Crypto Market Implosion a Necessary Evil for Long-Term Stability, Say Funds

The crypto market’s implosion has been violent, including and as a result of the algorithmic stablecoin TerraUSD’s and its sister token Luna’s collapse, which sent shockwaves across the sector, plummeting prices and upheaving the ecosystem supporting the coins.

But asset managers, large fund houses and research analysts in a Blockhead survey have not been deterred by wild swings and the resultant crash in the market capitalisation of the cryptocurrency industry to $1.09 trillion, down from approximately $2.4 trillion in May 2021 – greater than 50%.

While just a few months ago, financial experts were switching from traditional investment sectors and pouring into cryptoland from Wall Street to London and Singapore, firms are being compelled to slash positions to save expenses and pause withdrawals to stay alive.

Even some of the biggest players in the sector have been severely impacted. Market participants have all suffered due to the “crypto winter,” which has forced businesses to reorganise their workforces and restructure their budgets and plans.

Still, all 20 analysts at research and large investment management firms in a Blockhead survey conducted between August 22 and 27 said that implosion and the reshuffle of the crypto landscape is a “necessary evil” for stability over the long term in the sector driven by a historic wave of innovation.

“It’s the devil in the details that is important to gauge. The implosion is directly proportional to the massive and unprecedented rise in fly-by-night firms, products and investors,” said the head of research for alternative investments at a large investment firm in London.

“This year has been what we call a massive but much-required ‘correction’ in the sector, with tremendous potential for the future. It is a ‘necessary evil’ for the sector to be sustainable for the years to come,” added the research head.

According to the Blockhead survey, discussions and research on the topic may well be true, based on the argument that appetite for cryptocurrencies are still strong, are based on innovation and rising productivity, and for the opportunity for wealth accumulation that follows.

Indeed, the landscape after the Terra implosion partially highlights the crypto industry’s capacity to quickly adjust following a major shakeout.

“Of course, the fallout has been massive, including rising bankruptcies, job losses and a bloodbath across geographies, for investors and firms. But this is not new for global financial markets or the world,” said a chief investment officer at a large investment management firm in New York.

“Innovation is at the centre of the crypto sector’s appeal. And we have seen many crypto-related firms, including small startups, already rebuilding and venturing into offering new products. But there’s a long way to go.” said a chief investment officer at a large investment management firm in New York.

Wild Gyrations Remain

Indeed, following a 15% collapse on a single day in June due to investors fleeing high-risk assets driven by aggressive rate hikes by major central banks and extremely high inflation, Bitcoin plunged 7.7% in a matter of minutes in just one day in August.

“The volatility of cryptocurrencies is another justification for investors to play a steady long game. Don’t be concerned with short-term volatility if you’re buying with the intention of long-term growth. The best course of action is to ‘set it and forget it,’ and stop thinking about your cryptocurrency investment, said a chief fund manager of a boutique investment house in Edinburgh.

“Every time there is a price movement, whether it is up or down, we warn our investors that emotional reactions can lead to act hastily and make choices that cause them to lose money on their investment,” she added.

Broadly, most respondents to the survey remain unfazed and have accepted the pitfalls of the sector.

All but one of the 20 analysts in the survey said they were unfazed by the significant jerky movements in the crypto industry this year due to the Russia-Ukraine war and its fallout.

“Volatility is a given in this sector. But those broad trading themes this year have not impacted other so-called traditional financial sectors any less either. We have an inverted Treasury yield curve, a rampant dollar, which has hit levels not seen in over two decades, and job losses across businesses,” said a fund manager at a large investment firm in Berlin.

“So, the focus should remain on what the blockchain technology can offer and the returns associated over a while. The rebuilding and research in the sector is an important theme, and we can call it the ‘next phase’ for this still nascent sector, which erupted on the scene with all guns blazing,” added the fund manager.

While debates from the formidable naysayers will remain and even the “I told you so” will be repeated on every debacle the sector faces, investors have doubled down on their bets in favour of cryptos, according to a separate Blockhead survey.

Indeed, that poll showed investors were increasing their exposure to top cryptocurrencies to take advantage of price implosion and that repositioning in portfolios is driven by expectations for the crypto winter to end soon.

That even as the industry is dealing with other problems; this week, Celsius filed a lawsuit against a former investment manager for allegedly misplacing or stealing assets worth tens of millions of dollars before the bankruptcy of the crypto lender last month.

The increasing theft stories and potential security breaches are some of the associated risks, and investors believe the current phase will help stabilise those concerns as firms look at new products, keeping in mind those fears.

“The year 2021 represents a breakthrough year for the cryptocurrency market as it is receiving a lot more attention; the sector is still in its nascent stage and constantly evolving,” said an asset manager at a large fund house in Tokyo.

“Every investor and firm are asking, ‘We have this blockchain product,’ you say, ‘This sounds fantastic’ and shows you’re keeping up with the crypto world, but how is it any different or any better?”

“That will negate many investors’ concerns and only breed innovation, a vital driver of the sector,” he added.