Crypto Firms facing Insolvency: Should better risk management structure be enforced?
Crypto seems to enter a long drawn-out phase of a Bear Market and tells a different story of our economy, which seems to be in the recovery phase. Strangely enough, this Crypto Winter as some of the crypto enthusiasts refer to it also acts as a testing factor in which the strong prevail and the weak get eliminated. This is what we see in the crypto space as despite toppling the market, some institutions managed to spread their wings to new markets while others had to face the undeniable fate of insolvency. So should a better risk management structure be enforced in this space?
Crypto Firms facing Insolvency
When we refresh our minds towards the year 2020 and 2021, your expectations of crypto space would be at an all-time high with prices of digital assets flying to the moon and more tech unicorns being born from this technology but fast forward to 2022, your sentiment might have changed. With the market falling from its all-time high figures and a decrease in investments flowing to the space, it feels like we are entering another Crypto Winter.
The difference between the Bear Market of 2018 and 2022 is that the market itself has grown more than 8 times from its projected market size of $189.9 Million in 2017 so the recent crash is harder felt than its predecessor. Pair that with a cryptocurrency space that is already better integrated with our economy which is still in its recovery phase after the Pandemic and you know why this crash in 2022 is at the center of the attention of crypto enthusiasts and economists.
This Crypto crash also became a lesson for regulators who are looking for regulations to better protect the people within the space and these bear markets serve as the best times to see how prudent the regulations are in achieving their main purpose. While the Crypto Market is still plagued with speculation and volatility, this will also affect Crypto Firms who have to continuously navigate the uncertainty within the Market to keep their business afloat.
The situation begins from the very peak, as crypto enthusiasts and maximalists begin to enter their expectation that Bitcoin will break the six-figure barrier. Of course, what follows from there was a declining phase that has somewhat continued until today, and Bitcoin so far has not reached its highest level in 2022. The situation is mirrored in other digital assets on the market but a price drop of more than 50–60% from its original value will affect crypto firms whose majority holdings are in those digital assets themselves.
This will affect Crypto Hedge Funds and Lending platforms who have to see their investments and deposits decline in value. One of the most well-known cases was the fall of the Anchor Protocol which offered generous amounts of interest rates to its users but had to face the undeniable collapse that also brought down the whole Terra Ecosystem. This trickles a massive uncertainty around the market that forces other crypto firms to lay down measures to protect themselves as $60 Billion of Market Cap got wiped out from the market.
Others include the now famous case of the Celsius Network that recently filed for bankruptcy because of its too fast-growing network and questionable investment strategy which also now triggers a chain reaction pulling Voyager Digital and Three Arrows Capital to file for Bankruptcy. This was followed by Genesis Trading and Blockchain.com which had to also face losses due to their exposure with Three Arrows Capital (3AC).
Of course other than losses and bankruptcy, some crypto firms managed to survive so far although with huge layoffs along the way. From Opensea one of the largest NFT Marketplaces to Crypto.com one of the largest exchanges worldwide, layoffs were a common thing as trading activity and revenue fell to a sharp decline. Even Coinbase, the world’s first crypto firm to enter the New York Stock Exchange, had to also cut 1,100 jobs as its stock also declined by more than 70% of its value.
Of course, this is still the surface of what happened as plenty of crypto firms struggled to cope with this crypto winter which should last for quite some time as market sentiments improve. In light of all this, it seems like Binance, the world’s largest crypto exchange, seems to be spreading its wings, hiring more than 2000 Jobs and obtaining licenses in Dubai and France as it seeks to take the opportunity to expand the business to new markets.
This Crypto Winter phase was simply a neutralizing time that was inflated due to the enormous stimulus or investments during the pandemic and the hype that was growing around the phase. Once this dried up, the assets would naturally come back to a price valued by the market but along the way, many investors have to witness their portfolio and savings vanish into thin air. Will there be better risk assessment regulations in place to protect institutions and crypto firms alike?
Should Better Risk Management Structure be enforced?
Risk is an important word in dealing with all investments or businesses as essentially every action a person will always contain some portion of risk into it. Obviously in the crypto space that risk got geared up way up a notch as the volatile nature of the crypto market itself will always affect investors and institutions who are willing to join the space. This also comes with the point that crypto is still in the early phase and most of the regulations enforced are still in a reactive stage.
Risk can also be mitigated with proper transparency between the stakeholders in the crypto space, transparency that to a certain extent still goes missing in the cases of Celsius Network and its investment strategy. Transparency is important in conveying the right message to the investors despite the market conditions so all the stakeholders could make an informed decision for their portfolio and don’t have to ever face the undeniable fate of platforms freezing withdrawals.
The biggest issue also lies in the amount of overleveraged most of these crypto firms are to maximize the yields earned in a short period. This is all good news when the crypto space is going to the moon but what if the market turns the other way? Then what you have is a space that was built on credit and leverage waiting for the house of cards to finally collapse. Expectations are great but crypto firms should also be prepared in terms of cash flow and planning for the worst-case scenario so leverage should not exceed the number of reserves the company is holding.
The key behind all the risk in the market also somehow lies in the tokens listed in the platforms so there should be regular oversight by regulators to make sure that the digital asset and the crypto project present in the market are built upon with long-term sustainable plans in mind. Risk will always be present in any instruments of our portfolio but we can do our best to mitigate it to build a better outlook for the crypto space in the future.
We in Nagaya Technologies Pte. Ltd is well aware of the volatile nature of the crypto space and that is why we believe that a cryptocurrency should be more important than all to have an intrinsic value as it forms the backbone of any asset instead of just Market Value. That is why we decided to create the world’s first hybrid crypto asset called Nagaya with this idea in mind. Nagaya is a digital asset that is backed by gold to strengthen its intrinsic value while also running subsidiary projects to continue to provide benefits to all our HODLers. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.io
Or you can talk to us at t.me/nagayaofficial