As if this year couldn't have gotten any worse for crypto, the month of November brought a new onslaught of scandals that further damaged investor trust, which was already remarkably low. Fortunately, renowned investor Cathie Wood and her team at Ark Invest have released their monthly update on the market to help give investors a little more insight into current market dynamics and what to possibly expect. Here's what the November update had to say.
The bad
The most recent debacle in crypto had to do with one of the world's most popular exchanges, FTX. In Ark's opinion, FTX's bankruptcy is one of the most damaging events in crypto history -- one that is likely worse than the 2014 Mt. Gox hack which resulted in more than 700,000 bitcoins being lost. At the time, this was about 7% of all bitcoins in circulation.
Rather than a hack, the FTX debacle was the result of an inside job. As more evidence has come to light, all signs point to former Chief Executive Officer Sam Bankman-Fried as the source of the trouble. It's believed that Bankman-Fried improperly transferred about $4 billion of customer funds to meet the debts of his other trading firm, Alameda Research.
It gets worse. Mounting evidence suggests that Bankman-Fried even withdrew $1 billion of corporate funds to purchase personal property.
CRYPTO: BTC
Key Data Points
Ark believes that FTX's implosion might delay institutional crypto adoption by years and set a precedent for regulators to impose overreaching laws that do more harm than good for the industry.
But before regulators arrive on the scene, it's possible that more damage may lie ahead. The list of companies with exposure to FTX is disturbing, to say the least. In some way or another, and to varying degrees, well-known entities such as Binance, BlockFi, Three Arrows Capital, Genesis Capital, CoinDesk, Coinbase, and Grayscale find themselves in this current mess. The risk for further contagion is surely possible.
The good
Surprisingly, out of all this Ark sees a silver lining. Despite selling pressures increasing throughout the market, bad actors are being purged. As this process continues, it should provide more badly needed transparency and resiliency. In an effort to meet the demands of investors, Binance, the world's largest crypto exchange, has agreed to implement a "proof of reserves" that aims to prove that the exchange is not overleveraged and maintains a healthy balance sheet.
Due to the nature of the FTX bankruptcy, data show that more crypto investors are fleeing from centralized exchanges and using decentralized exchanges. Ark analyzed trading volume on centralized exchanges and decentralized exchanges over the past months and found that since the FTX implosion, volume on decentralized exchanges has increased by 40%. This could be viewed as a promising development because it proves that the decentralized nature of blockchains is resilient to malpractice and can operate without the need for any centralized entity.
Lastly, Ark evaluated the current position of one of its favorite cryptocurrencies, Bitcoin (BTC 0.63%). In the report, analysts found that particular Bitcoin metrics, not just its price, are as low as they've ever been and signal that one of the largest capitulation events is underway. These include statistics such as the realized profit/realized loss ratio. This shows that the average price a bitcoin is purchased and sold at recently hit an all-time low.
The better
However, despite some concerning statistics, macrotrends signal that long-term adoption continues to remain strong. Ark uses Bitcoin typically to gauge current trends in the sector because it is the most valuable cryptocurrency. Ark found that the number of active Bitcoin owners, defined as an individual or organization managing the same set of addresses sending and receiving funds, has maintained its overall growth-trend line even though current market conditions seem to be poor.
Image source: Messari
It's these long-term trends that buttress Ark's view that decentralization will win. This period of crypto's history will likely go down in infamy, but it could serve as a fork in the road where more responsible practices are put in place and a greater push for decentralization is encouraged. Extremely decentralized and transparent blockchains such as Bitcoin are likely to remain resilient no matter the market conditions, which is one of the key reasons Ark believes Bitcoin is in a class of its own and worthy of long-term investment.
