Over the course of this week, we’ve seen crypto markets continue to feel jittery. the crypto crash we saw earlier this week on Tuesday saw major coins lose 10%+ in value, with Bitcoin dropping just below the $40k level. We wrote about a similar crash that occurred earlier in September, that can be read here. With two notable crashes already this month, what is going on here?

Coinbase dropping Lend

The first reason for the crypto crash we feel is linked to the news earlier this week of Coinbase doing a 180 degree move on the launch of Lend, an interest bearing deposit product linked to USDC. It was being mooted to offer up to 4% interest. This at a time when the US Fed base rate in at the zero lower bound between 0-0.25%. 

The decision to not release this product came after the SEC threatened Coinbase with a lawsuit earlier this week. Clearly, crypto markets are not regulated in the same way as stocks or bonds. But the SEC can still get involved with companies that are offering retail deposit products.

The move is a negative for crypto markets in general. High-yield deposits has been an area of large interest in recent times. If it’s going to become hard for crypto-related exchanges or companies to branch out into alternative deposit offerings, it could stunt demand for coins growing into the future.

SEC concerns sees crypto crash

Another reason for the negative momentum in crypto over the past few weeks can be linked to SEC Chair Gary Gensler’s comments. He expressed a number of concerns about cryptocurrency. In some fairly damning comments, he was quoted as saying that “frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted. This asset class is rife with fraud, scams and abuse in certain applications.”

He also commented that there was a need for the industry to be brought inside the public policy framework. Markets took this as a negative, although we think that regulating crypto to a certain extent is a good thing. It’ll likely provide new investors with more confidence to invest.

China risk spillover

Finally, the crypto crash specifically linked to this week can be seen to have followed the general risk off mood in asset classes across the board. This follows the news out of China regarding Evergrande, and the spillover impact in China that the stricken property-developer-come-wealth-manager could have.

Although we don’t see major risks on this event alone, a slippery slope of lower growth out of China could likely be a much larger problem for the world. In the short run, the tree was shook, with US Treasury yields falling, NASDAQ taking a hit, and crypto crashing. 

The above three reasons sum up the sentiment that we are seeing in the crypto markets at present. On balance, we don’t feel that these are fundamental game-changing news stories for the industry. 

Leave a Reply