What caused crypto to crash this time (in five charts) and will it last?

Some systems link lenders to borrowers, and depending on how much demand is on both sides, calculate the ‘interest rate’ for the investor tipping the money.

These are called “automated lending protocols,” and the biggest ones were Aave, Maker and Compound, which fell 65 percent, 59 percent, and 72 percent, respectively.

DeFi also offers “automated market makers” or decentralized exchanges, which automatically connect buyers and sellers and also provide liquidity to the market.

The biggest ones are Uniswap, Curve and PancakeSwap which are down 60 percent, 78 percent and 67 percent respectively since January 1. Australia’s DeFi projects include Synthetix, which is down 38 percent, Maple Finance, which is down 14 percent. .

While token prices are the most obvious way to track the performance of a DeFi project, the results show how much demand there is for the system.

For example, if many people want to lend their money, the yield is high. When people don’t want to lend it, the yield is low. The yield in January was between 10 and 20 percent, while the yield is between 0.5 percent and 5 percent now, indicating how much money has been withdrawn from the crypto market.

NFTs, or non-exchangeable tokens, have been hit the hardest in this latest crypto selloff. NFT is any digital asset that is mounted on a token, and is seeing a boom in popularity in the digital art market.

The popularity of digital artwork embedded in NFT technology makes many people who were never previously interested in the crypto market pour their money.

Australian businesses exposed to the NFT market are NFT market maker ImmutableX, which is down 73 percent, and video game Illuvium, which is down 86 percent since the start of the year.

The only type of digital asset that has seen an inflow are stablecoins. It is a cryptocurrency that is traded in line with other assets such as the US dollar or Australian dollar.

Although Bitcoin’s market cap has fallen by 70 percent this year, the market cap of all stablecoins is only down 11 percent. Most analysts say this is an indication that money has flowed out of many digital assets, but has not completely left the ecosystem.

What caused the sell-off (and is it just crypto)?

There are two main reasons why cryptocurrencies of all stripes are sold out.

The first is macroeconomics. For a long time, low interest rates meant bonds and other “safe” investments made very little, so investors were pushed into equities and sometimes crypto to try and find returns.

Digital assets are notoriously volatile and subject to market sentiment and momentum, rather than fundamental analysis, so there are plenty of eager traders trying to make money on those moves.

Combined with the rise in lucrative DeFi results, and speculation about NFTs, and the crypto market has soared over the past few years.

But rising interest rates around the world mean investors want to avoid holding risky assets at this time.

Since the US Federal Reserve started raising interest rates in March – the first time in three years – and signaled there would be more hikes, investors have been pulling their money out of riskier markets. The US central bank acted again on July 27, raising interest rates by another 0.75 percentage point.

This “risk-off stance” is seen in the indiscriminate crisis in high-tech stocks which have fallen as much as 70 percent.

What caused so many crypto ‘banks’ to collapse?

The second reason cryptocurrencies were sold was the collapse of several large crypto “banks” and hedge funds. Most notably, Three Arrows Capital and crypto lender Celsius, both have filed for bankruptcy.

Just like in the global financial crisis, this collapse boils down to massive leverage and borrowing in this latest crypto cycle.

In May, an algorithmic stablecoin called Terra/Luna collapsed. It was meant to remain firmly pegged to the US dollar through trading mechanisms. But the team behind the coin pays traders 18 percent interest to keep the coin stable.

Terra/Luna was widely held as a stablecoin and when it suddenly dropped to $0, many businesses were in trouble.

One of them is Singapore-based Three Arrows Capital. Not only was it heavily exposed to Terra/Luna, but it has also taken loans that cannot be repaid after the crypto collapse.

Another crypto business that collapsed was Celsius, which offered customers more than 18 percent returns on depositing their digital assets. Celsius has taken those deposits and traded them in high-stakes markets behind the scenes to earn interest to repay customers.

One actual investment in Three Arrows Capital; illustration of market contagion that makes crypto investors nervous. How many big players are facing each other?

It turned out to be a lot. Greyscale Trust, BlockFi, Voyager are just a few names that had a big hole in their balance sheet when Three Arrows Collapsed.

Another crypto bank, Babel Finance, is also struggling to stay afloat. It turned out that Babylon also took depositors’ money and traded it without risk control behind the scenes.

Australian-founded cryptocurrency exchange Zipmex has been caught up in the chaos, announcing last month that it was trying to recover $69 million it had lent to the rocky “bank.”

It should be noted that all these businesses are centralized organizations. They are run by a team of people who make decisions about how much they want to borrow from their stash.

Unlike traditional stock exchanges, which have automatic “circuit breakers” that stop trading if the market starts selling drastically, crypto businesses cannot stop the cash outflow in time.

They also borrow more crypto to increase their returns. They took a big risk and exploded.

The contagion within the crypto market hasn’t extended to other markets yet, but a look under the hood reveals how interconnected many of these crypto projects are.

How does this compare to previous crashes?

This is not the first crypto crash. In fact, in bitcoin’s 10 year history there have been several 70 percent declines, as well as a tantalizing 90 percent decline.

Ethereum, which emerged in 2015 with its cryptographic smart contract blockchain, has also experienced at least two 70 percent collapses.

During the crash, it was pretty clear what caused the sell-off. Whether it’s hacking, exchanges shutting down, regulators banning cryptocurrencies or the macro picture getting investors of all walks of life cashing in on their investments.

This time, however, there is a more complex reason why cryptocurrencies – and there are 19,000 of them – are being sold.

But sophisticated crypto investors don’t seem too concerned about the pullback.

If you have done your homework on the type of project being developed, and are examining the on-chain economic unit, many investors see a buying opportunity. Just like technology investors in the stock market.

Can crypto bounce back from this?

Like many venture capital-backed or speculative businesses, crypto startups have laid off waves of workers to save money.

But at the heart of much of the crypto industry’s “laundering” is the internal debate, or reexamination, of decentralized versus centralized business.

For market watchers, crypto organizations built on-chain using decentralized systems have survived widespread carnage.

They say blockchain-based technologies that connect buyers and sellers, or lenders and borrowers, may experience less activity than usual, and their automated yield calculations may be lower, but the technology itself isn’t broken.

In fact, many investors are happy the sell-off has swept some overzealous, frenzied and unsophisticated investors obsessed with speculation out of the market.

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