With more Dominoes to Fall, the Crypto Contagion intensifies

Below is an excerpt from Bitcoin Magazine Pro’s most recent edition. Subscribe now to be among the first to get these insights and other on the-chain bitcoin market analysis right to your inbox. We are currently experiencing market panic and industry contagion. FTX and Alameda are both down, but many other players, including market makers, exchanges and miners, will follow their lead. This is a similar strategy to what we saw in the previous crash that Luna sparked, but it will have a greater impact on the market. This is the proper cleansing from the excess leverage, speculation, and misallocation of capital that comes with the global economic liquidity flood going back out. Everyone is quick to jump on to the next domino to drop. It’s natural. It’s natural. However, most information about balance sheets and hidden leverage within the system are not known. New information and developments in real-time are coming out every half an hour, it seems. The market is monitoring every transaction and move of exchanges right now, and they are under the spotlight. It’s unlikely that any exchange will be as egregious about client funds as FTX or Alameda, but we don’t know which exchanges are able to survive a bank ran. The market’s reaction to Crypto.com’s Cronos token, (CRO), dropped 55% in a week before seeing some relief over the last few days. The exchange has been experiencing a massive withdrawal trend — a bank panic — over the past two days. The CEO made media rounds to assure everyone that withdrawals were going well and that they will be able to survive. The price of CRO fell 55% within a week. Crypto.com Nansen assetsHuobi token(HT) also fell nearly 60% in the past two weeks. Huobi recently shared their assets list on the platform. It showed that around $900 million of HT was owned by Huobi Global users and Huobi Global. Although it is not clear how much of the $900 million Huobi Global owns, it is quite a haircut. In an effort to calm the market, exchanges around the world have scrambled to provide some form of proof of reserve. In two weeks, the price of HT dropped 60%.Huobi Nansen assets. This trend has been similar for the three most recent market panic events, which were the March 2020 COVID crash and the Luna crash. Now, the FTX, Alameda, and FTX crashes. As exchange and counterparty risks become priority No. 1, bitcoin flees exchanges. To mitigate. This is a welcome trend, with more than 122,000 bitcoin leaving exchanges in the last 30 days. The latest drop is due to a lack of transparency, trust, and excessive leverage in central institutions. This risk can be countered by having more bitcoin in self-custody. However, it is unlikely that all of the bitcoin will be returned to the market. Market participants will likely take every precaution possible regardless of whether they intend to store the bitcoin for long-term or send it back to an exchange later. In the past, bitcoin’s movement in and out of exchanges was a sign of price. However, as more bitcoin has been wrapped on other chains and used for financial products, exchange flows reflect current user trends. This is despite recent exchange outflows that marked local price bottoms. Today, 12.02% of bitcoin supply is on exchanges, a decrease of its 2020 high of 17.29%. Even though we are only halfway through the month of 2019, November 2022 looks set to be the biggest outflow month in history. The trend in bitcoin balances on exchanges has continued to decline since March 2020. However, the silver lining to this industry’s biggest-ever exchange crash is that buyers of bitcoin will feel more distrust in their counterparts and be more self-sovereign. Although many have spoken for more than a decade about the importance of personal custody as the world’s first digital bearer asset, it was often ignored by financial institutions like FTX, which seemed trustworthy and credible. Fraud can certainly change that. This dynamic, and the potential for greater amounts of contagion among the crypto space, has users fleeing to personal custody, with this past week bringing in the largest week-over-week decline in bitcoin on exchanges at -115,200 BTC.This past week was the largest week-over-week decline in bitcoin on exchanges.Interestingly enough, this sell-off was unique in the sense that unlike previous sell-offs in recent years, it wasn’t triggered by a flood of bitcoin being sent to exchanges, instead moreso by an implosion of illiquid crypto collateral without many (or in the case of FTT, any) natural buyers. We have been focusing so much on the dangers of crypto-native contagion in the past six months that we strongly recommend that our readers look into self-custody. If nothing else, it will allow them to be more relaxed. Final Note: Banks must be trusted with our money, and they can transfer it electronically. However, they lend it out in credit bubbles with very little reserve. We must trust them with our privacy and trust them not let identity thieves drain accounts. – Satoshi Nagamoto on FTX Relevant ArticlesThe Bigger They are…The Exchange War… Binance Smells of Blood As FTX/Alameda Rumors MountCounterparty Danger Happens Fast