Article

Why are Cryptos in crash mode?

date 11  November,  2022
time 3 mins read

In the last few weeks, the financial markets have been in a dream run where the equities have generated significant returns from the lower levels while on the other side the commodities too have participated and have exhibited good rallies after making the panic lows. On the other hand, the new tranche or the way of investing which has recently evolved in the financial markets has been under severe pressure.

Yes, we are talking about the trending new-age investment avenue, very popular amongst the millennials, the crypto markets, or the cryptocurrency. In the last few days, cryptocurrencies have corrected significantly with Bitcoin trading below the 17,000 mark. The reason why cryptocurrencies are hurting is due to a panic selloff in the native token of the crypto exchange FTX. Investors seem to have been riled up after insolvency rumors sparked the investors to doubt the viability of their investments.

The crypto market has been under tremendous pressure this year due to various reasons. The rising interest rates dampened the investor sentiment to ditch this risky or speculative asset as many safe haven investments were available at good prices in the financial markets. The collapse of several crypto lenders, including Celsius and Voyager, major tokens terraced and Luna and hedge fund Three Arrows Capital also have created a hallow in the minds of the investors who have already invested in this asset class and also to the new entrant who had the desire to enter this new world of trading.

The recent sell-off in the crypto happened after the event of Binance and the FTX where the news of the merger was floated into the streets. But later Binance scrapped a proposed bailout following a review of the company’s structure and books. This fiasco began with Alameda Research which was founded by Sam Bankman-Fried as a proprietary trading firm dealing in cryptocurrencies. They made money buying and selling crypto and wanted to help others do the same and then he came up with an exchange – FTX which facilitates cryptocurrency trading.

In the recent major development, the news of FTX getting liquidity issues has emerged among the market participants which has not created a big havoc in the cryptocurrency market. The news of Binance which is a global crypto exchange run by 45-year-old Chinese-Canadian billionaire Changpeng Zhao aka CZ.

Interestingly, both the founder of FTX Sam, and the founder of Binance aka CZ started as good friends and when Sam founded FTX, CZ took up a sizeable stake in the company just after the company began operations. Meanwhile, in the due course of business, both founders became business rivals and started to compete among themselves in the market.

In between, Sam apparently started peeping about Binance to US regulators. He even took a jibe at CZ — the CEO of Binance and questioned whether he would be allowed to visit Washington DC. On the other hand, the moment the crisis reports about Alameda’s balance sheet hit the media, CZ acted swiftly on it. He said he was going to sell all the FTT tokens he had owned citing recent concerns. This spooked the few investors who actually held FTT and a massive sell-off started in the markets.

The above development has spooked the crypto investors and a nasty sell-off is already seen in the cryptocurrency markets where the prices are trading at multi-year lows. The crypto market is very different from the stock market where prices are determined by fundamentals and holding for the long term has yielded high returns. In the crypto market, prices are driven by sentiments, and volatility is invisible. In India, still complete clarity is yet to be given from the regulators about the viability but the as expected and seen is very much higher in cryptos if it is compared with the equity markets.