The month of November started with a significant amount of panic and uncertainty within the cryptocurrency market. As one of the biggest crypto exchanges and its subsidiary imploded, Bitcoin’s price started to fall from $21,5K and bottomed at $15,6K. Shortly after, Bitcoin’s price started to stabilize between the price levels of $16,5K and $17K. Currently, the market is showing signs of hesitation as it remains unclear how this will further affect the market.
The turmoil started when rumors began to circulate that the balance sheet of trading firm Alameda Research largely consisted of the FTT token, the trading token of FTX, one of biggest crypto exchanges. In essence, this isn’t a big issue, however, Alameda used the token as collateral to obtain various loans. A problem arises when the provided collateral, the FTT token, decreases in value, when the collateral surpasses a certain threshold, Alameda is forced to sell the collateral to redeem the loan. When investors of the FTT token learned about the situation, they started to sell their FTT holdings. This started a vicious cycle of increasing selling pressure and as a result, the value of FTT started to drop. As Alameda, FTT and FTX are heavily interconnected, the crypto exchange also started to experience problems. Clients of FTX started to withdraw their holdings from the exchange which resulted in a bankrun. Shortly after, on Tuesday the 8th, FTX halted all withdrawals leading to more speculation about the insolvency of the exchange. You can read more about the events of crypto exchange FTX and trading firm Alameda Research in the news article we published earlier this month.
Since our latest article, more information has been released about the predicament of FTX and the possible effects it will have on the market. As it currently stands, there is still a risk that partners, investors and users of the platform can start to fall like dominoes as FTX filed for bankruptcy on the 13th of November. It still remains unclear where the assets of the users are and which partners used the platform to store their assets, allegedly, $10B has been misplaced. According to rumors, FTX has lent most of the assets to Alameda, which invested it in startups, as a result that most of the funds are stuck in vesting schedules. This hinders both creditors and new projects; these new projectors will experience immediate selling pressure when the tokens are released as Alameda needs to repay their loans. Besides the mismanaging of client funds, Alameda is also facing heavy criticism for its risk management. Many believe that the use of leverage has played a big role in the liquidation of large amounts of capital.
Established names as well are experiencing troubles due to the implosion of both organizations. Various protocols used the exchange as a place of storage, funds used it for trading and the platform had outstanding loans at DeFi lenders. The organizations which took the hardest hits have already come forward, however, it may take some weeks to determine the full impact it has on the market.
Besides crypto organizations, various traditional institutions have been negatively impacted by the bankruptcy of FTX. Earlier this year, the exchange was valued at $32B and conducted a funding round. Institutions such as Sequoia Capital, Softbank and pension fund Ontario Teachers Plan invested in the bankrupt exchange, $63.5M, $100M and $95M, respectively.
To add insult to injury, on the 12th of November, FTX was attacked by a hacker who was able to withdraw $600M from the troubled exchange. When the news of the hack broke, FTX employees advised users to delete the app and avoid the website as both may have been compromised. As the attack took place on the same day of the bankruptcy filing, speculations began to circulate that the hack was an inside job. The speculations increased as the hacker managed to transfer large sums of cryptocurrency and gained access to multiple systems.
American regulators Janet Yellen, secretary of the treasury, and Gary Gensler, chair of the Securities and Exchange Commission, already voiced their opinion about the roque exchange and warned investors. Both also emphasized the need for more regulation.
In case you have not yet read the earlier news article, we would like to re-emphasize that the Hodl funds have a "long only" strategy, are not leveraged in any way, do not use derivatives and never use their positions to serve as collateral. The Hodl funds utilize cold-storage for the storage of cryptocurrencies and try to avoid the storage of assets on exchanges as much as possible. We did not use the services of FTX and did not invest in the FTT token.
Cryptocurrencies evolved from the idea of decentralization and from time and time again, the importance of decentralization is highlighted. Despite the event happening in the cryptocurrency market, it once again took place by the malicious actions of a centralized organization. Similarities are drawn with the financial crisis of 2008 where banks were the malicious centralized entity. Over the past few days we have seen the interest in the market turn toward decentralized solutions that can provide an alternative to centralized solutions such as a Centralized Exchange. In addition to the implementation of necessary laws and regulations, we expect that there will be a strong increase in the use of decentralized alternatives.
Whereas the cryptocurrency market was mostly dealing with turmoil, the stock market actually had room for a scope of movement. For example, on November 10, the latest inflation figures from the United States were published, which was 0.2% lower after several months of high inflation rates, resulting in a small relief rally. Although the market is reacting positively, there is still a year-on-year inflation rate of 7.7%. It remains to be seen whether this decrease is enough for the Fed to adjust its policy. As chairman of the Fed Jerome Powell Stated they are far likely to overdo the tightening as they have the tools to make the economy thrive again. Currently, 80% of the market assumes that the rate hike on December the 14th will be 0.5%. This is already a lower hike than previous ones where the Fed implemented hikes of 0.75%.
Throughout the year, we have highlighted Hodl Finance several times in our newsletters. Hodl Finance was founded by several members of the Hodl team and it acts as an incubator for other cryptocurrency projects. One of the incubated projects was the Night Watch NFTs in collaboration with the Rembrandt Foundation. We are happy to share that the hard work of the Hodl Finance team has been rewarded with a nomination for the Dutch Blockchain Awards 2022 in the category: Technology Implementation Award!
The Dutch Blockchain Week (DBW) is one of the best-known conventions for the Dutch crypto ecosystem. During the DBW, various stakeholders of the market such as legislators, funds and entrepreneurs come together to learn and discuss the development of the market. The category for which Hodl Finance has qualified relates to which company or project has best implemented blockchain technology. We are obviously very proud that Hodl Finance was able to qualify for the Awards and are very much looking forward to the ceremony. Voting is open untill today, Friday the 18th of November, via the link below.
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