After recent allegations that the CEO of a significant crypto exchange misused a large sum of money that belonged to customers, the entire digital currency market has felt the effects. The fallout of the FTX scandal began as a liquidity problem and mushroomed into a total collapse of the exchange. The whole fiasco has become such a major international financial event that it has caused a ripple effect across not only its own sector but several others.
Precious metals, equities, and dozens of non-digital asset classes are enjoying a nice bump in business due to the massive outflow of cash from segment-leading players like bitcoin. The crypto index fell sharply, while several of the DeFi (decentralized finance) platforms saw sudden growth. It’s important to realize that investors are resorting to various tactics when they decide to ditch centralized exchanges.
Some are moving their money to gold and silver. Others are parking their capital in safer, DeFi-based coins like ethereum. One big winner across the board is any company that sells hard wallets. The cryptocurrency index price was not a winner, as all versions of the metric fell precipitously during the first week of November. In the wake of this and previous digital coin problems, hard wallet sales usually increase significantly. Who wants to leave crypto assets on an iffy exchange when they can hold them in a locked tight digital wallet? Before making any long-term decisions about your holdings, consider the following ways that the FTX debacle impacted the cryptocurrency sector.
Flight to Safer Assets
It’s instructive to note that one major FTX meltdown and crypto-based scandal has caused millions of cautious investing enthusiasts and retail traders to reconsider the definition of safe haven. However, it’s probably true that the majority of cryptocurrency owners were in the game not so much for safety but for potentially high returns. Many haven’t left. But for the large numbers of people who decided to make the jump out of digital currencies and into other areas, the choices have been all over the map.
Gold is a prime example. During the same 10-day period when bitcoin’s price fell by nearly 25%, the value of an ounce of gold rose 9%. That’s a clear testament to the fact that plenty of savvy investors moved cash from one asset to the other. Anything perceived to be safer than bitcoin and other crypto-based holdings tends to do well. It’s instructive to note that one major crypto-based scandal has caused millions of cautious investing enthusiasts and retail traders to reconsider the definition of safe haven. However, it’s probably true that the majority of cryptocurrency owners were in the game not so much for safety but for potentially high returns.
DeFi Protocol is the Big Winner
A sports scoreboard might encapsulate the news by posting: Ether wins, bitcoin loses. The subtext of that phenomenon is that ether also lost about one-fourth of its value in the immediate aftermath of the FTX breakdown. However, because the coin is structured unlike its main competitor, bitcoin, it was able to recapture some of that loss rather quickly. Likewise, there’s a good chance that cryptocurrency devotees will be looking to switch from old-school bitcoin to DeFi-friendly ether in the coming months.
Demand Surges for Hard Wallets
Hard-wallet sellers always do well in the wake of cryptocurrency market jitters, particularly when exchanges display volatility and weakness. It’s important to see how holders (as digital asset owners describe themselves) behave. They prefer to stay in their favorite niche but want to ramp up the safety factor. In this case, they had three realistic options: buy gold, move to a DeFi protocol coin or park digital coins in a hard wallet. When you don’t trust the major exchanges, hard wallets make a lot of sense.
Smaller Coins Suffer the Most
It’s one thing for the major actors in the digital asset segment to take a hit. Ethereum and bitcoin can lose a quarter of their value and eventually rebound. However, the same is not true for new and small coins, some of which have only been around for less than a year and are not well capitalized. For those wondering if they should invest the survival of the big fish is a hallmark of all capital and securities markets and not something unique to the crypto sector. If one thing is true about the recent cryptocurrency market problems, it’s that late 2022 is a very challenging time to introduce an ICO (initial coin offering). While nothing is certain in the world of intangible assets, it’s highly likely that at least a few of the smaller coins will not survive through 2023.