This month’s bombshell in the crypto industry has only left bitcoin with a flesh wound. There are good reasons for the largest crypto token to be holding on despite the disorder surrounding it, but this is not the time for investors to be buying.
That’s not to say that Token hasn’t suffered. On November 2, CoinDesk published An article that eventually led to the downfall of the second largest crypto exchange, FTX. As of Friday, in the 16 days since the story was published, the price of bitcoin had fallen by nearly 18% to $16,500.
Such a sharp decline would mark disaster in any other market, but for an asset renowned for its volatility, recent price changes have been surprisingly modest.
“If you had asked me earlier what would happen to the bitcoin price in an FTX bankruptcy with zero recovery prospects, I would have predicted much lower prices,” says Stéphane Ouellet, CEO of Toronto-based FRNT Financial.,
A crypto-focused capital markets platform.
Some factors may be the strength of lending to bitcoin.
For one, unlike many other tokens, bitcoin has a strong core of investors who are almost religiously committed to holding their coins, even calling themselves “Bitcoin maximalists”. Each crypto catastrophe that sends elite investors running for the hills reduces their chances of short-selling the remaining base of holders, no matter what, Ouellet says.
Wednesday’s decision by Genesis Global Capital to suspend withdrawals and new loans is a case in point. A significant blow to one of the most important crypto lenders would be huge news in any other month, Oulet notes, but bitcoin barely budged, indicating that either the market has already priced in more problems or that Investors remain but they are only blindly holding on.
The second reason could be that the collapse of other digital-asset firms earlier this year had already washed away much of the leverage in the crypto market which could fuel a deeper downturn. While the demise of FTX is certainly more surprising to investors, it comes just six months after the failure of “algorithmic stablecoin” TerraUSD and the collapse of significant crypto firms including Celsius Network and Voyager Digital. During that debacle, bitcoin prices were cut in half, and investors and companies were forced to rapidly repay loans borrowed against their tokens or businesses.
Because of this, in FTX’s case, “the hit to crypto market cap is likely to be smaller” than the pain it suffered earlier this year, JP Morgan analysts said in a recent note.
Despite all this, investors should be careful. It is unclear which other crypto firms will be caught in the FTX collapse. For example, some offshore crypto exchanges have experienced massive withdrawals, despite assuring customers that they do not engage in the practices that led to the collapse of FTX.
What’s more, FTX and its sister firm Alameda Research were themselves backing other industry players. With that aid cut, analysts expect more firms to offload digital assets in fire sales to raise cash, lest they themselves become insolvent.
The recent price action also renders the coin vulnerable on technical grounds. According to Katie Stockton, managing partner at technical research firm Fairlead Strategies, bitcoin is now trading below a key technical support level at $18,300, which could signal further downside in the price.
Crypto rallies happen quickly, Oulet notes. This means that anyone waiting for an “all clear” signal could miss out on huge gains.
But for now, taking that risk isn’t worth it. There is no way to bargain when the market is so volatile.
Write to Joe Light at [email protected]
Credit: www.marketwatch.com /