There seem to be two camps developing about cryptocurrencies following the fallout from the FTX blowup and other systemic tremors through the sphere. In essence, some see this as a 'wizard of oz' moment that is revealing the true nature of cryptocurrencies - a predatory, get-rich-quick scheme for shady operators who are selling a dream of decentralization and easy money. The other is that this is just another severe stress test for the system which will come out stronger as a result.
Another potential and more immediate factor to consider is whether we could start seeing spillover effects from the distress in crypto markets into more traditional markets. A crypto contagion refers to the potential for a crisis in the cryptocurrency market to spread and affect other financial markets.
Some potential risks of a crypto contagion include a loss of confidence in the broader financial system, a decrease in the value of cryptocurrencies, and an overall decrease in the demand for digital assets. Additionally, a crypto contagion could lead to increased market volatility and potentially even the failure of more cryptocurrency exchanges and institutions.
One potential relief for the asset class is that the market seems to be digesting a 'peak' in inflation which is leading to the Federal Reserve slowing its pace of hikes. In turn, longer-term Treasury yields are moving lower, while shorter-term yields are pausing their relentless ascent.
This makes all types of long-term growth and speculative assets more appealing and could be one factor in bitcoin and other currencies not plunging to new lows even despite recent developments.
On the other hand, this could only be a short-term reprieve given that the long-term demand case could be severely disrupted by all the fraud and leverage that was exposed by FTX and other blowups.
Like the financial system in 2008, the cryptosystem is extremely interlinked which increases systemic risk. So far, the effects on the traditional financial system have been muted although there have been some incidents of spikes in smaller banks accessing the Fed discount window which some have attributed to crypto.
Overall, this needs to be like the post-dotcom period for crypto where real commercial applications used by millions of people are built on top of the technology. Otherwise, it's destined to go down in history like the tulip bubble.