One issue that has emerged from the multimillion-dollar collapse of the UST stable currency this month is to blame the evil Wall Street traders who are invading the world of cryptocurrencies. The answer to that of cryptographic executives with training in finance: growing.
The blame for the disappearance of UST and its cryptocurrency LUNA depended on allegations that hedge fund Citadel Securities and money manager BlackRock attacked stablecoin as part of a coordinated shorting strategy or a bid to lower the price.
Cardano blockchain founder Charles Hoskinson expanded the theory on Twitter but later removed the tweet. Both Citadel and BlackRock have denied the allegations, saying they do not market UST.
Lev Mazur, founder of global cryptographic brokerage Quantfury, said the blame for the “bad guys on Wall Street” was a knee-jerk reaction. “I know many Wall Street institutions have been hurt by their exposure to the MOON,” said Mazur, who has worked in banks, mutual funds and family offices as a trader.
Speaking in interviews with Forkast, Mazur is among several executives who have said that the various cryptocurrency projects that exist will face the necessary tests of financial stress of all kinds as the industry emerges as a new asset class. The vulnerabilities will be exposed, they said.
Whether the LUNA event was caused by market forces or a coordinated attack, both ideas “represent the reality of the risks that must be addressed for a global currency to survive,” said Max Liao, managing director of Antalpha Technologies, a financial services company. subsidiary of Bitmain Technologies Ltd., a China-based chip maker used in Bitcoin mining.
Wall Street hedge funds are already trading with cryptocurrencies, and money managers, including mutual funds and pension funds, are looking for a way to enter the market, the Wall Street Journal reported earlier this month.
Coinbase cryptocurrency exchange has seen its institutional customers trade in cryptocurrencies worth $ 1.14 trillion in 2021, up from $ 120 billion in 2020 and more than double the $ 535 billion traded by retail investors, according to a February report from The Wall Street Journal.
“Cryptographic product designers and protocol designers should operate under the assumption that attackable weakness will eventually be attacked,” said Wayne Huang, CEO of Taiwan-based crypto-fiat exchange XREX.
“This has always been how financial markets work, and crypto markets are no different. Vulnerabilities will be discovered much sooner than before,” Huang said. “I don’t necessarily see it as a bad thing.”
Huang said he expects more failures as that is an inevitable process to foster innovation.
“We anticipate that such incidents will continue to occur to remind us how financial markets work and the costs of maximizing capital efficiency in exchange for stability,” he said.
Liao at Antalpha Technologies said the collapse of LUNA will encourage more cryptocurrency companies and investors to take risk management more seriously. Andrew Sullivan, a former marketer and founder of Asianmarketsense.com, agreed.
“This is likely to lead to requests for better regulation and certainly a better understanding of where exactly the assets that support these currencies are stored,” Sullivan said.
There is also a broader lesson about the disappearance of UST and LUNA related to the risk of infection, said Derek Lim, chief information officer at Singapore-based cryptography exchange Bybit, in a written response.
“The collapse of the UST has shown that cryptocurrencies could absorb the shock without threatening the broader financial markets,” Lim said.
As for the risk of short selling, it is only “a natural part of discovering the market price,” said Liao of Antalpha.
“Although sometimes considered unpleasant, short selling is a tool that plays a key role in facilitating rationality in price discovery, which is an important function of capital markets,” he said.
Whether crypto or stocks, any asset always runs the risk of being overvalued, and the skepticism inherent in the short selling process allows the market to expose and correct the overvaluation, Liao added. “It simply came to our notice then freedom in the financial markets rather than downplay it. ”
Although many cryptocurrency and blockchain projects have been created with the vision of democratizing money and improving inefficiencies in traditional banking, the industry is now suffering from excessive speculation, according to some officials.
“Cryptocurrency itself should not replace Wall Street, but I think it should replace inefficiencies on Wall Street and in government,” Mazur told Quantfury cryptocurrency brokerage.
However, “most of DeFi’s (decentralized finance) money is being used to speculate even further,” Mazur said, adding that traders take advantage of the guarantee and use leverage again to buy the same guarantee. “It’s almost like a pyramid of endless exchanges.”
Amnon Samid, CEO of cybersecurity company BitMint, said that what is really hurting the reason for financial freedom is a small number of investors who own a disproportionate share of cryptographic assets.
“For example, a tiny 0.01% of Bitcoin holders control almost a third of the supply. It means short sellers can manipulate it and could have manipulated UST,” he said.
Michael Wong, co-founder and managing partner of Hong Kong-based cryptocurrency fund MaiCapital, said the nature of DeFi or blockchain projects is that “they have to stay very open when it comes to transactions.”
This can expose them to aggressive business strategies, he said, noting that this illustrates the need for sound risk management. MaiCapital’s strategy was neutral before the collapse of UST, “which means we haven’t been in crypto in a long time,” he said.
XREX’s Huang, however, is optimistic about cryptography. Despite the turmoil, “it doesn’t change the mission of cryptography,” he said.
“It doesn’t change the fact that the blockchain, distributed account books, and cryptocurrency are the fastest way to provide financial sovereignty to everyone in this world,” he said, adding that the crypto industry needs to do better.
“And we can’t blame the guys on Wall Street.”