2022 was a tough year for cryptocurrencies, and November was particularly tough for investors and traders alike.
While it was incredibly painful for many, the explosion of FTX and its ensuing contagion that threatens to pull down other centralized cryptocurrency exchanges could be a positive in the long run.
Allow me to explain.
What people learned, albeit in the hardest way possible, was that the exchanges were running fractional reserve-like banks to fund their speculative and leveraged investments in exchange for providing users with a “guaranteed” return.
Somewhere across the crypto Twitterverse, the phrase “If you don’t know where the yield is coming from, you are the yield!” float around.
This has been true of decentralized finance (DeFi), and it has also proven true of centralized cryptocurrency exchanges and platforms.
Who knew that some ill-timed bank run would destroy the entire house of cards by proving that while exchanges seem to have high revenues and tons of tokens on their books, many are completely incapable of satisfying user withdrawal requests?
They take your coins and secure them to fund highly speculative bets.
They lock your coins in DeFi centralized exchanges to earn a return, which they promise to share with you.
They put users’ money, along with their own reserves, into an illiquid asset that was difficult to convert into stablecoins, bitcoin.
When customers and platform users wanted access to their funds.
Not your keys, not your coins.
This phrase has never been more true.
Let’s explore some of the things happening in the crypto market this week.
Investors have withdrawn a record number of coins from exchanges to self-hold
As Cointelegraph reported earlier this week, cryptocurrency investors have panicked with record amounts of bitcoin, ether, and stablecoins being withdrawn from exchanges.
Separate reports indicated a sharp rise in sales of hardware wallets as investors realized the importance of self-holding their wallets.
If the number of defaults and “pause deposit and withdrawal” messages continue to pop up over the next few weeks, this trend of coins leaving exchanges and showing up in hardware wallets is likely to continue.
DEXs and DeFi saw an uptick in inflows, perhaps a sign of things to come
Cointelegraph has also reported rising decentralized exchange (DEX) activity and inflows into DeFi occurring in conjunction with record outflows from exchanges. After the events of the past two weeks, trust in centralized exchanges and crypto companies can be broken, and the current and next wave of cryptocurrency investors can adopt Web3-focused DEX and DeFi protocols.
permanent exchange volume. Source: Token Terminal
Of course, what DeFi and DEXs need is a more transparent framework and processes that ensure users’ funds are safe and used “properly.”
Related: DeFi Platforms Turn Profit Amidst FTX Crash and CEX Exit
A steady stream of bad news could be a good opportunity
At the moment, the price of ether looks a bit weak from a technical analysis point of view, the recent news about the FTX thief holding the 31st largest ether position, as well as concerns about censorship, centralization, and the imposition of the US Office of Foreign Assets Control on this “whale” and other Ethereum-based protocols that have exposure or near bankruptcy like FTX and Alameda could raise a bit of a FUD affecting altcoin price action.