the country’s largest crypto exchanges believe the fundamental underpinnings of the industry are still strong and that, in time, crypto prices will rebound.
Sean Sanders, CEO of Cape Town-based Revix, and Farzam Ehsani, CEO of Johannesburg-based VALR, both say the industry will emerge stronger on the other side of the current tumult. However, it might take quite some time for crypto prices to rise again – in other words, the “crypto winter” may not be over for a while.
Sanders says events in recent weeks have led to “contagion”, and that both retail and institutional investors have been “spooked” by slumping asset prices.
The destruction in value has been astonishing, with the total value of all crypto coins falling below US$900-billion – from north of $3-trillion at the market peak in 2021.
One market-shaking event after another – starting with the collapse of Luna and its associated stablecoin, UST– has piled the pressure on crypto prices, Sanders says.
“There has been a lot of credibility lost over the last three to four weeks. It all started with the Luna collapse, and then [crypto-lending firm] Celsius freezing withdrawals, and more recently [the crisis at crypto hedge fund] Three Arrows Capital [which failed in June to meet its margin calls]. It’s probably only a matter of time until we see further contagion,” he says.
As a result of the chaos, he says, many of the institutional investors that Revix assists have taken a wait-and-see approach to investing further into crypto assets. “They are waiting for the dust to settle before re-entering the market.”
The turmoil, Sanders says, will ultimately lead to “harsher” regulations, especially around stablecoins. “I expect to see a flood of new regulations in both the local and international markets, which could ultimately end up being a net positive.”
However, the crash – and the problems that caused the contagion – “does not build long-term trust in this new monetary system”.
“We’ve taken a couple of steps back. I’d say that over the last four years, we’ve taken 10 steps forward; this has just taken us four steps back.”
Many smaller players, both in South Africa and worldwide, will be “flushed out” now. This includes crypto companies as well as investors. Already, trading volumes on Revix’s exchange have declined by about 30%. However, Sanders says trading is still “pretty robust” given the scale of what’s happened. Revix’s monthly churn rates also remain low at about 1.5%, suggesting investors are “HODLing” – crypto-speak for investing for the long term.
“Crypto will become a bit quieter over the next few months as the dust settles after what has been a crazy period. Having said that, it’s during these periods that the building takes place,” Sanders says. “After the 2018 crash, it took until 2020 until we really started to see the market moving up again. Throughout that period, there was an insane amount of building happening. The same is going to happen again now.”
Several leading indicators support this view, he says. One is that a record number of software engineers have entered the crypto space in the recent past. Secondly, venture capital has poured into the sector – and that must lead to further development. And lastly, regulators – although they could hinder the industry – will ultimately provide much-needed credibility to the sector. “These are all fundamentally positive developments,” Sanders says.
Ehsani, meanwhile, says the sharp declines in cryptocurrency prices in recent months are directly correlated to the end of ultra-easy monetary policy from central banks like the US Federal Reserve as they move to fight soaring inflation.
“The cost of capital has been artificially low over the past few years, and indeed since the Great Financial Crisis over a decade ago,” Ehsani says. “This has resulted in our financial system being awash with liquidity which has found its way into financial assets, including cryptocurrencies. Now that this liquidity is also showing up in the traditional measures of inflation — including CPI — central banks are responding by unwinding the accommodative monetary policy put in place over the last few years.
“As quantitative easing slows and interest rates start to increase, valuations of financial assets start to drop. And as financial markets anticipate the actions of central banks to slow the rise in prices, many financial asset holders head for the doors — no one wanting to be last holding the bag. This thought process acts as a self-fulfilling prophecy.”
This asset class, while holding tremendous potential for the future of humanity’s financial system, is still in its early days
He says volatility is not new to crypto – in fact, volatility has been the hallmark of the asset class since its creation a little over a decade ago in the wake of the financial crisis.
“They have been seen as ‘risk-on’ assets and as such have moved in tandem with traditional ‘risk-on’ assets such as equities, albeit with much more volatility,” Ehsani says.
“It should be noted that the cryptocurrency industry is literally in its teens and as such comes with the vigour and tumult of what this age is associated with in humans. There has been a lot of experimentation of new types of protocols — such as algorithmic stablecoins — as well as business models in the crypto space. We’ve recently seen a couple of these experiments fail, bringing increased market movements to this industry. I anticipate this volatility to continue and repeat my caution that this asset class, while holding tremendous potential for the future of humanity’s financial system, is still in its early days.”
He says VALR is well protected against the current storm. “We have always remained lean, and we’re lucky to be in a financial position where we are still hiring and fortifying our foundation as a young company.”
The worst of the current cycle may yet be coming, Ehsani says, but the “fundamentals of what bitcoin and cryptocurrencies can offer the world — a censorship-resistant, global digital financial network — have not changed”.
Like Sanders, Ehsani believes the industry will “keep building during this crypto winter and will emerge on the other side even stronger and with more to offer the world”.
Asked when he expects the crypto winter to end, Sanders says it could be anything from six months to, “worst case”, two years.
“There’s still another six to nine months of interest rate hikes coming. A lot of that is priced into the market already … but the markets could easily go down another 25% just as easily as they could go up another 25%. It’s going to be a very volatile few months.”
And in time, cryptos like bitcoin could start to serve as something of a hedge against inflation, Sanders says. This clearly hasn’t happened yet, but there is still the potential for this to happen, even in the current cycle. “It’s going to be about how this asset class finishes this inflation period, and not how it started it.”
Ehsani echoes this view. “Many in this space view cryptocurrencies such as bitcoin as inflation hedges and expect a decoupling of this asset class against other ‘risk-on’ assets in the future. Whether this comes to pass, only time will tell.” — © 2022 NewsCentral Media