- The balance of centralized crypto exchanges declined in seven out of eight months in 2022
- Bitcoin's price drop led to the liquidations of positions of several big crypto lending firms
The recent series of bankruptcies of crypto lending platforms set the trend for withdrawing funds from centralized platforms, as users fear the spread of “infection” throughout the industry and other possible problems with exchanges.
Analysts at Arcane Research have found the total balance of centralized crypto exchanges declined in seven out of eight months in 2022.
A worrying trend
Bankless Times spoke with two experts about this worrying trend.
Iakov Levin: The bear market is the main factor
According to Iakov Levin, CEO and Founder Midas.Investments, the main factor for this "trend" is the bear market itself. He said:
The fact that Bitcoin price has dropped from its ATH to $40,000-$30,000 influenced the whole crypto market this year. But it led to the liquidations of positions of several big crypto lending firms and contributed to a further market downtrend.
If we take a look at the Arcane Research exchange net flow statistics, we will see that the recent series of bankruptcies of crypto lending platforms only accounted for the spike in withdrawals in June. Moreover, this spike happened amid the last major Bitcoin price drop. It was down from $30,000 to about $19,500 in June, resulting in market panic. The crypto Fear and Greed Index showed 10 scores – the lowest for a year. A similar situation caused outflow for crypto exchanges in January and March this year.
He concluded that is the reason why users' fear triggered the figures from Arcane Research. It was mainly about the price drop. Users prefer to withdraw funds from centralized platforms during the bear market. It was to be expected.
Brian Pasfield: Users’ fears are justified
Brian Pasfield, CTO of Fringe Finance, believes user fears are justified. He said:
It's at these times that we're reminded that without full regulation of the industry and with assets such as cryptocurrencies, any losses would be final. Not your keys, not your coins, they say.
What does this mean for crypto lending firms?
Not too much. Blowups increase the chances of regulation coming to the space which in turn might make things more complicated but a bit safer. However, it's impossible to know what's coming.
In order for centralized platforms to compete with fully decentralized alternatives such as Fringe, Aave, Compound, they need to solve their overhead. Decentralized competitors are empowered by lack of overhead, which makes it impossible for players such as Celsius to survive without using risky strategies, which is what led to this mess in the first place.