2022 has been a tough year for crypto, and November was particularly tough for investors and traders.
Although it was incredibly painful for many, the explosion of FTX and the ensuing contagion that threatens to bring down other centralized crypto exchanges could be positive in the long run.
Let me explain to you.
What people have learned, albeit in the hardest way possible, is that exchanges run fractional-reserve-like banks to fund their own leveraged speculative investments in return for providing users with a return.” guaranteed”.
Somewhere across the crypto Twitterverse is the phrase “If you don’t know where the yield comes from, you are the yield!” floats around.
This was true for decentralized finance (DeFi)and this has also been shown to be true for centralized crypto platforms and exchanges.
Who would have known that a few rash banking transactions would bring down the whole house of cards by proving that while exchanges seem to have high revenues and tons of tokens on their books, many are utterly incapable of meeting user withdrawal requests?
They took your coins and collateralized them to fund highly speculative bets.
They locked your coins on centralized DeFi platforms to earn yield, some of which promised to share with you.
They placed users’ funds, as well as their own reserves, in illiquid assets that were difficult to convert into stablecoins, Bitcoin (BTC) and Ether (ETH) when clients and platform users wanted to access their funds.
Not your keys, not your coins.
Never has the expression sounded more apt.
Let’s explore a few things happening in the crypto market this week.
Investors pulled a record number of coins from exchanges as a warning
As Cointelegraph reported earlier this week, crypto investors are panicking-withdrawing register amounts of Bitcoin, Ether and stablecoins from exchanges.
A separate report cited a strong increase in sales of hardware wallets as investors realized the importance of self-curating their portfolios.
If the number of insolvencies and “temporary suspension of deposits and withdrawals” messages continue to appear over the next few weeks, it seems likely that this trend of coins leaving exchanges and appearing in hardware wallets will continue.
With #Bitcoins simply inundated with trade, we now have a roughly 5-year high in sovereign supply of 87.7% of the total.
All $BTC which has been leaking in exchanges since January 2018, has now been withdrawn.
— _Checkɱate ⚡☢️️ (@_Checkmatey_) November 18, 2022
DEXs and DeFi saw a slight increase in inflows, perhaps a sign of things to come
Cointelegraph also reported the rise in decentralized exchange (DEX) activity and the influx into DeFi occurring simultaneously with the exchanges’ record outflows. After the Events of the Past Two Weeks, Trust Centralized Exchanges and Crypto Firms could be brokenand the current and next wave of crypto investors may embrace the more web-centric DEX and DeFi protocols3.
Of course, what DeFi and DEX need is a more transparent framework and processes that ensure user funds are safe and used “properly”.
A steady stream of bad news could present a great opportunity
Currently, Ether’s price is looking a little soft from a technical analysis perspective, and recent news regarding thief FTX holding Ether’s 31st largest spot position, as well as concerns over censorship, centralization, US Office of Foreign Assets Control’s enforcement of this “whale” and other Ethereum-based protocols that have exposure or bankruptcy proximity to FTX and Alameda might spark a bit of FUD that has an impact on the price action of the altcoin.
Top 10 addresses with the largest ETH holdings:
– 6 are CEX-linked wallets
– Jump Trading comes third with just over 2 million ETH
– @arbitrum bridge with ~750K ETH
– ETH Staking & WETH contract has over 19 million ETH combined
Hoping to see fewer CEXs on the list in a year pic.twitter.com/S1HHi5swnN
— Martin Lee | Nansen (@themlpx) November 18, 2022
Uncertainty about when the Shanghai upgrade will be enacted and investor concerns about when staked coins can actually be withdrawn are also interesting conversations that could turn near-term sentiment against Ether.
The thesis is quite simple. ETH has held support around $1,200-$1,300 quite well throughout all previous months of bearish market developments, but will the potential challenges mentioned above lead to a retest of the level?
Stakeholders are basically spotted buying and gaining yield, so at this point opening a low-level short position with take profit orders at $700-$600 could possibly 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, practical trend tips, analysis, and early research on potential emerging trends in the crypto market.
The views 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 conduct your own research when making a decision.