1.1 Cryptocurrency Market

After the Covid-19 liquidity bubble, the Terra-Luna incident shook the entire ecosystem. Cryptocurrency investors are still in chaos. The cryptocurrency market, called “digital gold,” has been experiencing obstacles. Bitcoin and Ethereum, the leaders of the cryptocurrency market, fell more than 70% from their peak. It seems like ‘crypto winter’, where the cryptocurrency market is contracting and entering a bear market.

Liquidity Reduction and Lunar Crisis Launched 2022 Crypto Winter

The background to this year's decline in cryptocurrencies is caused by reduced liquidity. While the enormous liquidity released in the global asset market during the Covid-19 period formed a bull market for cryptocurrencies, this trend was reversed as the U.S. federal reverse system recently raised interest rates and started quantitatively tightening. As concerns about the global economic recession grow, not only cryptocurrencies but the entire investment market has been experiencing an economic slowdown; however, the fluctuation range of cryptocurrencies is out of control compared to other investment targets such as stocks and gold. At the end of last year, the global virtual asset market cap reached $2.2 trillion. Still, the total market capitalization of virtual assets stood at $1 trillion (as of July 19), and more than half had disappeared.

In particular, the collapse of ‘Tera’, a stable coin (a coin pegged to the value of fiat currency), and ‘Luna’ had crashed the public’s trust in the virtual asset market. The global financial industry and central banks also warned about the cryptocurrency market's risks after the Terra-Luna crisis.

The risk of the cryptocurrency market has been recognized by investors, and it has made them rigid. According to CryptoCompare, a cryptocurrency data analysis company, the spot cryptocurrency trading volume in June was $1.41 trillion, which has gone down 28% from the previous month. The fear and greed index (investment sentiment index) calculated by Alternative, a cryptocurrency data provider, has maintained a level of ‘extreme fear’ or ‘fear’, moving from single digits to 30 after the Terra-Luna incident. As the index approaches 0, investors feel incredibly pessimistic about investing, and as it closes to 100, it means they are optimistic about investing. Although major cryptocurrencies such as Bitcoin showed a rebound in July, it is uncertain that investment sentiment has returned to a meaningful improvement in the broadest sense.

As the rosy outlook for the market lifts, cryptocurrency miners are also withdrawing. Core Scientific, a North American bitcoin miner, sold $23,000 worth of bitcoin in June. Canadian cryptocurrency miner Bitfarms said, “Considering market volatility, we will not hold all of our daily bitcoin production.”, and participated in the sale of Bitcoin.

“The background to this year's decline in cryptocurrencies is none other than reduced liquidity. While the enormous liquidity released in the global asset market during the Covid-19 period formed a bull market for cryptocurrencies, this trend was reversed as the U.S. federal reverse system recently raised interest rates and started quantitative tightening in earnest.”

Cryptocurrency Companies Going Bankrupt One After Another

The cryptocurrency ecosystem is also not in perfect condition. The Terra-Luna crash has resulted in cryptocurrency lending companies and exchanges declaring bankruptcy. Recently, Celcius Network, a cryptocurrency lender, filed for bankruptcy protection in the Southern District of New York.

Celsius is America's leading virtual asset platform with 1.7 million customers. After the Terra-Luna incident, the cryptocurrency market suffered a bank run. The liquidity crisis could not be prevented, and bankruptcy protection procedures were taken. Celcius' balance sheet deficit is about 1.19 billion dollars.

Before this, 3AC, a Singapore cryptocurrency hedge fund, was also ordered to bankruptcy by the British Virgin Islands court after failing to overcome the aftermath of the failure to invest in Luna Coin. Voyager Digital, a cryptocurrency lending and brokerage firm that financed 3AC, also filed for bankruptcy protection in the face of the bank-run crisis. "While we have strong beliefs about the future of this industry, we have made this decision due to continued market volatility and 3AC's default," said Steven Erlick, Voyager Digital's CEO.

Large-scale workforce restructuring is also in full swing. Coinbase, the largest U.S. cryptocurrency exchange, has cut its workforce by 18%. Gemini, another cryptocurrency exchange, also laid off 10% of its employees in June and recently decided to lay off an additional 15% of its employees. OpenSea, a non-fungible token (NFT) marketplace, said it would cut its workforce by up to 20%. The background of workforce restructuring is also Crypto Winter. Devin Finzer, CEO of OpenSea, said, “Crypto winter coincided with widespread macroeconomic unrest, followed by a slump in cryptocurrency prices and increased economic unrest.” And, he said, "the company needs to be prepared for a possible long-term recession."

Unbroken Optimism in the Cryptocurrency Industry

There is no disagreement that the cold wind of Crypto Winter cannot be avoided. The consensus is that a significant downturn has begun again after 2011, 2014, and 2018. The problem is that we don't know where the end and the bottom are.

Past Cryptor Winters took five months at the shortest and over a year. It is difficult to estimate the bottom of the crashed cryptocurrency price. CIO Scott Minerd predicted Bitcoin would survive but warned the price could fall as low as $8,000. The current Bitcoin price is in the low 20,000 range (July 19).

Although the crash has swept through the cryptocurrency ecosystem, industry insiders remain optimistic. Just like the information technology (IT) market did not disappear into a big zero just because the dot-com bubble subsided in the past, the cryptocurrency market will also go through a long-term maturity and settle into the institutional system. There are many claims that true boulder screening will occur during this time.

There are also forecasts that the industry can get out of the crypto winter period faster than the market forecast. Korbit, a Korean cryptocurrency exchange, recently published a report titled “How long will crypto winter last in 2022?” The report states that “the fourth crypto winter we are currently experiencing was due to the macro factor of monetary policy by the US Federal Reserve. It is very similar to the third Crypto Winter. Considering the experience of the crypto winter, inflation reflected in the current market, expectations for the Fed's monetary policy, and changes in geopolitical dynamics, we judged that the time to break out of the crypto winter zone is the fourth quarter of this year." This report was written on the premise that the fundamentals of the cryptocurrency market are healthy.

On the other hand, 70% of global cryptocurrency experts predict that the crypto winter will not end this year. According to a survey of 53 global cryptocurrencies and web 3.0 experts by Pinbold and Finder (a polling company), 46% said it would last until next year, and 24% said it could last until 2024 or even several years after that.

The Answer Lies in Securing Independent Liquidity.

We will not list lengthy market trends to talk about the depreciation of cryptocurrencies, the downturn of the cryptocurrency market, and the prediction of the overcoming period of the crypto winter. We argue that securing independent liquidity is the key for the virtual asset market represented by cryptocurrency to form an institutional system and establish itself as a stable investment area. This means that securing and maintaining liquidity is essential to ensuring the sustainable growth of the virtual asset market, regardless of its own or the influence of the macro market.

“We argue that securing independent liquidity is the key for the virtual asset market represented by cryptocurrency to form an institutional system and establish itself as a stable investment area.”