According to a recently released monthly outlook by Coinbase, the crypto market could be in for a longer winter than previously anticipated all because of the FTX crisis. Coinbase’s report support what was highlighted in our earlier news coverage, showing the crypto market could suffer more because there were many counterparties that had interacted or lent funds to either Alameda or FTX.
According to Coinbase’s report, the FTX crisis has made investors lose confidence in crypto platforms and also created a liquidity crisis within the crypto market that could easily extend until the end of 2023. The implosion of the world’s third-largest cryptocurrency exchange has triggered a fallout in the crypto ecosystem.
Funds stuck on FTX after it filed for bankruptcy
Many institutional and individual investors who had cashed in on FTX have their funds stuck on the exchange after it filed for bankruptcy on November 11. This in a way has caused fear among investors and buyers and thus deterring them from the cryptocurrency ecosystem.
The FTX bankruptcy proceedings may have significant legal complications and may also limit the probability of contagion as the courts look for a safe outcome.
With the whole drama around FTX having upset what was otherwise an emerging positive comeback since the Terra Luna collapse, the FTX bankruptcy will be closely watched although a lot within the crypto space depends on the path of US Federal Reserve interest rates.
Already bid-ask spreads on most crypto platforms have widened since market makers who used FTX as a liquidity pool feel less confident transacting in it.
In the report, Coinbase says:
“We believe poor liquidity conditions may last through at least the end of the year. Stablecoin dominance (see chart 1) has risen to a very high 18% of the total crypto market cap, which has itself fallen from ~$1T at the end of October to ~$800B as of November 12.”
Market volatility
Besides lack of confidence among investors and liquidity crisis, the crypto market is also witnessing very high volatility levels considering the amounts of withdrawals being witnessed across crypto platforms due to fear.
For example following the increased Bitcoin outflows from exchanges, Bitcoin volatility has increased to 66% which is close to what was witnessed at the end of June after the Celsius and Three Arrow Capital crisis.
The majority of cryptocurrencies including Ethereum (ETH) and Bitcoin (BTC) have already given up their previous gains.
Conclusion
In conclusion, Coinbase finds that the market will take time to recover from the current situation.
In the report, the exchange notes:
“Remediation will take time, and very likely this could extend crypto winter by several more months, perhaps through the end of 2023 in our view. Truthfully, it was going to be a challenging market regardless, as traditional risk assets still need to reckon with the high likelihood of a US recession in 1H23.”
In addition to the tough condition within the crypto space, there is also the policy tightening in the US and a stronger dollar that has increasingly made it difficult for investors to hold long positions in the crypto market and other high-risk markets.