Cryptocurrencies have experienced an exceptionally violent crash in recent weeks: since 1er In April, more than a trillion dollars disappeared. This asset class had certainly experienced exceptional growth with capitalization reaching $3 trillion, attracting both individual investors looking for miracle returns and investment funds looking to invest in “this new world”.
So much so that many traditional financial services have been added:
– “Stock Exchange” through which these assets can be traded “cash” or in the form of derivatives;
– “credit institutions” that offer their customers the possibility to borrow or borrow in cryptocurrencies;
– finally, stablecoin issuers, which are supposed to reproduce the classic currencies (dollar, euro, etc.) in the crypto world.
For purists, centralized finance is to blame
These new players have developed with two models; the first, called “centralized finance” (CeFi), is reminiscent of a company’s classic mode where decisions, governance and processes are determined by management. The other, called “decentralized finance (DeFi)”, replaces any possible human intervention with computer programs (“smart contracts”): the client is therefore presented with a protocol whose elements are known and tamper-proof.
For cryptocurrency purists, the current crash is only due to the rise of centralized finance.
It is true that bitcoin’s fall accelerated from June 9 following the press release from the credit institution Celsius to block all refunds. Celsius, whose slogans were “The bank is not my friend”, has also called on one of them, Citibank, to join him in his rescue attempt…
Many expect another player in centralized finance to suffer the same fate as Celsius: the stablecoin Tether, which has been suspected of fraud for years. If they turn out to be real, given the $70 billion capitalization, the ramifications for crypto markets would be even more violent.
Human analytical skills can be useful…
However, it must be recognized that decentralized finance also bears a significant share of the responsibility for market movements. Its operation to ensure the security of the system is based on automatic liquidations once the level of collateral is no longer respected by the client.
In an illiquid and tense market, these liquidations can lead to an even greater decline in assets with the risk of a domino effect.
However, its capacity for human analysis has saved the global financial system many times over: the Fed, by organizing the 1998 rescue of the hedge fund LTCM by major creditor banks, or more recently the Intercontinental Exchange, by failing to liquidate not in the midst of the Covid crisis, Citibank’s positions that were a few hours late for the payment of a margin call for technical reasons.
The risk of spreading to the real economy
The features of these possible liquidations are known to everyone thanks to the inherent transparency of the blockchain. Hedge funds have well understood the benefits they can derive from this by ‘manipulating’ the market, especially on weekends, to trigger these liquidations.
The total lack of regulation in the world of cryptos is the first reason for this crazy exuberance, both on centralized finance (capital rules, investment transparency, liquidity ratios) and decentralized finance (manipulation, market abuse).
Mainly due to anarchist marketing practices, individual investors have been the big losers in this domino game to date.
Hopefully, regulators will know how to take the right steps to ensure the next crypto bubble doesn’t spread to the real economy. It’s time.