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The Crypto Industry is Dealing with Both Structural and Systemic Risk

We cannot just claim to move away from the old legacy banking and financial system and consistently copy all its flaws while hoping everything will be fine.

It shouldn’t be a surprise if Bitcoin bottoms to $8-12k before picking back up on a bull run at a later stage. The crypto industry is today mostly speculative and needs to further introduce the fundamentals of traditional financial system based on sound economics and real performance value creation from real economic assets.

In other words it borrowed the bad stuff from traditional financial system and disregarded the good stuff that are supposed to make the industry sustainable and protect investors. If we had to compare with

traditional finance system we could say Bitcoin is the Beta of the crypto market. “Beta is a concept that measures the expected move in a stock relative to movements in the overall market. A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility. In other words, Bitcoin is a de facto industry barometer, therefore if the price of Bitcoin swings the crypto market up and down. If Bitcoin has lost 25% of its value in 24 hours, you can

therefore imagine what will be happening to the other assets. I can bet my 2 decades experience in high finance and investment track record in the tech industry that this is just the beginning of a domino effect, as many key players (along the biggest in the world) had exposure on FTX.  systemic risk in crypto industry is way much higher here than in traditional finance and 10 times more damaging in terms of market drops due to limited liquidity, highly correlated assets and very limited number of big players (2 main assets represent 60% of the total industry market cap) in an industry with a tiny market cap $2-3 trillion compared to the size of global financial market $750 Trillion (out of which the global stock market and fixed incomes market caps represent $125 Trillion each).

In order to put things in perspective, let’s compare the two major events that happened this week respectively on the crypto market and the US Stock market. When Elon Musks announced the sale of $4 billion of Tesla shares, the stock dropped by 5%. While when CZ (Binance CEO) announcement to dump FTT Tokens led to a freefall of FTX token by 80% in one day. While Testla’s shares may bounce back due to sound fundamentals at some point though unlikely for  FTX that will most likely undergo a painful liquidation due to lack of fundamentals and of course poor governance. The drop is

acute for the reasons mentioned above referring to the highly correlated crypto assets, limited market liquidity leading to high vaolatility, further hammered by lack of business fundamentals and real economic backing fueled by digital assets backed by nothing or almost nothing.

Yet, the crypto industry is still at infancy stage: Let’s not throw the baby with the bath water.

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