Published on January 20, 2023, 06:51
1. The slow recovery in investor confidence
At $1 trillion, the global cryptocurrency market cap is back to its pre-FTX bankruptcy level on Nov. 11. But that doesn’t mean investors have moved on. The seized cryptocurrencies will have to be sold to recover liquidity, which will weigh on the market. The domino effect of failure is not contained. Cryptocurrencies are still in a credit crunch. Excessive speculative borrowing has led to excesses and the purge is not over.
Institutionalists about to take the plunge into cryptocurrencies could wait and see or back off. For cryptocurrency market analyst Glassnode, the situation is improving but the market has not yet embarked on a sustainable bull cycle, according to the ten technical indicators (capital inflows, investor confidence, etc.) below.
Firms “will cut costs to survive this transition period,” Mike Novogratz, the manager of major hedge fund Galaxy, told CNBC. According to Chainalysis, the collapse of Sam Bankman-Fried’s group is only the third in 2022 in terms of losses inflicted on investors. That was $9 billion compared to $20.5 billion for the collapse of Terra USD (a cryptocurrency that should have remained stable under all circumstances) in May 2022 and $33 billion for the failures of Three Arrows Capital and Celsius a month later. A new incident involving a major player would plunge the market into doubt.
2. High stock market volatility
Apart from Cathie Wood, the manager of the Ark funds, few financial professionals are betting on a rapid return in favor of listed crypto stocks. Last year’s debacle left its mark: despite the recent recovery, many crypto stocks are still down more than 80% from their peaks. In this context, listed companies in the sector, forced to be more transparent and subjected to more intrusive supervision, appear at a disadvantage compared to unlisted competitors, who are also often based in conciliatory jurisdictions.
The lower interest of long-term investors is reflected in an exacerbated volatility of cryptocurrency values on the stock market, left in the hands of stock traders and “hedge funds”. While bitcoin has rebounded 25% year-to-date, the NYSE FactSet Global Blockchain Sector Index is up 40%. Conversely, bitcoin’s 2% drop on Wednesday led to an 8% drop in the index.
The “minor” Marathon Digital, the main value of the index, thus fell 17% on Wednesday after having risen by almost 150% between January 1 and 17. Hedge funds also remain heavily involved in these stocks, with more than 25% of the outstanding shares of Marathon Digital, Coinbase and MicroStrategy selling short, according to data from S3 Partners.
3. Decentralized finance that must convince
The FTX crash damaged trust in centralized exchanges (CeFi) and, in effect, put their decentralized alternatives (DeFi) in the spotlight. The difference: the former (Binance, Coinbase, etc.) manage savers’ funds – and can divert them, like FTX – and the latter (MakerDAO, AAVE, etc.) are only intermediaries to carry out peer-to-peer exchanges between investors: they never get their hands on cryptocurrencies and therefore cannot lose them.
Yet DeFi players are not emerging victorious from the FTX bust. First, their technicality limits them to an audience of cryptocurrencies and insiders. Then, their youth makes them prey to hackers ($2 billion stolen in 2022). Above all their yields, topic number 1 until then, melted with the cryptocrash and are now lower than US bonds, which are much less risky. At $45 billion, DeFi is three times smaller than it was in early 2022. In 2023, it will remain a proving ground.
4. A redistribution of cards in terms of employment
When the ship rocks, the sailors clink their glasses. Since the fall of FTX, nearly 2,500 positions have evaporated in the industry. Coinbase, Blockchain.com, Genesis… So many well known names in the industry that have reduced their workforce. However, several layoff plans had taken place even before the FTX soap opera, already revealing how some actors had been eager to hire, too visibly, during the exceptional year 2021.
Among the teams affected by these plane strikes, many engineers were called to take the door, especially those working on the development of the projects. Exchanges and cryptocurrencies are refocusing on their core businesses that make the most money. These programming talents who had sometimes given up on other jobs elsewhere are now in the water, sometimes after only a few months on the job, as evidenced by some testimonies.
On the other hand, several professions could benefit from the crisis, in particular those of compliance, to ensure compliance with local legislation. But also external communication functions to restore a solid brand image, jobs related to financial control, or even the fight against fraud and theft of tokens.
5. Towards more regulation
FTX could be the trigger that ended the Wild West of cryptocurrencies. In the United States, the US Congress is considering working on legislation this year to regulate this industry. For his part, the president of the SEC (the American policeman of the markets) is asking for more means to be able to guarantee his surveillance. Some politicians or regulators argue that if the rules aren’t comprehensive, they will be useless. In November, Stefan Berger, MEP and rapporteur for the MiCA text that regulates crypto-assets in Europe since late 2022, jumped at the chance to call for a “global MiCA”. “Europe took the first step, now it’s the turn of the United States,” he added.
Another aspect, the internal rules of investors could also be strengthened. The SEC is investigating whether some of those who have done business with FTX have done their security audit procedures correctly.
6. New transparency guarantees
“Backup proof,” or “backup proof” – the expression is most often phrased in English – sounds like a magic word ever since FTX’s bankruptcy. By revealing what they hold as assets, major cryptocurrency platforms, such as Binance, Kucoin, Kraken or Crypto.com, have wanted to reassure their customers of their creditworthiness. But is that enough?
Reserve evidence provides a point-in-time snapshot of assets held. It is still necessary to know which assets we are talking about. The “proof of reserve” shows a certain degree of transparency in a platform and the balance of its digital wallets. But it does not provide a complete verification of the financial situation of the entity, nor does it provide an assurance of its good health or a guarantee on the management of funds. Finally, it says nothing about the safety of these funds.
7. Self-custody return of digital goods
The loss of billions of dollars in cryptocurrencies on a centralized platform considered safe by most of the ecosystem taught its users that they were not the owners of their funds. “Not your key, not your coin,” goes the adage of the cryptocurrency world. The difficulties of the platforms could thus strengthen other digital asset custody systems.
Winners of FTX bankruptcy could include providers of secure storage solutions for digital assets. The “hardware wallet”, a physical instrument that can take the form of a secure USB key for example, is considered the most secure method of securing cryptocurrencies. A custody method that French Ledger leads the world with its flagship product, the Ledger Nano X. The French unicorn broke sales records as crypto investors’ fears about the safety of their funds were reignited by the FTX failure.

Nessim Aït-Kacimi, Laurence Boisseau, Joséphine Boone, Bastien Bouchaud, Thomas Pontiroli and Samir Touzani