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One month after FTX filed for bankruptcy, an initial post-mortem by crypto investors has posed a universal question: How far off is a market recovery?
The industry in 2022 was impacted not just by macro factors, but also repeat breaches of user trust. Rebuilding that trust, in the eyes of market participants, will be key to establishing a floor on falling spot prices — and, eventually, to clawing back steep losses sustained this year.
In a December market update, Vetle Lunde, a senior analyst for Arcana, laid out his outlook of what investors can expect to transpire.
Lunde expects any potential recovery to take some time, because of the reputational damage in the aftermath of FTX.
Already, several signs suggest the market ought to bottom in the first quarter of 2023. Digital assets have slumped 75% since the beginning of the bear market earlier this year, and observers expect another 5% to 10% decline in short order.
Investors shouldn’t be overly active now, according to Lunde, due to “unresolved contagion” and a slowdown in trading volumes.
“Still, the deep drawdown is in favor of maintaining and accelerating a dollar-cost averaging strategy in BTC,” Lunde said.
Bitcoin and US equities seem to have — at last — lost their lockstep. Historically, correlations have declined in down markets.
Apart from that relationship, other macro events could provide a more complete picture. The week of Dec. 12 is expected to be more telling, with another inflationary reading and the final Federal Open Markets Committee press conference of the year.
In the leadup, Lunde warned investors against holding yield products on centralized platforms, saying “the yields do not outweigh the risks of further contagion and potential bankruptcies.”
Centralized platforms are created and run by a company that oversees transactions and determines rules and fees. Decentralized exchanges allow users to execute orders without an intermediary.
“Overall, [bitcoin] and crypto seem eerily stable after absorbing the FTX shock, and potential contagion-related knock-on-effects loom. In essence, there are a bunch of arguments in favor of a cautious approach to the market, and 2-10% yields on your precious hard-earned capital are definitely not worth the associated risks,” Lunde said.
He drew a parallel between today’s shocking ripple effects with the Mt. Gox collapse in 2014, followed by the launch and growth of “more secure and robust spot markets.” Lunde expects the tough 2022 picture to likewise be followed by better managed exchanges, funds and lending platforms.
Institutional participation to aid recovery
FTX’s collapse is understandably expected to have repercussions for the industry, but they may not be as severe as expected. That’s because institutions are already showing interest in snapping up opportunities.
Goldman Sachs, for one, is looking to deploy millions into bargain crypto deals, especially startups now stuck with significantly lower values than earlier this year.
“In due time, this will be reflected in further maturation of the industry and hopefully less short-term gain and long-term pain scenarios like the never-ending crypto credit crisis of 2022,” Lunde said.
Still, he doesn’t expect institutions to rush to buy bitcoin or other digital assets.