Why is the crypto market down today?

FTX-related contagion continues to spread, taking most of the crypto market down with it. What will it take to reverse the trend?

Crypto prices are falling across the board on Nov. 21 as fallout from FTX and Alameda insolvency continues to roil the entire crypto market. 

Large cryptocurrency firms like Digital Currency Group are experiencing a liquidity crunch after multiple scandals and unexpected market volatility have left large holes in their balance sheets.

Generally, investor sentiment plays a huge role in how traders approach high-volatility risk assets. The current uncertainty about which major market makers and crypto firms are solvent, and which are not as clearly translating into a lack of demand for cryptocurrencies and the current price action reflects this fact.

Earlier in the day, Bitcoin (BTC) price briefly slipped below the $16,000 mark and Ether (ETH) price continues to sell off as worries around prominent market makers and the FTX hacker selling large amounts of Ether weigh on the altcoin’s price.

Crypto contagion fears spook the market

The FTX bank run and ultimate bankruptcy filing reverberated through the cryptocurrency market and the fallout continues with Digital Currency Group (DCG) facing liquidity issues. 

Genesis, a market-making and lending provider for DCG, reportedly has hundreds of millions in losses and the liquidity crunch comes as DCG’s Grayscale Bitcoin Trust (GBTC) is seeing a 50% discount on its net asset value (NAV).

In addition to the FTX-induced contagion, a black hat hacker known as the FTX Exploitor is impacting markets by selling large amounts of Ether into Bitcoin.

At the time of writing, Ether dropped below the $1,200 mark, registering a 4.2% loss on the day and this comes after the FTX “hacker” dumped 50,000 Ether.

The persistent threat of regulation

The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets.

Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.

The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon and understood set of laws is enacted.

Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations or, in the worst case, an outright ban continues to impact crypto prices on a nearly monthly basis.

After the FTX debacle, regulators may begin to step up strict enforcement as signaled by Germany announcing they are looking into Coinbase’s business practices. The United States also seems poised to increase regulatory scrutiny.

Scams and Ponzis triggered liquidations and repeat blows to investor confidence

Scams, Ponzi schemes and sharp market volatility have also played a significant role in crypto prices crashing throughout 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to the lack of regulation, the youth of the cryptocurrency industry and the market being relatively small compared with equities markets.

The implosion of Three Arrows Capital (3AC) has trickled down to DCG’s Genesis Trading from a failed margin call. In addition to the 3AC losses, Genesis Trading also had $176 million locked on FTX. Genesis Trading had to seek a $175 million influx of cash from parent company DCG.

Bitcoin is currently the largest asset by market capitalization in the sector, and historically, altcoin prices tend to follow whichever direction BTC price goes.

As FTX collapsed on itself, Bitcoin price corrected sharply due to multiple liquidations occurring — and investor sentiment tanked.

The same may happen with an even greater magnitude if DCG collapses.

Related: DeFi platforms see profits amid FTX collapse and CEX exodus

What to expect for the rest of 2022 through 2023

The factors impacting falling prices within the crypto market are driven by reckless lending and insufficient capital controls coupled with investors’ fears from previous insolvencies. The DCG saga with Genesis Trading and Grayscale will also weigh heavily on investors fearing liquidations and capitulation.

In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders might consider waiting for signs that U.S. inflation has peaked and for the regulatory environment to become more clear.

The views and opinions expressed here 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.