Crypto markets stabilize but contagion fears loom – Cryptocurrency News



Undoubtedly, last week was a turbulent one for cryptocurrencies as the bankruptcy of the second largest crypto exchange in the world, FTX, rattled investor sentiment towards digital assets. Even though prices of major coins have stabilized this week on hopes that the fallout from FTX’s collapse could be contained, more and more crypto-related firms are suspending their operations. In the face of a capitulation, investors are urging governments to regulate cryptocurrency transactions. Is it too late?

What happened with FTX?

On November 11, the cryptocurrency exchange FTX filed for bankruptcy protection a few days after a report by CoinDesk cited potential leverage and solvency concerns for the company, which led to mass withdrawals. To make matters worse, investigations revealed that FTX’s subsidiary, Alameda Research, was buying digital tokens before listing them on the FTX exchange and then dumping those coins on traders. This is known as ‘front-running’ the market and is illegal but the CEO of both companies Sam Bankman-Fried managed to pull the act by exploiting unsophisticated investors and the lack of strict regulations.

During this turmoil, Binance attempted to step in and rescue FTX in an effort to calm crypto investors and reduce market volatility. However, Binance backed out of the deal after corporate due diligence identified accounting issues in FTX’s balance sheet as well as mishandling of customer funds. In turn, this sparked a new round of selling in crypto assets, with the crypto market cap following back below $1 trillion and the Crypto Fear & Greed Index re-entering the ‘extreme fear’ zone.

Market implications

FTX’s failure has sent shockwaves across the crypto universe, and it is hard to determine when and where this contagion will stop. For now, many investors may not recover their digital holdings as FTX has also been a potential victim of hacking, while customers of other crypto exchanges are rushing to liquidate their digital assets, creating a liquidity crunch in the broader market. On the bright side, this latest development could prompt governments to tighten cryptocurrencies’ regulatory framework to minimize investors’ uncertainty and protect them from frauds.

Moreover, many crypto-related firms are suffering collateral damage due to FTX’s collapse. Specifically, two crypto lenders BlockFi and Global Capital have paused their withdrawals. Up until now, big players in the industry have been bailing out cryptocurrency companies struggling from the steep downtrend in token prices. FTX alone had spent more than $1 billion to rescue such companies, but it seems that this option is no longer viable, and we could observe a series of bankruptcies in the near future.

Risk on sentiment rescues Bitcoin for now

The crypto market is currently in a consolidation phase after sharp declines in the prices of most digital coins paused. Nevertheless, this recovery was not driven by signs that FTX’s fallout was contained, but by a broader improvement in risk sentiment as data from the US hinted that inflation is finally coming under control. Hence, even though the advance in stock markets dragged cryptocurrencies above their recent lows, investors would need concrete evidence that the risks associated with FTX are resolved in order to regain optimism about the future of cryptos.

Cryptocurrencies go offline

The crypto market crash has been continuously exposing flaws and failures in several cryptocurrency projects and business models, delivering significant blows to the trustworthiness of the broader crypto space. As always, markets adapted to those events and discovered a way to mitigate risks stemming from hacking or frauds. This can be achieved with the so-called cold storage, which is essentially a way to protect your digital assets by taking them offline.

Since these wallets are not connected to the internet, they are insusceptible to hacking attacks, while the risk of your exchange going bankrupt would not affect your holdings. However, there are downside factors to consider as offline digital assets are illiquid and cannot be used for staking, which is essentially locking up your crypto holdings in order to earn interest.

Bitcoin drops below crucial support, what’s next?

BTCUSD pierced through a key support region around 18,000, which was providing strong support in the last couple of months. Although the king of cryptocurrencies has been trading sideways in the past few daily sessions, near-term risks remain predominantly to the downside as concerns about stability and security within the crypto space persist.

Should the decline resume, BTCUSD could initially test the 2022 low of 15,620, which is the lowest price observed since November 2020. Even lower, the August 2020 resistance region of 12,490 might act as support.

On the flipside, bullish actions could trigger an advance above the crucial 18,250 mark. Breaking above the latter, the recent peak of 21,470 may come under examination.

 

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