2022 was a tough year for cryptocurrencies, and November was especially tough for investors and traders alike.
While incredibly painful for many, the FTX explosion and the resulting contagion that threatens to bring down other centralized crypto exchanges could be a positive in the long run.
Let me explain.
What people learned, albeit the hard way possible, is that exchanges ran banks similar to fractional reserve to fund their own speculative and leveraged investments in exchange for providing users with a “guaranteed” return.
Somewhere across the cryptocurrency Twitterverse, the phrase “If you don’t know where the performance comes from, you are the performance!” is floating around.
This was true for decentralized finance (DeFi), and it has also been shown to be true for centralized cryptocurrency exchanges and platforms.
Who would have known that some ill-timed bank runs would topple the entire house of cards by proving that while exchanges seem to have high revenues and tons of tokens on their books, many are completely incapable of meeting user withdrawal requests?
They took their coins and collateralized them to finance highly speculative bets.
They locked their coins on centralized DeFi platforms for performance, some of which they promised to share with you.
They placed user funds, along with their own reserves, in illiquid assets that were difficult to convert into stablecoins, Bitcoin (BTC) and Ether (ETH) when clients and users of the platform wanted to access their funds.
Not your keys, not your coins.
The phrase has never rung more true.
Let’s explore some things that are happening in the crypto market this week.
Investors withdrew a record number of coins from exchanges to self-custody
As Cointelegraph reported earlier this week, crypto investors panicked and withdrew record amounts of Bitcoin, Ether, and stablecoins from exchanges.
Separate reports cited a sharp increase in hardware wallet sales as investors realized the importance of self-custody of their wallets.
If the number of insolvencies and “temporary pause on deposits and withdrawals” messages continue to appear over the next few weeks, this trend of coins leaving exchanges and appearing in hardware wallets seems likely to continue.
With #Bitcoin Simply flooding out of exchanges, we now have a ~5yr high in Sovereign Supply of 87.7% of the total.
all USDBTC which flowed into exchanges since Jan 2018, has now been withdrawn.
Self-custody, and spot driven #Bitcoin markets are back on the menu. pic.twitter.com/Kqr36SBBJC
— _Checkɱate ⚡☢️️ (@_Checkmatey_) November 18, 2022
DEX and DeFi saw inflows surge, perhaps a sign of things to come
Cointelegraph also reported the surge in decentralized exchange (DEX) activity and DeFi inflow that came at the same time as record exchange outflows. After the events of the past two weeks, confidence in centralized exchanges and cryptocurrency firms could be broken, and the current and next wave of crypto investors could embrace the more Web3-focused DEX and DeFi protocols.
Of course, what DeFi and DEX need is a more transparent framework and processes that ensure user funds are safe and used “properly”.
A constant stream of bad news could present a good opportunity
Currently, the price of Ether looks a bit low from a technical analysis point of view, and the recent news about the FTX thief holding the 31st largest spot position on Ether, as well as concerns about censorship, the centralization, US Office of Foreign Assets Control enforcement on this “whale” and other Ethereum-based protocols that have exposure or proximity to bankruptcy with FTX and Alameda could lead to a bit of FUD affecting the altcoin price action.
Top 10 addresses with the largest ETH holdings:
– 6 are CEX related wallets
– Jump Trading coming in third with just over 2M ETH
– @arbitrum bridge with ~750K ETH
– ETH Staking & WETH contract has over 19M ETH combinedHoping to see less CEXes on the list in a year pic.twitter.com/S1HHi5swnN
—Martin Lee | Nansen (@themlpx) November 18, 2022
Uncertainty about when the Shanghai update will be enacted and investor concerns about when staked coins can be withdrawn are also interesting conversations that could turn sentiment against Ether in the near term.
The thesis is quite simple. ETH has held support around $1,200-$1,300 quite well throughout all the previous months of bear market developments, but will the potential challenges mentioned above lead to a test of the level again?
Participants are essentially long spot and yield, so right now, going low level short with take profit orders at $700-$600 could be rewarding.
This newsletter was written by Big Smokey, the author of The Humble Pontificator Substack and resident newsletter author at Cointelegraph. Every Friday, Big Smokey will write market insights, trend guidance, analysis, and advance research on potential emerging trends within the crypto market.
Points of view and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the entire amount invested may be lost. The services or products offered are not directed or accessible to investors in Spain.