The Staggering Fall of FTX Exchange, One of the Biggest and Most Reputable Players in the Digital Asset Market, Raises Alarm among people who own cryptocurrencies as investors run for cover.
There are still many unanswered questions. But two big issues loom: how far will the damage extend? And can the battered crypto industry bounce back?
Industry insiders are debating whether to call the implosion of FTX, which filed for bankruptcy on Friday, a “Lehman moment,” referring to the 2008 collapse of the investment bank that sent shock waves around the world. Many think this is an apt comparison.
What is clear is that the fallout from the FTX crisis is injecting significant volatility into the crypto ecosystem. The episode destroyed confidence and emboldened regulators, who are now on high alert.
“It was one of the most trusted entities in the crypto space, so it will take some time to recover,” said Jay Jog, co-founder of California-based blockchain startup Sei Labs.
“Sh*tstorm.” “Mad.” “Chaos.”
These are terms crypto investors and pundits have used to describe the failure of FTX, which was launched in 2019 by Sam Bankman-Fried, a 30-year-old prodigy once hailed as a modern-day JP Morgan.
The company was valued at $32 billion in its last funding round and had signed on from top backers including SoftBank, Tiger Global, Singapore’s Temasek, as well as celebrities like Tom Brady, Gisele Bündchen and Naomi Osaka. . His name is on the arena where the Miami Heat play.
This week, investor Sequoia Capital said he had reduced the value of his FTX stake to $0. The exchange – believed to be short between $8 billion and $10 billion – was unable to meet customer withdrawal requests. Bankman-Fried resigned on Friday and FTX filed for bankruptcy protection in the United States after a failed bailout of rival Binance.
“Everyone is a bit in shock,” said Shan Jun Fok, co-founder of Moonvault Partners, a Hong Kong-based crypto investment firm. “A lot of people trusted FTX as the gold standard.”
He compared the collapse of FTX to Enron, the 2001 corporate fraud scandal that led to the US energy company’s surprise bankruptcy.
The situation is still changing rapidly. But one concern is how this might ripple across the entire crypto sector, which was worth over $1 trillion in August.
Over the summer as digital assets fell in value, Bankman-Fried has invested around $1 billion to bail out companies and consolidate assets to keep the entire industry afloat. Now there are few white knights left to save FTX and others in distress.
“The number of entities with stronger balance sheets able to rescue those with low capital and high leverage is decreasing within the crypto ecosystem,” JPMorgan strategists said in a note to clients this week.
The disappearance of FTX could make other victims. It is unclear at this stage who is exposed, although there are clear ripple effects.
The prices of bitcoin and ether, the two most-held cryptocurrencies, are down more than 20% in the past week. The price of the Solana digital coin also took a beating on reports that Bankman-Fried’s trading company, Alameda Research, held significant holdings. The stablecoin Tether, which is supposed to be a safe place to park money, recently broke its peg to the US dollar. And crypto lending platform BlockFi said on Thursday that it was suspend customer withdrawals.
Traditional investors have also been burned, despite reassuring their clients that they can handle the fallout. The Ontario Teachers’ Pension Plan said that despite the uncertainty, losses from its $95 million investment would have “limited impact” given that participation represents less than 0.05 % of total assets.
Changpeng Zhao, CEO of Binance, tweeted that he texted Nayib Bukele, the president of El Salvador, who bet everything on bitcoin. “We don’t have Bitcoin in FTX and we’ve never dealt with them,” Zhao explained from Bukele. “Thank God!”
Analysts note that many risky activities have already been eliminated from the system after a tumultuous few months.
But as frightened investors withdraw funds from crypto, more pain could come. JP Morgan estimates that bitcoin could fall to $13,000, a drop of almost 22% from its current level. Fok said the digital coin could drop below $10,000, a low it hasn’t seen since 2020.
In this climate, the “crypto winter” is about to get even worse, especially as fears about the broader economic backdrop continue to erode appetite for risky assets.
“In the short term, this is going to be really, really bad for the crypto industry,” Sei Labs’ Jog said. But he doesn’t think it will “end things” completely, and hopes it could boost interest in his company, which is focused on building more transparent and decentralized crypto exchanges.
Fok said he expects the collapse of FTX to push institutional investors away from the crypto space, just as they had been preparing for it. While some people will continue to work on interesting projects, it may take years to restore faith in the promises of the sector.
It is also almost certain to encourage regulators to tighten the screws, increasing costs for crypto firms that survive the ongoing purge.
“It reinforces the idea that any kind of financial business needs extensive regulation,” said James Malcolm, head of currency strategy and crypto research at UBS. “Probably by 2024 the whole world will look a lot more cohesive and tight.”
Gary Gensler, head of the U.S. Securities and Exchange Commission, told CNBC on Thursday that if the crypto space is regulated, investors “need better protection.” The Wall Street Journal reported that the SEC and the US Department of Justice are investigating FTX. (The Justice Department declined to comment.)
At a conference in Indonesia on Friday, Binance’s Zhao said the 2008 financial crisis is “probably an exact analog” for what is happening.
“We’ve been down a few years,” he said. “Regulators will rightly scrutinize this industry much, much harder, which is probably a good thing, to be honest.”
— Allison Morrow contributed reporting.
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