The crypto market saw a massive price drop during the crypto winter, with the total market capitalization of all cryptocurrencies shrinking by $2 trillion.
Most assets have seen their prices decline from bull market peaks – see Bitcoin struggle to stay above $20,000 after falling over $69,000, or Ethereum bulls battle to hold onto $1,000 after testing $4,800 in November.
The market fell sharply as cryptocurrency Terra (LUNA) and algorithmic stablecoin TerraUSD (UST) crashed, wiping billions of dollars of investor money off the face of the earth.
The main culprit behind the crypto collapse
While investors have seen the UST’s march towards zero and a market cycle wreak havoc on prices, the main culprit is the over-leverage that has characterized the bull market environment in 2020 and 2021.
Nik Bhatia, the founder of The Bitcoin Layer, said CNBC in an interview that the plummeting market could also be attributed to the macroeconomic environment characterized by aggressive central bank interest rates and the end of easy money amid inflation.
But Bhatia, an adjunct professor of finance at the University of Southern California (USC), says the shockwaves that have hit investors and crypto companies amid the severe bear market are more down to leverage. and perhaps to the presence of some “bad actors” within crypto than these. other factors.
The implosion related to Terra and Three Arrows Capital aside, the analyst says there has been “Ponzi schemetrends that characterized the business of crypto lenders like Celsius.
“…they were attracting depositors with high returns just so they could repay the return they promised to their existing investors,” he noted.
He says the collapse of Celsius was due to the wider “misallocation of capital within DeFiwith investors determined to earn high returns without knowing exactly where the huge interest was coming from.
The founder of Bitcoin Layer added that indiscriminate capital allocation is what led to the free fall. If investors did this without leverage, the impact would be felt in their portfolios.
However, entering it at incredibly high leveraged positions only means that the domino would be even more destructive.
You can watch Nik Bhatia’s interview with CNBC here.