The FTX crisis has deterred investor confidence and created a liquidity crisis in the cryptocurrency market, which could well prolong the crypto winter until the end of 2023.according to a new report.
A study by Coinbase analyzing the consequences for the cryptocurrency ecosystem after the collapse of FTX points out that the implosion of the third largest cryptocurrency exchange in the world has created a liquidity crisis that could contribute to prolong the crypto winter.
Many institutional investors in FTX had their investments stuck in the platform after it filed for bankruptcy on November 11. The FTX implosion has also discouraged investors and large buyers from moving away from the cryptocurrency ecosystem. Coinbase highlighted that stablecoin dominance has hit a new high of 18%, indicating that the liquidity crunch could drag on at least until the end of the year.
Stablecoin dominance assesses the relative dominance of stablecoins in the cryptocurrency ecosystem compared to total market capitalization. As stablecoin dominance increases, this suggests that market participants are moving out of crypto assets and into US dollar-denominated stablecoins.
The report predicted that, Although the possibility of a crypto contagion is limited now, as the exchange has filed for bankruptcy, the cryptocurrency market could see “second order effects” from counterparties that may have lent to or interacted with FTX or Alameda.. An excerpt from the report reads:
“The unfortunate events surrounding FTX have undoubtedly damaged investor confidence in the digital asset class. Remediation will take time, and very likely this could extend the crypto winter for several more months, perhaps until the end of 2023, in our opinion.”
The FTX crash has hit the crypto market hard, especially at a time when traditional financial markets have posted a significant rebound on lower-than-expected consumer inflation data. Many believed that if not for the ongoing self-inflicted crisis, the crypto market would have seen a similar market rally.
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