Investors investing in cryptocurrencies have needed strong nerves so far this year. The local crypto industry is nevertheless still confident and hopes for a sustained wave of regulation.
Decentralized financial solutions, or “DeFi” for short, experienced a real boom last year. Among other things, these applications enable users to deposit cryptocurrencies as collateral for loans on decentralized platforms or to generate interest income with them – without having to rely on an intermediary.
Lighthouse collapses
The DeFi boom peaked in November 2021. According to the data portal Defillama, assets of over 240 billion dollars were invested in such applications at the time. In the meantime, however, this “Total Value Locked” (TVL) has shrunk by around two-thirds to around 76 billion dollars.
A major reason for this slump was the demise of the algorithmic stablecoin UST and the associated cryptocurrency Luna. At its peak, it had a market capitalization of around $40 billion. Before the eyes of the crypto community, the industry’s “lighthouse project” collapsed within a very short time.
According to crypto bank Seba, the stablecoin’s crash had a “dramatic impact” on the DeFi sector. “His case sent shockwaves through the entire industry,” Zuger Bank wrote in a report. The distortions are attributed, among other things, to a “wrong incentive structure.”
liquidation cascades
The demise of the Terra Luna project, which was closely intertwined with many other applications, was followed by a cascade of liquidations across the sector. The highly capitalized hedge fund Three Arrows Capital (3AC), which according to the blockchain data specialist Nansen managed assets of 10 billion US dollars, got into such serious difficulties that bankruptcy proceedings were brought before a court in Berlin last week New York opened.
As in the classic financial world, the companies in the sector lent each other capital, although transparency in this respect was limited. In addition to 3AC, another industry giant, Celsius, also faltered. As a centralized financial provider (“CeFi”), Celsius enabled investors to enter the decentralized financial world and promised horrendous returns.
Latest example: Crypto lending provider Voyager Digital halted trading, deposits and withdrawals a week ago and has since also filed for bankruptcy. According to its own statements, Voyager holds crypto assets of around $1.3 billion. The company puts claims against 3AC at over $650 million.
Swiss crypto industry hardly affected
The Swiss crypto industry has so far been largely spared from the turmoil, although many “crypto-savvy” financial providers have joined the DeFi bandwagon. For example, the bank Sygnum, which specializes in digital assets, and the cryptocurrency trader Bitcoin Suisse launched various investment products from the DeFi sector in April.
Bitcoin Suisse is not involved in the current turmoil, stressed Bitcoin Suisse CEO Dirk Klee recently at a media briefing. But Klee does not believe in a rapid recovery either: “We are currently seeing a diver who could possibly last longer”. The crypto market is also “not immune” to current macroeconomic dynamics such as high inflation and interest rate hikes.
Not ripe yet
The established Swiss private bank Julius Baer is also sobering. In recent years, the asset manager has stepped on the gas as a “crypto pioneer” in the classic Swiss financial world with regard to the adaptation of the new “financial world”. The pace is now likely to be slowed somewhat given the recent market turbulence.
Julius Baer CEO Philipp Rickenbacher recently admitted that “many applications are not yet mature and we may be seeing a bubble bursting on the crypto markets at the moment.” Similar to the bursting of the dot-com bubble at the beginning of the millennium, this could also pave the way for completely new applications. And according to Rickenbacher, the DeFi area in particular has the potential to transform the financial sector in the next ten years.
Consistent regulation required
Despite the recent turmoil, local supporters of blockchain technology remain confident in the future of the sector. For example, Martin Burgherr, Chief Client Officer of Sygnum, describes an upcoming regulation of the market as a “positive development for the industry as a whole”.
“A consistent regulatory framework will create the conditions for greater acceptance by institutional investors,” predicts the head of customer business. The recent crash and the problems faced by several platforms and funds should be seen more as a “natural development” towards a stronger market. “The technological potential of DeFi remains unchanged,” says Burgherr confidently. (SDA)