New Crypto Winter ? 🥶
It’s been a rough start to the year…
And, with the Fed looking like it’s raising rates in March, there are concerns that we could be entering that Bear market.
However, what’s even more concerning than this is the prospect that this crypto bear market could translate into a longer crypto winter. One that sees subdued prices and lackluster interest for a year or more.
So, are we headed to a cold crypto winter?
Well, one of the best ways to judge this is to compare and contrast the market conditions now to those that preceded the previous crypto winter. That was back in 2018 & 2019. Two long and hard years in the crypto space. One that many of us had experienced first hand.
I am going to be taking a look at the two different periods and analysing if there are any similarities or differences. I will also take a look at what is driving the market now and give my perspective of whether the market rout that we have seen will continue.
Thoughts on Market 📈
Last week I mentioned that this week would determine which way the crypto market is headed in the short to medium term. This was primarily because of the Federal Reserve’s press conference on Wednesday, and the worries of what they would say about raising interest rates. Luckily, it looks like they’re sticking to the original schedule, so the crypto and stock markets didn’t crash. But the markets didn’t exactly rally either, at least not until Apple released its record high quarterly earnings on Friday. Apple is the largest company by market cap, and it’s believed that Bitcoin and other cryptocurrencies are correlated to tech stocks such as Apple. As such, it looks like Apple carried the crypto market and the stock market into the green. This isn’t a stretch to say either, because Apple also announced their own metaverse plans. Recall that Apple CEO Tim Cook holds crypto too. Speaking of which, Tim also said that Apple is seeing supply chain issues ease as countries drop pandemic restrictions. This is seriously good news, because most of the inflationary pressures seem to be coming from supply chain disruptions.
So consider this…
If the Federal Reserve is raising interest rates to fight inflation being caused primarily by supply chain issues (or so they say), then what happens if, say, the World Health Organisation suddenly declares the pandemic is now more of an endemic? This would mean that countries would no longer have a leg to stand on when it comes to these restrictions. The more countries that lift these restrictions, the less bottlenecks in the supply chain. While it may take some time for it to clear the current backlog, the positive sentiment around this announcement could help to lift the markets.
This is one of many “white swans” on the horizon that could lead to a nice recovery across the board. By the same token though, there are some black swans that appeared last week as well. The most significant of these is probably the upcoming executive order on cryptocurrency that’s expected to be signed as soon as next week (covered below)
There are also ongoing concerns about energy shortages around the world, including in the United States. This has resulted in many countries cutting off crypto mining operations to preserve power, and it’s possible that this could happen in some US states. An upcoming video I’m doing will analyze what US politicians have been saying about crypto mining, so stay tuned. For what it’s worth, the charts and fundamentals are looking damn good. BTC balances on exchanges continue to fall, and we seem to be seeing some actual momentum to the upside for the first time in weeks. There’s of course no guarantee that this will continue, but it’s the best sign we’ve seen in a while.
DeFi Drama 😴
Of all the innovations in cryptocurrency, decentralised finance is arguably one of the most important. The ability to trade, borrow, lend, and save without a middleman is the pinnacle of financial freedom. The proof is in the pudding – the protocols that power this technology have hundreds of billions of dollars in total value locked. If only they were truly decentralized.
Regulators such as SEC Chairman Gary Gensler have said that most DeFi protocols are centralised enough to face the scrutiny of regulators. There is no denying that there is truth to this statement, and it’s one that unfortunately applies to many crypto projects as well. The intense competition in the crypto space has made centralisation tempting, after all. Regulations aside, the fact of the matter is that centralisation increases risk because humans are corruptible. This was put on full display during
This was put on full display during a recent fiasco involving a DeFi protocol on Avalanche called Wonderland. In short, Wonderland is a fork of Olympus DAO, a DeFi protocol on Ethereum that’s essentially aiming to be the central bank of cryptocurrency.
Like Olympus DAO, Wonderland was infamous for providing insanely high yields to users who deposited funds into the protocol (one of the many red flags of a scam). Wonderland was also famous because of its prolific founder, Daniele Sestagalli, who is a well known DeFi developer that’s worked closely with the likes of Andre Cronje (Yearn Finance founder).
Wonderland wasn’t a one man show though. There was another DeFi personality who went by the pseudonym 0xSifu. Nobody knew who he was (another red flag), until another DeFi sleuth named ZachXBT revealed that 0xSifu was the co-founder of Quadriga CX, a cryptocurrency exchange that shut down in 2019 after its founder disappeared with the crypto.
If that wasn’t bad enough, Michael Patryn (0xSifu) has a history of financial crimes, which left the crypto community wondering why Daniele chose to partner with this individual. The answer seems to be money. Michael was an early investor in another DeFi project Daniele had founded. Daniele also claims to this day that Michael is not the same person he was before.
The Wonderland community didn’t buy it though, and they voted to remove Michael from the project not long after the news broke. There is also a vote that is currently running to entirely close down Wonderland and give the funds back to the community. Even so, this saga has no doubt attracted the attention of regulators around the world.
Let this be a lesson to the crypto community and DeFi community. If we do not regulate ourselves, then the real regulators will come in, and it will not be pretty. Luckily there are a lot of actual crypto journalists out there who are keeping tabs on what’s going on, but the best medicine is prevention. What’s the solution? Better governance. Let’s hope it comes soon.