When a large firm in a sector goes bankrupt, it almost always has a negative impact on regular consumers.
Regrettably, this contributes to skepticism toward crypto. Nevertheless, the crypto sector is in a far better place currently compared to where it was a few years ago. Its ecosystem has seen significant growth, and it is expected that market participants who are honest will push out those who abuse the assets of customers. In addition, the ecosystem will become more robust as regulatory frameworks are developed and the industry continues to make strides toward a larger degree of decentralization.
In perspective, even before the FTX collapse, 2022 was a disappointing year for cryptocurrencies; this most recent price reduction in crypto assets is not the first drop in value to occur in the cryptocurrency market. Therefore, let’s get to work and clear the path to a speedy recovery.
Lessons from history: the collapse of Mount Gox in 2014
Before we get to any conclusions about the present health of the cryptocurrency market, let’s take a step back and look at the Mt. Gox breach that occurred in 2014. The bankruptcy of the exchange, the loss of $460 million, and the disappearance of $27.4 million from its bank accounts did not come as a surprise to those who were acquainted with the inner workings of the exchange.
On the interior of Mt. Gox, there was a complex combination of incompetent governance, negligence, and professionals who were unable to do their jobs. Having said that, the exchange was primarily a reflection of its chief executive officer and a large stakeholder, Mark Karpeles.
The most important thing to learn from the debacle that occurred at Mt. Gox is that the world of cryptocurrencies, which includes Bitcoin and altcoins, is still in its infancy and is quite different from traditional financial institutions. As a result of the inability of bankruptcy law to deal with the repercussions, the transition to civil rehabilitation establishes an important precedent for the cryptocurrency business.
The cryptocurrency industry has rebounded from the setback that occurred in 2014, with the emergence of new successful exchanges that continue to operate safely to this day. The market has had a remarkable comeback and reached its high point in 2018, with the highest values for Bitcoin and Ethereum being recorded in November of that year.
The fall of the FTX and its implications are discussed.
FTX was one of the largest centralized cryptocurrency exchanges in the world as measured by trading volume and the number of active users. However, after uncovering black holes in its financial sheet on November 11th, 2022, the exchange announced that it was closing down and declaring bankruptcy. According to the findings of the investigations, the failure to maintain accurate records, the commission of a number of accounting mistakes, and a decline in investor confidence were all factors that led to the collapse of the FTX cryptocurrency. Sam Bankman-Fried, the company’s current CEO and founder, is the one who is being accused of masterminding “one of the largest financial scams in American history.”
The FTT token, which is the native token of the FTX exchange, served as a representation for a portion of ownership in the FTX corporation. It has been reported that the cryptocurrency hedge fund Alameda Research used the FTT token as a form of financing for dangerous loans. As a result, owners of FTT tokens were prompted to sell their tokens and withdraw their assets from FTX. It is also said that Alameda permitted wire transfers for FTX customers, making it possible for customers to engage in criminal behavior.
There are a lot of parallels to be seen between the hack on Mt. Gox and the disaster that occurred with FTX. They have a common history of weak management, lax security, insider trading, centralized decision-making power, speculative CEO behavior, and a disregard for their responsibilities to the people they serve as customers.
Days after declaring bankruptcy
After FTX announced on November 11 that it would be filing for bankruptcy, numerous other firms were forced to disclose whether or not they had any exposure to FTX or any of its related companies. What exactly took place in the days that followed?
The trading desk at Genesis Trading has stated that there is $175 million in “frozen money” in the company’s FTX trading account. Later on, as a result of unexpected volatility in the market, they were compelled to put a stop to any withdrawals from the lending division.
Due to Genesis, Gemini Earn’s lending partner, stopping withdrawals, the Gemini Exchange issued a warning that withdrawals from its Earn product will be delayed.
The cryptocurrency lender BlockFi submitted its bankruptcy paperwork on November 28. According to BlockFi, the liquidity issue was brought not just by coins that were locked on FTX’s platform but also by BlockFi’s exposure to FTX as a result of loans made to Alameda.
On-chain data obtained today suggests that the failure of Terraform Labs in May 2022 was the first cause of the sequence of events that ultimately resulted in the bankruptcy of FTX. This might imply that one epicenter of financial contagion, FTX, connects back to another source of the same problem, the TerraUSD, which lost its 1:1 peg with the UDS and caused a loss of $40 billion.
The not-very-frightening domino effect
Over the course of the last few weeks, we have seen a number of price fluctuations in cryptocurrency as well as changes in market value. A discussion has been generated about the relative benefits of decentralizing and centralizing authority over cryptocurrency as a result of these factors, which have forced several crypto heavyweights to sell their holdings. Is this thus an example of the Domino effect?
The “domino effect” is the name given to the chain reaction of unanticipated occurrences that take place in rapid succession after an initial startling occurrence. The domino effect in the cryptocurrency ecosystem is being caused by crypto forking, the implications of initial coin offerings (ICOs), and crypto dumping.
When a significant participant in the cryptocurrency market runs into liquidity problems, it has the potential to have a domino impact on the industry as a whole. An example of a chain reaction is the Domino effect. It acts in an unpredictable manner, taking the appropriate measures if you are unable to control the damage it does.
As a consequence of this, the only approach that can be taken to solve the issue is to embrace the concept of “market rationalization,” which upholds the characteristics of market dynamics in complex markets and price volatility.
How long do you think it will be until the cryptocurrency industry gets back on its feet?
Due to the fact that investors’ trust in the exchange’s token and other crypto assets was affected by the announcement of the FTX bankruptcy, the repercussions of the FTX bankruptcy will be felt for some time to come. On the other hand, it highlights the need for self-custody and the hazards involved with storing your money on a centralized cryptocurrency exchange. This is a positive aspect of the situation.
In order to stay up with the fast improvements in cryptocurrency, law enforcement and cryptocurrency trading both need constant updates. Even if the safety of using blockchain technology is constantly being improved, it is still important for you, as a trader, to do your research before deciding which exchange to join. Despite the fact that cryptocurrency is an unhackable method of exchange, cybersecurity is of equal importance to the assets’ market value.
Now is the moment for DeFi protocols to shine because they take power away from CEOs and put it in the hands of a decentralized community that does not have a single point of failure. This is better than depending on just one business or a small number of well-known people. Users need to embrace decentralized finance because it will help them keep their assets safe.
I also agree with what the CEO of the Mercado Bitcoin exchange said: “The collapse of FTX is not about problems in the ecosystem or the technology. It’s about a company that ran without governance, risk analysis, or any responsibility to its clients.” I am on the same page as he is. There is certainly nothing wrong with blockchain technology and its development, and it is very normal for the cryptocurrency industry to see both growth and contraction. At this time, the bear market is demonstrating what is known as the “Domino effect.” Still, since the cryptocurrency market goes in cycles, the cryptocurrency equivalent of spring is coming up soon.
The “Mt. Gox bear market,” which began more than 10 years ago and is now outperforming the lows of 2022 is the conclusion that can be drawn from the comparison between the Mt. Gox disaster and the present FTX collapse. Bitcoin’s value in comparison to the ATH at the time of the attack in 2014 dropped by as much as 85 percent in the months that followed, reaching its all-time low in January 2015, more than a year after the security breach. It wasn’t until December of 2017 that Bitcoin reached yet another all-time high price. If this trend continues, it might indicate that the price of bitcoin will make a complete recovery in less than three years and reach new highs that have never been seen before.
When the market finds its footing again, we will see an increase in the number of companies willing to invest in cryptocurrencies and implement solutions based on blockchain technology.
I have the answer if you are curious about how INC4 is dealing with the current market situation. Since 2013, our team has been working on blockchain, so we know how to handle any situation that might come up in the cryptocurrency market. Because of this, the developers and project managers working on INC4’s ongoing projects, such as PembRock Finance, the Open Forest Protocol, GYNN.io, Spaceport Docking Station, and others, continue to build and deliver new features.
There is no way that bull market adoption can be eradicated by bear markets or any other kind of market shock. Because developers are busier than they have ever been, it is quite unlikely that the cryptocurrency industry will remain quiet for an extended period of time.