The latest crypto currency market crash began on 9 November.
On 8 November, the total capitalization of the crypto market was over $1 trillion, while on 10 November it had fallen to almost $800 billion.
The crash was due to the sudden failure of the large crypto exchange FTX, which caught virtually everyone by surprise.
The question everyone is now asking is whether this crash will continue, or whether it has stopped.
Actually, the crash due to the closure of FTX has already stopped, because in the days following 10 November, the total capitalization of the crypto market has not fallen below $800 billion.
However, the above question should not necessarily refer only to the crash due to FTX, but should also take into consideration the possible chain reaction.
The chain reaction in May/June that led to the cryptocurrency crash
A somewhat similar crash occurred between May and June.
On 4 May 2022, the capitalization was about $1.8 trillion, but starting on 6 May it began to fall.
Then the main cause was the implosion of the Terra/Luna ecosystem, which was virtually wiped out within a week.
By 13 May, the total capitalization of the crypto markets had fallen below $1.3 trillion, and the worst seemed to be over.
But at that point, a chain reaction was set off that led to the bankruptcies of Celsius, Voyager and 3AC, which occurred in June.
While capitalization on 10 June was still just under $1.3 trillion, six days later it had fallen below $900 billion.
Thus the first collapse, which lasted about a week, created an overall loss of 28%, which was followed the next month by another -30%. Overall in just over a month, the cumulative loss was 50%.
A new chain reaction?
Last week’s loss was 20%, which is proportionately less than in May.
At this point, it would be fair to expect another similar loss in the event that again it triggers another snowballing reaction.
Actually, such a reaction has already been triggered, but so far it has been of a lower magnitude than that of May/June.
Furthermore, it has probably already been priced in by the market, although it is by no means certain that nothing unexpected can happen again.
The fact is that both the implosion of Luna and the failure of Celsius first and then FTX were unexpected events. So while in order to imagine a new crash similar to the one in June one would have to assume some other resounding unexpected implosion, for now there are only vague signs of something like that.
But, as it happens, unpredictable events are by definition not predictable.
The case of Grayscale
At present there is already evidence, hence no longer unpredictable, that the chain reaction involved BlockFi and Genesis Global Capital.
However, it is not yet clear whether Grayscale is also involved or not.
What is known is that Grayscale is expected to hold even more than 630,000 Bitcoin, so any implosion of it could be a big deal.
Doubts arise from the fact that the share price of its Grayscale Bitcoin Trust (GBTC) is far undervalued.
In theory, GBTC is only a trust that owns BTC, such that the performance of its share price should replicate that of Bitcoin. However, this is not the case.
Each share in the fund should correspond to 0.00091502 BTC, safely stored in cold wallets. This means that at current prices each share should be worth about $15, whereas on Friday they were trading at just over $8.3.
The fact that they are trading at 45% less than they should be is causing many to fear that there is some underlying problem, and that Grayscale may be forced to sell its Bitcoin.
Added to this is the fact that the company has not wanted to publish the evidence certifying that it holds the reserves in BTC to cover the full amount of the fund, but some breaking news has surfaced on this point.
Custody of those reserves is entrusted to Coinbase, and the latter has publicly released data regarding the BTC and ETH in custody on behalf of Grayscale. While this is by no means sufficient to certify with absolute certainty that these reserves exist and are sufficient, it has nevertheless helped to weaken the case for Grayscale’s insolvency.
Market reaction to the new crypto currency crash
Focusing on Bitcoin, it turns out that in the past 24 hours the price had twice returned below $16,000, probably partly because of Grayscale’s refusal to provide proof of reserves.
When the information from Coinbase began to circulate, the price made a very small spike that brought it back above $16,100.
However, this in no way means that the markets have become convinced that Grayscale has all the reserves, nor does it mean that Bitcoin’s price has risen steadily above $16,000. It just means some fear has passed.
It is worth noting that the lowest price Bitcoin reached in this crash was about $15,500 touched on 9 November, and it has remained above this figure ever since.
This rather clearly shows that the early November crash is now over, but gives no guarantee that another one will not be triggered.
On the contrary, the doubts regarding Grayscale circulated in recent days have brought the price of Bitcoin back below $16,000, making it clear that this is a risk that the crypto market has not yet priced in.
Then again, for now there is only speculation circulating about Grayscale’s possible insolvency, with no concrete evidence that it is true.
However, it must also be added that the market is not only afraid that Grayscale might go bankrupt, but is also afraid that its BTC holdings might be liquidated in the market en masse.
The near future
The question at this point, in addition to the question regarding Grayscale’s resilience, is whether the future will still hold unpleasant surprises for us in the short term.
For example, rumors were circulating last week that were not at all reassuring about Crypto.com, but these rumors were later proven to be incorrect.
Indeed, it was thought that the exchange was unable to withstand the huge load of withdrawal requests, so much so that speculation circulated that it might end up like FTX. Instead, it held up, executing all the requested withdrawals.
In theory, a similar argument could be made for Grayscale as well, although it is still too early to say for sure.
So after the crash of 9 November, and the beginning of the chain reaction, there have already been two unforeseen events that threatened to resume the collapse, but instead turned out to be merely imaginative scenarios devoid of concreteness.
At this point, the future looks decidedly uncertain even in the short term, because while there are no concrete situations in sight that are so serious as to resume the slump, it is clear that instead new unforeseen events could pop up at any moment.
Moreover, the crypto markets at this time still appear decidedly weak, such that any major unforeseen event could easily trigger new collapses.