The recent downturn in the crypto market has left many investors and traders wondering about the causes and implications of these events. This article delves into the factors that contributed to the crash, the role of stablecoins in the current market landscape, and the future outlook of the crypto market.
The Crypto Market Crash
Last week, the bottom fell out of the crypto market, and unlike previous downturns, the cause of the crash appears to be specific to crypto. With stock indices like the S&P 500 and the NASDAQ continuing to trade sideways, it is unclear what crypto catalyst caused the crash. It could be a combination of factors, such as the liquidation of over $250 million of leveraged long positions, primarily from traders betting that BTC’s price would increase.
BTC and ETH Price Movements
At the time of writing, BTC’s price is at the bottom end of the $27k to $29k range, while ETH started to fall a day or two later. If BTC breaks below this range, the next stop would be the $22k to $25k range. If it breaks above, BTC could retest $31k and possibly rally to $34k.
Institutional Investment and Regulatory Uncertainty
Cryptocurrencies won’t come close to their previous highs without institutional investment. Regulatory uncertainty and the shutting off of crypto-to-fiat ramps, like Silvergate Bank SEN, have discouraged direct crypto investment by institutions. Institutional investors have been investing indirectly in cryptocurrencies like BTC and ETH through paper derivatives on traditional exchanges like the CME.
The popularity of these paper derivatives continues to rise, meaning institutions are very interested. The only thing stopping them from investing directly in the crypto market is regulatory uncertainty, especially around stablecoins. Stablecoins are how institutional investors can easily get large amounts of money in and out of the crypto market.
The Ongoing Crypto Crackdown and Stablecoins
The hostility against stablecoins in the United States stems from fears that stablecoins will compete directly with Central Bank Digital Currencies (CBDCs) and other similar technologies, such as the Fed’s upcoming FedNow payment system. SEC Chairman Gary Gensler believes that all cryptocurrencies, except BTC, are securities, including stablecoins.
This view makes little sense given that there is no expectation of profit when investing in a stablecoin. Nevertheless, the SEC is pursuing stablecoin issuers like Paxos. Gensler’s recent testimony before the House Financial Services Committee focused on stablecoins, specifically implying that Circle’s USDC is not used for payments. This is significant because Circle has been arguing that USDC is used for payments and has been lobbying U.S. politicians to pass regulations that would give the Fed authority over payment stablecoins.
Congress and Stablecoin Regulations
During the House Financial Services Committee hearing, Democrat politicians, including Maxine Waters, indicated that Congress is starting from scratch on stablecoin regulations, meaning they won’t become law anytime soon. This continued scrutiny and uncertainty will drive stablecoin development overseas, and stablecoin issuers aren’t the only ones leaving the United States.
Offshore Crypto Exchanges
Coinbase, the largest and best-known U.S. crypto exchange, recently confirmed that it will be launching an offshore cryptocurrency exchange. This move could be seen as both bullish and bearish for the crypto market. It could be bullish because it will likely increase Coinbase’s overall profits, improving investor sentiment for crypto in general. On the other hand, it could be bearish because it would mean more crypto capital and liquidity moving offshore.
Following Coinbase’s lead, Gemini also announced plans to launch an offshore crypto exchange. Interestingly, trading on Gemini’s offshore platform will take place against its own stablecoin, GUSD. This could potentially take market share from Tether’s USDT, which is primarily used for trading.
Gemini co-founder Cameron Winklevoss has stated that he believes the next crypto bull run will be driven by countries in East Asia, and he is positioning Gemini to benefit from this trend.
The crypto market is currently facing significant uncertainty due to a combination of factors, including regulatory pressures, market sentiment, and the role of stablecoins in the market. As the market continues to evolve and adapt to these challenges, investors and traders must stay informed about the ongoing developments and make well-informed decisions.
The future of the crypto market may hinge on the resolution of regulatory uncertainty surrounding stablecoins, the potential growth in institutional investment, and the ability of exchanges to adapt to the changing landscape. In the meantime, market participants should keep a close eye on how these factors influence the direction of the market and plan their strategies accordingly.