It shouldn’t be a surprise if Bitcoin bottoms to $8-12k before picking back up on a bull run at a later stage. The recent FTX collapse confirms that We cannot just claim to move away from the old legacy banking and financial system and consistently copy all its flaws while hoping everything will be fine.
Indeed, subsequently to exponential growth in the industry, that creates crypto billionaires, the crypto market is in crisis as it has become mostly speculative and needs to further introduce the fundamentals of traditional financial system based on sound economics and real performance value creation from real economic assets.
In other words it borrowed the bad stuff from traditional financial system and disregarded the good stuff that are supposed to make the industry sustainable and protect investors.
Comparison with Traditional Finance System
If we had to compare with traditional finance system we could say Bitcoin is the Beta of the crypto market. “Beta is a concept that measures the expected move in a stock relative to movements in the overall market.
A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility. In other words, Bitcoin is a de facto industry barometer, therefore if the price of Bitcoin swings the crypto market up and down.
If Bitcoin has lost 25% of its value in 24 hours, you can therefore imagine what will be happening to the other assets. I can bet my 2 decades experience in high finance and investment track record in the tech industry that this is just the beginning of a domino effect, as many key players (along the biggest in the world) had exposure on FTX.
Systemic Risk in Cryptocurrencies
Systemic risk in crypto industry is way much higher here than in traditional finance and 10 times more damaging in terms of market drops due to limited liquidity, and highly correlated assets.
Also, it features very limited number of big players (2 main assets represent 60% of the total industry market cap) in an industry with a tiny market cap $2-3 trillion. This is dwarfed by the size of global financial market $750 Trillion (out of which the global stock market and fixed incomes market caps represent $125 Trillion each).
In order to put things in perspective, let’s compare the two major events that happened last week respectively on the crypto market and the US Stock market. When Elon Musks announced the sale of $4 billion of Tesla shares, the stock dropped by 5%. While when CZ (Binance CEO) announcement to dump FTT Tokens led to a freefall of FTX token by 80% in one day.
While Testla’s shares may bounce back due to sound fundamentals at some point though unlikely for FTX that will most likely undergo a painful liquidation due to lack of fundamentals and of course poor governance.
Spectacular Rise of Crypto Assets
Of course one could say that on the other hand the rise of crypto assets can be (and has been) spectacular because of the same liquidity reasons above mentioned (that’s the principle of high volatility) but do such peaks really last? Not really.
The drop is acute for the reasons mentioned above referring to the highly correlated crypto assets, limited market liquidity leading to high vaolatility, further hammered by lack of business fundamentals and real economic backing fueled by digital assets backed by nothing or almost nothing (that’s why the peaks in crypto don’t last).
Pre-empting Regulation to Offer More Transparency
For sure, industry leaders shall pre-empt regulation and offer more transparency on their “Net-reserves and actual backing of their tokens”. That will certainly help but will not be enough to address the industry’s systemic issues. What else needs to happen for the crypto industry to thrive and gloriously emerge from this infancy stage?
I see 5 key solutions to be implemented and standardized within the industry to ride this repeated crisis wave.
- Proactive disclosure and Transparent mechanisms while respecting privacy
- Broader Asset Class Diversification with assets tokenization bridging with real-world economy for more stability and liquidity
- Return to the economic and financial review of business fundamentals and tone down the purely speculative approach damaging the industry
- Implementation & Standardization of portfolio risk management/assessment protocols and tools
- Adoption, Adoption, Adoption to ensure broader market depth and liquidity through customer acquisition beyond the crypto community.
Optimism in Crypto Recovery
Yet, the crypto industry is still at infancy stage: Let’s not throw the baby with the bath water. There is probably more than $500 Trillion in the global financial markets, commodities market (gold, silver, etc) and assets from the real economy or even assets from creative industry (art, music, NFTs) that are waiting to be tokenized to offer fractional ownership for all.
Such assets have real economic value and could help bring asset class diversification and therefore, reinforce the robustness of the currently challenged yet highly promising crypto economy.
This industry has indeed a tremendous potential and there are billions of people waiting to enter the industry and seize its opportunities for wealth redistribution as such systemic and structural risks preventing growth and adoption are progressively addressed.