So far this year, we’ve seen crypto firms like Celsius, Three Arrows Capital, and Voyager Digital go belly up.
And as Daily editor Teeka Tiwari wrote earlier this week, we could see more dominoes fall in the crypto space before the end of the year.
The collapse of these centralized crypto firms has caused many investors to flee the space. And once again, skeptics are out in force… questioning whether crypto will survive as an asset class.
I can tell you unequivocally that it’s here to stay. As Teeka often says, bitcoin has reached escape velocity.
Of course, every time bitcoin and the overall crypto market crashes, the grave dancers come out of the woodwork. And the weak hands inevitably sell into the panic.
And once again, bitcoin will prove them wrong.
The root cause behind the sell-off has nothing to do with blockchain technology or bitcoin. This is a credit crisis… Not a bitcoin crisis.
The problem stems from overleveraged positions and extended risk-taking by centralized finance (CeFi) platforms.
You see, CeFi firms differ from decentralized finance (DeFi) protocols. DeFi is built on blockchain technology, and it aims to make banking, borrowing, lending, and investing more accessible, cheaper, and profitable for millions of people.
In the coming years, DeFi apps will allow users to trade billions of dollars in assets without human intervention. Many of these DeFi protocols have continued to work flawlessly.
But the problem is not with DeFi protocols…
The problem we’re going through today is because of the reckless lending activity by CeFi platforms.
Who’s Responsible for This Mess
DeFi lending works by taking collateral and issuing loans against it. To manage risk, these protocols require the collateral’s value to be greater than the amount borrowed.
CeFi firms like Celsius and Voyager took deposits from the public and lent them to hedge funds to generate yields… without safe levels of collateral to back those loans.
As it turned out, many of these hedge funds were taking on an absurd amount of risk… Far more than anyone anticipated.
When their bets went awry, they couldn’t repay their loans – leaving massive holes in the balance sheets of the CeFi lending platforms.
And as the debts began to sour, it sent a cascade of margin calls throughout the space. Every major lender began recalling loans since no one knew who was exposed.
The forced selling crippled Celsius and Voyager… Both companies have since filed for bankruptcy.
The silver lining of this shakeout is it highlighted the differences between CeFi and DeFi.
Centralized platforms like Celsius and Voyager are private companies. They’re opaque. We have no way of knowing how much risk they’re taking.
DeFi protocols are open and transparent. You can see exactly what’s happening under the hood at all times.
The major DeFi lending platforms continue to function exactly as intended – without the liquidity and credit issues we’re seeing on centralized platforms.
Of course, the prices of their underlying tokens have suffered along with the overall market – but we expect them to recover with the overall market… Especially as investors look for more transparent lending platforms.
Despite the recent setbacks, DeFi has proved it’s a much-needed innovation that’s here to stay. And that’s why we’re still invested in this area of the crypto markets.
Crypto Is Here to Stay
Even amid this pullback, we’re still seeing tremendous growth and innovation in crypto.
During the first quarter of 2022, venture funds raised a record $9.9 billion for crypto-related projects. And in the most recent quarter, they raised $6.8 billion.
Two of the recent fundraising rounds include big names like Andreessen Horowitz (a16z) and Multicoin Capital.
Two months ago, a16z raised $4.5 billion in its fourth funding round. It’ll use these funds for blockchain and Web3 projects. It’s now raised more than $7.6 billion.
Just last week, Multicoin Capital raised $430 million. It’ll use the funds to grow decentralized autonomous organizations (DAOs) and develop Web3 projects.
And despite the meltdown we’ve witnessed in CeFi, DeFi remains strong.
Today, over $80 billion in assets are exchanged, borrowed, and lent directly on DeFi protocols that operate without any centralized middlemen. That’s incredible growth considering DeFi was virtually nonexistent in 2017.
Plus, we’re seeing tremendous, innovative uses for blockchain technology.
For example, an infrastructure firm in South Africa is building a new water delivery infrastructure system. It’ll use blockchain tech to improve the funding process. This will get water to those who need it faster.
And when we look at the use cases of non-fungible tokens (NFTs), we’re seeing even more applications of blockchain. Remember, NFTs allow you to own a unique digital asset on the blockchain that only you control.
Hotels are using NFTs to create a “StubHub,” or secondary market, for lodging reservations. If you can’t make your trip, you can resell your reservation to another person. It’s like reselling tickets to sports events or concerts.
And last year, we saw the TV show Stoner Cats sell NFTs to raise funds. It featured A-list actors like Ashton Kutcher and Jane Fonda. This will open the door to being able to own a stake in your favorite TV shows down the road.
Nearly every big-name brand is scrambling to get involved in the NFT market in one way or another…
From food and beverage heavyweights like Coca-Cola and McDonald’s to fashion companies like Nike and Gucci… They’re all making strides in the NFT space.
Through the first half of 2022, over $17 billion in NFTs have traded hands on exchanges. That’s over 27 times the $637 million that traded hands in the first half of 2021.
And this is just the beginning.
As you know, Teeka believes nearly every asset class in the future will be tokenized. And the unique items will be tokenized as NFTs… From in-game assets to apartment buildings that generate income and even big-ticket collectibles like classic cars.
It’s a massive opportunity we believe will turn into a trillion-dollar market.
For example, even if only 0.5% of the $280 trillion real estate market is tokenized, that would be a $1.4 trillion industry in itself.
Bottom line: Blockchain technology is here to stay. And it will only get stronger as developers continue to build innovative products that attract billions of users.
This Will Be a Great Buying Opportunity
If you missed out on the crypto bull runs of 2013, 2017, and 2021… Teeka says to view this current pullback as an “in-game” reset.
Here’s how he recently put it…
The crypto market cap hit an all-time high of $3 trillion in November 2021. Right now, it’s around $1 trillion. If it just rallies back to its previous high, that’s a 233% increase from today.
Eventually, I believe just bitcoin alone will rival gold’s total market value of $11 trillion. That’s a 2,400% increase from today’s levels.
I don’t believe any other asset class in the world offers that kind of upside potential. That’s why I call this pullback an “in-game” reset.
In the meantime, we recommend you be patient as this current bout of volatility plays out.
We want to make sure the worst is behind us before diving back in and potentially losing even more… Even if that means buying at slightly higher prices.
So by waiting for the dust to settle, you’ll be able to sleep better at night knowing you have dry powder if we experience another drop lower.
Regards,
Houston Molnar
Analyst, Palm Beach Daily