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An unexpected incident known as a "black swan" is one that could have far-reaching, unfavorable impacts on a situation. A black swan risk has three characteristics: rarity, enormous impact, and retroactive predictability.
There are many factors that can lead to black swan events, such as regulatory restrictions, unanticipated economic shocks, liquidity issues, insolvency, etc. Black swan events are more common in bear markets, mostly because of the liquidity issue. Even said, there are also advantages to black swan situations. Black swan events are favorable for the price returning to its true worth because cryptocurrency assets frequently experience large bubbles during bull markets. After moving pretty sideways, assets will be sold off, bringing the price back to normal.
A crypto liquidity crisis happens when "convertible to cash" assets or money are in short supply. If you have crypto assets listed on the exchange, all of your transactions, including deposits in fiat money, purchases of cryptocurrencies, trading, and withdrawals, must be able to be funded. If there isn't enough money or resources, though, it becomes a major issue.
How does a liquidity crisis proceed? In the worst case scenario, a lack of money signals impending insolvency. Investors should be prepared for the worst even if there are no overt indications that a liquidity crisis is imminent. Due to the inability to remove your assets, you run the risk of losing the money you have on these exchanges.
The cryptocurrency market has been significantly impacted by three recent "black swan" events:
- FTX crisis
The platform token FTT of FTX was found to be the company's greatest single asset and a considerable percentage of collateral, according to a CoinDesk report on Alameda that was released on November 4. This discovery has once more sent the market into a tizzy, along with countless other murky transactions between Alameda and FTX as well as major investments and acquisitions in the market. Following the release of the CoinDesk report, SBF, Alameda, and FTX did not offer any in-depth comments.
Later, He Yi, the founder of Binance, Dylan Leclair, the co-founder of 21stParadigm, and several KOLs questioned Alameda and FTX. According to Binance, 20% of FTX's shares had been sold. Then, CZ unexpectedly revealed that Binance received almost $2.1 billion in BUSD and FTT in exchange for selling some of FTX's shares last year. Binance has decided to liquidate the remaining FTT because to the present snag. FTT abruptly decreased from 50 USDT to 22 USDT.
SBF and CZ
On November 6, FTX experienced the largest stablecoin outflow of any exchange over the preceding seven days, with a net outflow of $292 million. According to Nansen, Binance, which has seen inflows of $337 million over the last seven days, has been the largest CEX for stablecoin inflows. As market concerns about FTX's general liquidity grew, many consumers began hastily departing from it. Delays in FTX extraction as a result of an unanticipated run soon became apparent. The growing frenzy eventually led to an epidemic on November 8. FTT rapidly decreased from $22 to $15 after doing so.
On the other side, CZ and SBF both revealed that Binance will purchase FTX at the same moment on November 9. With a maximum increase of more than 20% in just one hour and this information, BNB grew to $398 while FTT recovered from $14.5 to $21.2 with a maximum increase of 46%. This declaration triggered the "Sherman Act," which prohibits direct competitors from intervening to defend one another. The moment the acquisition announcement was made, FTX experienced a liquidity crisis, which caused FTT to quickly crash and reach its lowest point of $2.5. Due to FTX, BTC and ETH both fell below $1,300, which also had a negative effect on market mood.
- Crisis in the Capital for Three Arrows (3AC)
The 3AC was one of the biggest cryptocurrency-focused venture capital firms in the world.
However, the entire cryptocurrency market contributed to the "collapse" of TerraUSD and Luna. On July 1, 3AC turned in a bankruptcy petition. Before Terra crashed in May, 3AC spent $559.5 million to purchase the locked Luna; the closed Luna's value then rose to about $670.
Among 3AC's major holdings are the institutional Bitcoin products GBTC and stETH. Significant decoupling has occurred for both assets, although GBTC has had a decoupling as high as 20%. 3AC obtained a long-term, uncollateralized loan of BTC at incredibly low interest rates in order to fund its investment in GBTC. In order to gain liquidity, 3AC mortgages the GBTC to Genesis, a lending platform that is also owned by Grayscale's parent company.
Ultimately, a lack of liquidity was what led to 3AC's bankruptcy.
A major liquidity crisis will result if 3AC cannot offer 600 million dollars to support user redemption in the event of an investment failure or user run.
- The de-risking of 312 traders' Big Collapse
Has caused the initial collapse (due to the global stock market sell-off). The second decline was brought on by the lenders' sale of collateral. The borrower was unable to make payments because of the initial collapse. Some miners ceased operating their rigs after the first reduction, and more after the second. ETH reached a low of $88 during the market collapse.
As BTC is the only form of collateral accepted by BitMEX, even traders utilizing low leverage began to be liquidated when the market fluctuated by more than 30% in a single day. Market makers therefore provide less liquidity, which leads the slide to accelerate even further. Derivatives are closely trailing spot prices as a result of a decrease in collateral liquidation. Given BitMEX's dominance in the cryptocurrency market, this price fall will probably also affect other exchanges.
Even worse, DeFi failed as well.
Maker, the most popular DeFi protocol, serves as the basis for numerous additional DeFis.
After the first decrease, several Maker "treasuries" started to have insufficient collateral. Liquidators try to sell "treasuries" for a profit with little in the way of collateral.
As can be seen from the aforementioned catastrophe, the main cause of the liquidity problem is enormous leverage, which preys on consumers' assets. When market panic spreads, user flight happens, which causes a liquidity crisis.
Prior to the FTX crisis, the market was in the midst of a much-anticipated slight rebound.
After several months of declines, market anxiety ultimately abated, and the Fed's rate hike slowed. At first, many investors had bigger expectations for the November market. BTC had once more reached $21,000, and ETH had also crossed $1,600. At that time, a lot of investors believed that the market had bottomed out.
On the other hand, the market often moves sideways after bottoming out before rising back up, according to the history of the encryption industry. The real bottom frequently appears after a series of black swan events. The price will increase to reflect its true value when the bubble bursts, as was first stated. As a result, many investors believe that the real bottom is approaching closer following the FTX crisis.
The unemployment rate rose by 0.2% from the previous month to 3.7% in October of this year, according to a report released on the fourth by the U.S. Department of Labor. In comparison, the average unemployment rate was 5.8% during the 2008 financial crisis; it rose to 9.3% in 2009. According to the current interest rate hike policy, the U.S. recession will not have fully begun when it reaches an economic low point in the middle of 2023. Usually, the announcement of interest rate increases is followed by an increase in the real unemployment rate.
Maybe by then, the cryptocurrency market will have reached its actual bottom.