The crypto industry as a whole is reeling from several dark clouds gathering over the market. Popular coins like Bitcoin are at risk.
Why exactly is this the case and what is the best thing to do in situations like this? WANT editor Robert Kroes figured it out and tells you in this article.
Short-term crypto risk: stock market run
Last week we reported on how FTX is holding the crypto market hostage. In the past week, developments have raged. FTX has not been bailed out, but declared bankruptcy. In the process, founder Sam Bankman-Fried has been detained in the Bahamas.
Authorities there said they forced him to transfer all of FTX’s liquid assets. As the bankruptcy threatens to become the largest in U.S. history with an estimated $53 billion in damages, many investors are anxious.
There is little buying and many investors are trying to take their crypto off the exchange. With little trading, platforms are becoming illiquid and are also having to discontinue services. For example, crypto lending platform Gemini of Winklevoss Brothers announced a withdrawal halt last week and they are not issuing new loans either.
Bitcoin’s well-known logo (Image: Pexels / Roger Brown)
Managing risk against a crypto bank run
As we have said many times before, it is important to make sure that you do not store your crypto on an exchange, but in a personal wallet. This way you have control over the private key and prevent third parties from taking control of your crypto. In addition, if you are using an exchange, it is important to check that the exchange has enough reserves to keep functioning.
DNB’s supervision of licensed crypto exchanges provides some guidance in this regard. In addition, for the sake of trust and transparency, Dutch crypto exchange Bitvavo now makes its reserves transparent to customers.
Incidentally, after a particularly volatile period, prices seem to be taking a break. On Tradeincrypto.com’s overview of live Bitcoin and cryptocurrency prices, we see at the time of writing that most crypto from the top 25 are moving between +1% and -1%.
Bitcoin (Image: Pexels / Karolina Grabowska)
Medium-term risk: crypto price implosion
FTX and sister companies are involved in numerous tech initiatives. As a result, it is unclear how big an oil slick FTX’s bankruptcy will make. One of the parties affected is business options provider Grayscale. With them, companies that are not allowed by U.S. rules to buy crypto directly can still invest in the crypto market.
To do so, they charge a premium (if the market rises) or a discount (if the market falls) on the market price (spot price) of Bitcoin (BTC). Evidently, corporate investors have dropped out, as the discounts peaked today. Where the market price was $16,813, the BTC at Grayscale quoted $9,562, creating a record 43% discount.
On top of that, the now also troubled Gemini acted as liquidity provider for Grayscale and they are not performing that function now. On top of that, on Friday, Nov. 25, monthly options on Bitcoin (BTC) will expire. This will release a large amount of BTC and given the market, there is an expectation that many investors will sell.
In the extreme case, this could cause Grayscale to collapse as well. If this happens, what is already being called a Bitcoin armageddon awaits. Indeed, the fall of such an institution creates another huge breach of trust. Moreover, the fund currently holds 633,570 BTC. If these suddenly hit the market, a gigantic price drop awaits.
Crypto (Image: Pexels / Karolina Grabowska)
Risk management strategy in the event of a crypto armageddon
When investing in a volatile market with a high probability of a price breakout (in this case a bear breakout) it is wise to choose a conservative investment strategy. The Dollar Cost Averaging method we discussed back in 2020 is then a logical consideration.
To ensure that you are not surprised by a sudden price drop, you can combine this DCA strategy with a stop loss facility.
Of course, we are very curious to see how the situation develops and will update you on any special developments.
Stay up to date on the latest stock price developments?
You can always follow the developments yourself with our WANT analyses and overviews. Of course, you can also follow the BTC and live cryptocurrencies 24 hours a day if you want to stay informed in real time. Finally, you can practice stock and crypto investing without financial risk by creating a free account on virtualinvestment.com.
Note: We never give financial advice, so you can’t interpret our contributions that way either. Always do your own research and decide rationally if, when, what and how much you want to invest.