As if this year couldn’t get any worse for crypto, November brought another onslaught of scandals that further damaged investor confidence, which was already remarkably low.
Fortunately, investor Cathie Wood and her team at Ark Invest have released their monthly market update to help give investors a little more insight into the current market dynamics and what they can potentially expect.
The most recent debacle in the crypto-currency space is related to one of the world’s most popular exchanges, FTX. According to Ark, the FTX bankruptcy is one of the most damaging events in crypto history, probably worse than the Mt. Gox hack in 2014, which resulted in the loss of over 700,000 bitcoins. At the time, that represented about 7% of all bitcoins in circulation.
Rather than a hack, the FTX debacle was the result of an inside job. As the evidence mounts, all indications point to former CEO Sam Bankman-Fried as the source of the problem. It is believed that Bankman-Fried improperly transferred approximately $4 billion in client funds to pay off debts at his other trading firm, Alameda Research.
And that’s not all. Mounting evidence suggests that Bankman-Fried even withdrew $1 billion in company funds to purchase personal property.
Ark believes that FTX’s implosion could set back institutional adoption of crypto-currencies by several years and set a precedent for regulators to impose overly strict laws that would do more harm than good to the industry.
But before regulators arrive on the scene, more damage may be in store. The list of companies exposed to FTX is worrisome, to say the least. In one way or another, and to varying degrees, well-known entities like Binance, BlockFi, Three Arrows Capital, Genesis Capital, CoinDesk, Coinbase and Grayscale are in the current mess. The risk of further contagion is surely possible.
The bright side
Surprisingly, in all of this, Ark sees a silver lining. Despite the selling pressure that is building in the market, the bad actors are being weeded out. As this process continues, it should bring much-needed transparency and resiliency. In an effort to meet investor demands, Binance, the world’s largest crypto-currency exchange, has agreed to implement a “proof of reserves” that aims to prove that the exchange is not over-leveraged and maintains a healthy balance sheet.
Due to the nature of the FTX bankruptcy, data shows that more crypto investors are fleeing centralized exchanges and using decentralized exchanges. Ark analyzed the trading volume on centralized exchanges and decentralized exchanges over the past few months and found that since the FTX implosion, the volume on decentralized exchanges has increased by 40%. This development can be considered promising as it proves that the decentralized nature of blockchains is resistant to malfeasance and can operate without the help of a centralized entity.
Finally, Ark evaluated the current position of one of its favorite crypto-currencies, bitcoin. In the report, the analysts found that some specific bitcoin metrics, not just its price, are at an all-time low and signal that one of the biggest capitulation events is underway. These include statistics such as the ratio of realized profits to realized losses. This shows that the average buying and selling price of a bitcoin has recently reached an all-time low.
However, despite some concerning statistics, macro trends indicate that long-term adoption remains strong. Ark typically uses bitcoin to assess current industry trends, as it is the most valuable crypto-currency. Ark has found that the number of active Bitcoin owners, defined as an individual or organization managing the same set of addresses sending and receiving funds, has maintained its general trend line of growth, even though current market conditions appear poor.
It is these long-term trends that support Ark’s view that decentralization will win. This period in the history of crypto-currency will likely go into infamy, but it could serve as a bifurcation where more responsible practices are put in place and a greater push towards decentralization is encouraged. Extremely decentralized and transparent blockchains such as bitcoin are likely to remain resilient regardless of market conditions, which is one of the main reasons Ark believes bitcoin is in a class of its own and worthy of long-term investment.