Bitcoin and other cryptocurrencies may be predicated on decentralization, but the industry still has entities and assets that are of systemic importance.
According to an ex-Messari executive and analyst in the space, there are three companies that, “if something catastrophic happened to them today, would cause a tsunami in crypto markets.”
These companies aren’t exchanges but three firms that act as the ‘Wall Street’ and ‘Federal Reserve’ of the crypto industry, so to say.
This is a breakdown of each company/service, their importance, and the potential impact on the market if “something catastrophic” were to happen.
Silvergate: The biggest crypto bank
Due to the nascency of crypto and blockchain, many Wall Street banks are hesitant to serve companies, especially if they actively deal with Bitcoin.
Enter Silvergate, a publicly-listed bank that is focused on being “as innovative as the entrepreneurs” they serve. The company has existed since 1988 but has largely pivoted to offering financial services to the digital currency industry
Silvergate clients include Bitstamp, Paxos, BlockTower Capital, Polychain Capital, amongst hundreds of others.
Notably, Silvergate may be becoming less important to this space as time goes on.
The systemic risk in Silvergate’s theoretical collapse is that a majority of the most recognizable crypto firms (exchanges, blockchain foundations, etc.) may be unable to operate with banking services, especially when it may be hard to get services through other banks.
JPMorgan was revealed last month to be offering banking services to Coinbase and Gemini. This could mark the start of the end of the tacit “crypto ban” enforced by Wall Street banks:
Galaxy Digital’s Michael Novogratz noted:
“The JPM announcement that they will provide banking services to Coinbase and Gemini is…recognition that the future will include crypto currencies, digital assets, and blockchain based systems.”
Tether: The reserve currency of the crypto market
Each financial market has a reserve currency. In most cases, like with American equities and commodities, that reserve currency is the U.S. dollar.
Funnily enough, it’s somewhat of the same for the crypto market. That’s to say, Bitcoin is becoming increasingly less like the reserve currency of all cryptocurrencies.
Due to it being widely adopted by exchanges and service providers, Tether’s USDT has quickly become a reserve currency for the market.
Data suggests that Bitcoin has $16 billion in volume in the past 24 hours while USDT touts $18 billion in daily volume — a small difference, sure, but one that becomes more pronounced on other days.
Even in terms of on-chain volumes, blockchain analytics firms have come out with reports indicating that there is now more value transacted through stablecoins (mainly USDT) than through Ethereum.
USDT’s importance is derived from the crypto asset being pegged to the U.S. dollar by reserves. Because it’s “stable,” it is used by traders and institutions in the space that value that stability.
When you want to “cash-out” of Bitcoin, Ethereum, or altcoins but want to easily be able to buy back in, you buy USDT or another stablecoin. If one wants to benefit from the speed, borderless, and digital nature of blockchain transactions but avoid volatility, stablecoins are a good bet.
Over recent months, USDT has begun to wield even more influence, with its market cap now nearing $10 billion.
No one really knows what would happen if Tether, but USDT disappearing would mean the loss of the most important asset in crypto.
Genesis: The foremost cryptocurrency loan provider
Finally, Genesis. Genesis is an institutional digital currency lender, which also offers over-the-counter trading services through an affiliated company.
By offering crypto loans, the company serves market-makers, speculators/traders, and firms that need money to expand or need capital for other uses.
The company’s client list isn’t known yet as of the end of Q1, it reported $6 billion in originations, making it the ostensible leader in its market segment.
Its theoretical collapse would decrease the availability of capital to the aforementioned groups of firms.
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