The year 2022 was a challenging one for cryptocurrency, and November was exceptionally hard for both investors and traders. While it was painful for many, FTX’s demise and the ensuing contagion threatening to bring down other centralized crypto exchanges may be beneficial in the long run.
People discovered, albeit painfully, that exchanges were acting as fractional reserve banks, funding their own speculative, leveraged investments in exchange for providing users with a “guaranteed” yield.
On the crypto Twitterverse, the phrase “If you don’t know where the yield comes from, you are the yield!” is circulating.
This was demonstrated for decentralized finance (Defi) and centralized cryptocurrency exchanges and platforms.
Who would have guessed that a few ill-timed bank runs would bring the entire house of cards crashing by demonstrating that, despite exchanges appearing to have high revenue and tons of tokens on their books, many are completely unable to meet user withdrawal requests?
They used investor coins as collateral to fund highly speculative bets.
They kept investors’ coins locked in centralized Defi platforms to earn yield, some of which they promised to share with investors.
When clients and platform users needed to access their funds, they invested user funds and their reserves in illiquid assets that were difficult to convert into stablecoins, Bitcoin, and Ether.
Let’s look at what’s happening in the crypto market this week.
A record number of coins were transferred from exchanges to self-custody by investors.
According to industry reports, crypto investors withdrew massive amounts of Bitcoin, Ether, and stablecoins from exchanges in a panic.
Separate reports indicated a significant increase in hardware wallet sales as investors realized the value of self-custody of their portfolios.
Suppose the number of insolvencies and “temporarily pausing deposits and withdrawals” messages continues to rise in the coming weeks. In that case, the trend of coins leaving exchanges and entering hardware wallets will likely continue.
There were also reports of an increase in DEX activity and inflows to Defi occurring concurrently with record outflows from exchanges.
Following the events of the last two weeks, trust in centralized exchanges and crypto companies may be eroded. The current and next wave of crypto investors may gravitate toward the more Web3-focused DEX and Defi protocols.
Of course, Defi and DEXs require a more transparent framework and processes to ensure that user funds are safe and used “properly.”
From a technical standpoint, Ether’s price is soft. Recent news about the FTX thief holding the 31st largest Ether spot position, as well as concerns about censorship, centralization, and US Office of Foreign Assets Control enforcement on this “whale” and other Ethereum-based protocols that have exposure or bankruptcy proximity to FTX and Alameda, could stir up some FUD that impacts the altcoin’s price action.
Uncertainty about when the Shanghai upgrade will be implemented and investor concerns about when staked coins can be withdrawn is also intriguing topics that could turn short-term sentiment against Ether.
The thesis is straightforward. ETH has held support around $1,200-$1,300 fairly well during the previous months of bearish market developments, but will the potential challenges mentioned above lead to another test of the level?
Stakers are spotted long and earning yield, so opening a low-level short position with taking profits orders at $700-$600 could be profitable.