More Dominoes are About To Fall As The Crypto Contagion Grows.

We are currently witnessing the emergence of market panic and industrial contagion. Despite the declines of FTX and Alameda, many more players from funds, market makers, exchanges, miners, and other industries will follow. This is a similar strategy to what we saw in the previous crash caused by Luna, but this one will have a greater effect on the market. This is the right purging and washing out of the excess leverage, speculation, and capital misallocation that come with the global economic liquidity tidal turning around.

Despite this, everyone is eager to jump on the upcoming domino. It’s organic. While new information and developments appear to be emerging every half hour, the majority of information pertaining to balance sheets and hidden leverage in the system remains unclear. The market is currently paying close attention to exchanges’ every movement and transaction. We don’t know which exchanges can or cannot withstand a bank run, thus it’s probable that no exchange will be as reckless with client cash as FTX and Alameda were.

The Cronos token (CRO) from Crypto.com plunged 55% in a week, as evidenced by the market’s response, before finding some relief during the past day. Over the past two days, there has been a parabolic trend of withdrawals on the exchange, like a bank run. The CEO has been making the rounds of the media, assuring everyone that withdrawals are processing normally and that they would survive.

The Huobi token (HT), which has decreased by almost 60% in the past two weeks, is on the same trajectory. Recently, Huobi released a list of the platform’s assets, revealing that both Huobi Global and Huobi users collectively controlled almost $900 million in HT. It’s a significant haircut, however it’s unclear how much of the $900 million belongs to Huobi Global. In an effort to calm the market, exchanges worldwide have been rushing to present some type of confirmation of reserves.

The March 2020 COVID disaster, the Luna crash, and the current FTX and Alameda crash have all seen an increase in the amount of bitcoin leaving exchanges. Exchange and counterparty risk mitigation is given top emphasis, which causes Bitcoin prices to soar off of exchanges. With almost 122,000 bitcoin leaving exchanges over the past 30 days, this trend is generally positive. The recent slide has been exacerbated by centralized institutions’ enormous leverage, lack of transparency, and lack of trust in one another.

The best approach to reduce this danger in the future is to keep a larger portion of the bitcoin supply in your possession. That being said, it is a broad, implausible assumption to assume that all of this bitcoin is going into self-custody and is designed to never return to the market. No matter whether they plan to keep this bitcoin for the long term or send it back to an exchange in the future, it is likely that market players are taking all precaution they can.

Although the last two significant exchange outflows coincided with local price bottoms, bitcoin exchange flows are now more indicative of user patterns than they were in the past as paper bitcoin, wrapped bitcoin on other chains, and financial products have increased in popularity. From a high of 17.29% in 2020, only 12.02% of the total bitcoin supply is currently held on exchanges. Even though the month is just halfway over, November 2022 is already on pace to record the highest monthly outflow ever.

The biggest exchange crash in industry history has one benefit: moving forward, buyers of bitcoin are likely to have a greater tendency to distrust counterparties and practice self-sovereignty. For more than ten years, many have emphasized the value of personal custody for the world’s first decentralized digital bearer asset, but their arguments frequently went unheard because financial institutions like FTX appeared to be reliable and trustworthy. Fraud may very definitely alter that.

Users are escaping to personal custody due to this dynamic and the possibility of increased levels of contagion inside the cryptocurrency ecosystem, with this past week seeing the highest week-over-week loss in bitcoin on exchanges at -115,200 BTC.

It’s interesting that this sell-off was different from others in recent years in that it was mostly caused by the implosion of illiquid crypto collateral without many (or, in the case of FTT, any) natural purchasers rather than by a torrent of bitcoin being delivered to exchanges.

We strongly advise our readers to learn about and research the possibilities of self-custody given our intense attention on the risks of crypto-native contagion during the preceding six months; if nothing else, for their own peace of mind.