As if this year couldn't be worse for cryptocurrencies, the month of November brought a new wave of scandals that further damaged already significantly low investor confidence. Fortunately, renowned investor Cathie Wood and her team at Ark Invest have released their monthly market update to help investors better understand the current market dynamics and figure out what to expect. Here's what the November update says.
What goes wrong
The most recent debacle in the cryptocurrency industry has had to do with one of the most popular exchanges in the world, FTX. According to Ark, the FTX failure is one of the most damaging events in cryptocurrency history, arguably worse than the 2014 Mt. Gox hack, which caused the loss of more than 700.000 bitcoins. At the time, this was about 7% of all bitcoins in circulation.
Rather than a hack, the FTX debacle was the result of an inside job. As more evidence emerges, all indications point to former CEO Sam Bankman-Fried as the source of the problems. Bankman-Fried is believed to have improperly transferred about $4 billion in client funds to service the debts of his other trading firm, Alameda Research.
The situation is even worse. Mounting evidence suggests that Bankman-Fried even withdrew $1 billion in corporate funds to buy personal property.
Ark believes that the implosion of FTX could delay institutional adoption of the cryptocurrency by years and set a precedent for regulators, who could impose laws that are too strict and more harmful than good for the sector.
But before regulators get on the scene, more damage could happen. The list of companies exhibited at FTX is disturbing to say the least. One way or another, and to varying degrees, well-known entities such as Binance, BlockFi, Three Arrows Capital, Genesis Capital, CoinDesk, Coinbase, and Grayscale are in this current mess. The risk of further contagion is certainly possible.
Which is fine
Surprisingly, Ark sees a silver lining in all of this. Despite increased selling pressures across the market, bad actors are being weeded out. This process should ensure much-needed greater transparency and greater resilience. In a bid to meet investor demands, Binance, the world's largest cryptocurrency exchange, has agreed to implement a "proof of reserves" which aims to demonstrate that the exchange is not overcharged and maintains a healthy balance sheet.
Due to the nature of the FTX failure, data shows that more cryptocurrency investors are fleeing centralized exchanges and using decentralized exchanges. Ark analyzed trading volume on centralized and decentralized exchanges over the past few months and found that since the FTX implosion, volume on decentralized exchanges has increased by 40%. This could be considered a promising development because it demonstrates that the decentralized nature of blockchains is resistant to malpractice and can operate without the need for a centralized entity.
Finally, Ark assessed the current position of one of his favorite cryptocurrencies, Bitcoin (quotation BTC). In the report, analysts found that some metrics of Bitcoin, not just its price, are at historic lows and signal that one of the biggest capitulation events is underway. These are statistics such as the realized profit/realized loss ratio. This data shows that the average price of buying and selling a bitcoin has recently hit an all-time low.
