JPMorgan says fallout from FTX collapse could halve value of crypto
by Arthur · November 10, 2022
It’s been a wild week for cryptocurrencies, and the plunge in the asset class may be far from over, according to JPMorgan. The uproar stems from the potential collapse of crypto exchange FTX, which was in the process of being acquired by Binance, amid a liquidity crisis. On Wednesday, Binance pulled out of the deal, leaving FTX near collapse. Cryptocurrency assets have been falling, with bitcoin losing more than 20% this week alone. At the end of this latest drawdown cycle, the asset class could see its value halved. “With the crypto market cap just over $1 trillion before the FTX/Alameda Research collapse, our guess is that the crypto market will find a floor above $500 billion in the current deleveraging phase,” JPMorgan analyst Nikolaos Panigirtzoglou wrote in a Wednesday note. . Downside pressure Another way to think about the downside in crypto prices from their current level is the production cost of bitcoin, he said, since it has historically served as a floor for the price of the asset. Currently, the production cost of bitcoin is $15,000, but could relive the $13,000 low it reached during the summer. “A production cost of $13k implies 25% downside from here, which would bring the crypto market cap to a low of $650 billion,” Panigirtzoglou said. Of course, unless a bailout is orchestrated quickly, this downtrend cycle could take a few weeks to bottom out, meaning losses in cryptoassets can be felt slowly. And the overall hit to market value in the asset class is unlikely to be as bad as it was after Terra, which collapsed between May and June, according to JPMorgan. Industry changes Still, the new phase of deleveraging is more problematic than the last time it happened to a crypto exchange, as the number of entities with balance sheets strong enough to bail out companies in trouble — those with low capital and high leverage — shrinks. “FTX and Alameda Research had emerged last May/June as the main entities with seemingly strong balance sheets to rescue weaker and more leveraged entities such as BlockFi, Voyager Digital and Celsius,” Panigirtzoglou said. “Now that the balance sheet strength of Alameda Research and FTX is in question just a few months after being perceived as strong balance sheet entities, it creates a crisis of confidence and reduces the appetite of other crypto companies to come to the rescue,” he added. . Going forward, the collapse of FTX is highly likely to increase investor and regulatory pressure on crypto companies to disclose more information about their balance sheets, he said. This will be aimed at securing the client’s assets, limiting asset concentration and creating more careful risk management, including counterparty risk among crypto market participants.
