Investors expect crypto turmoil to get worse

Investors expect crypto turmoil to get worse

Implosion of giant exchange FTX potentially far bigger than earlier setbacks

Binance, the world’s largest crypto exchange, has reportedly walked away from a plan to bail out rival FTX, causing fresh turmoil in the industry. (Reuters Photo)
Binance, the world’s largest crypto exchange, has reportedly walked away from a plan to bail out rival FTX, causing fresh turmoil in the industry. (Reuters Photo)

Cryptocurrency markets endured heavy losses on Thursday, with bitcoin near a two-year low as investors fretted about the fallout from the implosion of FTX, the world’s second-largest crypto exchange.

Larger rival Binance walked away from a bailout deal on Wednesday. FTX founder Sam Bankman-Fried said he was “exploring all the options”, but fading hopes for a rescue left the exchange teetering.

A message on the FTX website said: “FTX is currently unable to process withdrawals. We strongly advise against depositing.”

The focus is on the unknown size of customer losses and the blow to sentiment from the latest and possibly largest collapse in an industry that has turned into a minefield for investors.

FTX’s native token, FTT, is down 90% this week and was attempting to steady around $2 — not far above its record low around $1.50. Bitcoin fell below $16,000 for the first time since late 2020 but has since recovered to around $16,600.

Concerns were first raised when the crypto news website CoinDesk reported a leaked balance sheet that showed Alameda Research, Bankman-Fried’s crypto trading firm, was heavily dependent on FTT.

Crypto markets now face weeks of deleveraging in the fallout from the crisis at FTX, a period of upheaval that could push bitcoin down to $13,000, according to JPMorgan strategists.

A “cascade of margin calls” is likely under way given the interplay between the exchange, Alameda Research and the rest of the crypto ecosystem, they wrote in a research note.

Binance backed out of a non-binding offer to buy FTX after due diligence. Another exchange, OKX, said it was also approached by Bankman-Fried this week, who described liabilities of $7 billion that needed covering quickly.

“Even Elon Musk would not be able to commit to a deal with $7 billion liability within a few hours of negotiations. That was too much for us,” Lennix Lai, director of financial markets at OKX told Reuters.

“(It) is a big hole to plug,” he added. “The dagger will continue to hang over the crypto market, as long as the outlook of FTX’s fate remains unclear.”

The Wall Street Journal reported that Bankman-Fried told investors FTX needed $8 billion to cover withdrawals. FTX did not respond to a request for comment.

‘Confidence crisis’

There are also early signs that the fallout could spread beyond crypto markets, with jittery stockmarkets sliding on Wall Street overnight.

“A top exchange failing — that’s on a different level,” said Danny Chong, CEO of the decentralised finance firm Tranchess, with potentially far wider ramifications than the failure of the stablecoin TerraUSD and the crypto hedge fund Three Arrows Capital this year.

“People’s funds, including market makers’ funds, are still currently with FTX,” he said. “Just when people were thinking that the crypto winter might probably not last … along comes another episode like this.”

The US securities regulator, meanwhile, is investigating’s handling of customer funds and crypto-lending activities, according to a source with knowledge of the inquiry.

Bloomberg reported that the US Department of Justice is also looking in to the turmoil. A department spokesperson declined to comment.

Investors are already writing off funds ploughed into FTX. The venture capital firm Sequoia Capital wrote down a $150-million exposure to zero on Wednesday. Other big investors include the Ontario Teachers Pension Plan in Canada, Tiger Global and SoftBank of Japan.

Most crypto players remain bullish about the long term, but are braced for further falls in the near future. Bitcoin’s 20% losses this week are comparable to the drop in June when Three Arrows Capital came under stress.

“What makes this new phase … problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking,” analysts at JPMorgan wrote.

“Now that the balance sheet strength of Alameda Research and FTX is under question only a few months after being perceived as strong balance sheet entities, it creates a confidence crisis and reduces the appetite of other crypto companies to come to the rescue.”

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