Crypto exchanges are going bankrupt – Are we in a recession?

Some proponents of crypto exchanges who claimed that the ongoing market recession would not affect crypto startups have strangely disappeared after announcements of layoffs of up to 20% by various renowned exchanges. 

The perception that only coins and tokens such as Terra LUNA will suffer has been proved wrong. Not just the layoffs, a couple of exchanges have also filed for bankruptcy (Voyager’s chapter 11 and 3AC’s chapter 15) in the last few weeks. This depicts the severity of the ongoing winter in the crypto market that has continued for the last six months or so. 

After consecutively completing the second bearish quarter in the crypto market, we are formally in a state of recession. In the last couple of weeks, the effect of the recession has been gradually seen to be lifting, and the greed and fear index has started moving towards the greenish end, but some indicators are still pointing towards greater risk. This article aims to measure the depth of the damage that the ongoing market recession has caused to crypto exchanges.

Bitcoin’s Failure in Fulfilling the Claims

Bitcoin was supposed to be a hedge fund during inflation, but it has not been up to expectations. This failure has further worsened the situation of the crypto market. The authorities have been continuously hiking the interest rate, which has further deteriorated the situation. 

The crypto market has been tanking, and Bitcoin is surely not rallying. Bitcoin is the master coin that sets trends for altcoins, and uncertainty and higher volatility in Bitcoin have negatively influenced altcoins. This effect has also been witnessed in the Bitcoin mining revenue because it has reduced almost 60% from its all-time-high (ATH).

Top Reasons behind Current Market Recession

The current recession is nothing new for humanity, and we have survived plenty of them in the past, but what makes this different now is that this is about the crypto market, which itself is a relatively new market. The most basic cause behind the current market recession and crypto winter is that traders and investors have lost faith in the market. The bear market has lasted much longer than expectations, and fear has engulfed every single coin holder. No trader is willing to hold a bag; otherwise, this is the time to invest rather than bail out. 

The second most likely cause is the rise in the interest rate because investors give up liquidity in exchange for increased rates. In such situations, investors quickly shift from one asset to another to gain more profit which has overall negative effects on the economy.

Thirdly, the lack of proper regulations is upsetting investors. SEC (Securities and Exchange Commission) has been accused of forcefully bringing firms to its jurisdiction for which it has no formal regulations, especially regarding securities regulations.  In a most recent instance, SEC has claimed that Coinbase is involved in the trading of 9 securities; while the exchange has negated the claims, it witnessed a decrease in its market value.  

Economic and political shocks have also affected the performance of the crypto market one way or the other. The Covid-19 pandemic kept the whole market under pressure for a couple of years, and still, its effects are visible. After the pandemic (known as the Black Swan Event), people adopted unpredictable strategies to overcome their losses which, coupled with crypto volatility, resulted in recession. The Russia-Ukraine conflict has also added fuel to the fire as the Russian market is one of the biggest crypto markets despite its government’s step-mother attitude towards cryptocurrencies. Once the war is over, we will possibly have to face a post-war slowdown as well.

Another reason for crypto recession are Asset Bubbles. The prices of tokens are being influenced by artificial means such as pump and dump tactics. Due to these reasons, the prices get inflated beyond their sustainable limits, and as a result, the bubble bursts. In this way, asset bubbles have set a perfect stage for recession.

Finally, credit crunches have also added their part in causing a recession. Various crypto projects and exchanges have stopped lending, causing a massive credit crunch. At the moment, only FTX has tried to help other exchanges survive, but it has a history of acquiring firms by helping them in difficult times. In a most recent instance, FTX is in pursuit of acquiring BlockFi for around $200m only.

Effect on Crypto Exchanges

Big Crypto exchanges such as Binance and FTX have faced the recession well and beyond expectations, but smaller businesses have either lain off staff, defaulted, or bankrupted. Even Coinbase has lain off 18% of its manpower. July has proved nothing less than a nightmare for crypto exchanges and their clients. Let’s see how the global crypto exchanges has been affected some of them in detail.

• Voyager Digital

Voyager Digital halted its withdrawals and reports that it hired advisors to assist in a bankruptcy protection filing. Meanwhile, Three Arrows Capital (3AC) defaulted when it failed to pay $650m, which it owed to Voyager Digital. Some days later, it filed for chapter 11 bankruptcy, allowing it to remain operational. 

• Three Arrows Capital

On June 29, crypto hedge fund 3AC fell into a liquidity crisis and hired Teneo for restructuring. It had already defaulted more than $650m in Bitcoin and USDC to Voyager Digital. Three Arrows Capital didn’t fall alone as it also dragged Voyager Digital to bankruptcy. 3AC was one of the most affected platforms by TerraUSD and LUNA collapse, and later on, it was uncovered that it is unable to meet the margin call of BlockFi darkening its future as well. Its co-founders soon fled the country.

• Celsius 

The hard time for American crypto lender Celsius started when it halted withdrawals for its clients, saying that the market conditions had become unbearable for it. It soon came under the spotlight as securities regulators launched investigations against the firm. In July, Celsius officially filed for bankruptcy. In its filing, it requested the court to let it continue its operations. Celsius reached its success during the pandemic mainly because it provided easy loans to investors. 

• Robinhood

The digital currency exchange Robinhood has been continuously losing its market cap, and as per fresh reports, it has shrunk to approximately $25 billion. The financial services provider is facing a tough time due to recession and has said goodbye to its 9% workforce. Statistics show that the firm’s market cap is lesser than the available cash reserves.

• CoinFlex, BlockFi Share Similar Fate

CoinFlex went down by losing a single whale. Its CEO, Mark Lamb, announced that CoinFlex has gone into negative equity and halted withdrawals. As a last resort, it launched a new coin (rvUSD) to gather $47m in funds.

Struggling BlockFi owes $400 million to FTX, and now Sam Bankman Fried has signed an agreement to acquire BlockFi for $240 million (maximum). SBFs Almeda also provided a bailout package to Voyager Digital.