The recent crypto market plunge and the subsequent bear market have made many investors very skeptical of its long-term outlook and growth opportunities. However, Aaro Capital’s CEO Peter Habermacher argues that it is far from the first such bloodbath for crypto market.
Following the all-time highs in the crypto market in November 2021, the crypto market plunged further in May and June 2022 and hit mainstream media for all the wrong reasons. This market plunge and cascade in selling was driven by the LUNA stablecoin collapse and resulting knock-on effects. This caused large losses for some major crypto market players, the biggest being Three Arrows Capital, a crypto hedge fund, which at its peak managed more than $15bn. Three Arrows Capital was a highly leveraged hedge fund whose default and bankruptcy had a negative knock-on effect for most centralised crypto lending businesses, some crypto exchanges and hundreds of crypto projects and funds. This event has plunged the market into a liquidity crunch, a large unwinding of leverage and withdrawal of credit for the whole ecosystem. But this is far from the first such bloodbath crypto has experienced.
The main fundamental issues which caused the market turmoil are nothing new: currency peg breaks; high leverage; careless, volumes driven lending; and duration mismatches between deposits and loans. These market issues have played out hundreds, if not thousands of times in traditional finance. Amidst this chaos, decentralized lending platforms, which unilaterally enforce “the rules” in the absence of a centralised authority, benefitted from the lack of trusted intermediaries, via rules-based over-collateralization and position liquidations, hence market events did not affect the running of protocols.
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