The crypto market has witnessed a massive price meltdown over the crypto winter, with the total market cap of all cryptocurrencies shrinking by a whopping $2 trillion.
Most assets have seen their prices slashed from bull market peaks – see Bitcoin struggle to stay above $20,000 after dropping from highs above $69,000, or Ethereum bulls battling to keep $1,000 after testing $4,800 in November.
The market recoiled loudly as cryptocurrency Terra (LUNA) and the algorithmic stablecoin TerraUSD (UST) collapsed, wiping billions of dollars’ worth of investors’ money off the face of the Earth.
Crypto meltdown’s main culprit
While investors saw UST’s march to zero and a market cycle wreak havoc on prices, the main culprit is the over-leveraging that characterized the bull market environment in 2020 and 2021.
Nik Bhatia, the founder of The Bitcoin Layer, told CNBC in an interview that the market going into a tailspin could also be traced to the macro environment that had aggressive interest rates from central banks and the end of easy money amid inflation.
But Bhatia, an adjunct professor of finance at University of Southern California (USC), says the shockwaves that hit investors and crypto companies amid the severe bear market is more down to leverage and perhaps the presence of some “bad actors” within crypto than these other factors.
The implosion linked to Terra and Three Arrows Capital aside, the analyst says there were “Ponzi-type” tendencies that characterized the activities of crypto lenders like Celsius.
“…they were attracting depositors with high yields just so they could pay down the yield they had promised their existing investors,” he noted.
He says Celsius’ collapse was due to the broader “misallocation of capital within DeFi,” with investors bent on securing high yields without knowing exactly where the huge interests came from.
The Bitcoin Layer founder added that the blind allocation of capital is what led to the tailspin. If investors did this without leverage, then the impact would be on their portfolios.
However, going into it at staggeringly high leveraged positions only means the domino would be even more destructive.
You can watch Nik Bhatia’s interview with CNBC here.