Crypto winter drags on — frosty outlook for the crypto market

Trust in the crypto market has undoubtedly been damaged for the coming months after the FTX bankruptcy.

Trust in the crypto market has undoubtedly been damaged for the coming months after the FTX bankruptcy. Not only the insolveny proceedings of the collapsed exchange, but also the already harsh crypto winter will likely creep on as a result.

This is also the conclusion from the crypto exchange Coinbase. In a report to institutional investors, the company provides an overview of the market situation after the FTX shock and the rather grim outlook for the coming weeks and months. Will the long night for crypto be dark and full of horrors?

Liquidity Crisis

Many crypto trading platforms tried to temper the trust crisis that has lingered since the stock market crash by making their reserves public ("proof-of-reserves"). Yet, crypto investors have pulled billions of US dollars worth of coins and tokens off exchanges in recent days for safety. This is essentially exemplary Hodler behavior, but it means a loss of precious liquidity for the exchanges.

According to Coinbase, more aftershocks from the bankruptcy are coming. The battered sentiment, buoyed by further bankruptcies, is unlikely to improve in the near term. By year-end, the weak liquidity conditions are expected to persist, according to the report.

Nonetheless, Coinbase says the chance that the sector crisis could spread further is at least somewhat diminished by the FTX insolvency process. U.S. courts could, as the proceedings unfold, limit investor losses.

Macro Headwinds

Meanwhile, the FTX shock is being amplified by the fact that investors have already pulled money out of the crypto sector to prepare for a looming recession. Coinbase expects this to show up in the first half of next year.

The report also suggests the stock market, which has been rallying recently on softer inflation data, could turn sooner rather than later. There is a path to easing the tight monetary policy from the U.S. Federal Reserve.

According to Coinbase, this offers a small glimmer of light. Outside the U.S., many countries are starting to prepare fresh liquidity injections for their struggling economies. If the U.S. economy also takes a turn, a return to accommodative monetary policy seems likely. The crypto market could probably breathe a bit easier.

In the near term, however, the sector is likely to stay driven by the global economy’s overall direction and the fallout from the FTX bankruptcy. Coinbase believes this could extend the bear market by a few more months. For hodlers, it’s likely a case of gritting teeth and weathering the long night.