Analysis: FTX debacle prompts investors to rethink the battered crypto market

by Arthur · November 10, 2022

NEW YORK/LONDON, Nov 10 (Reuters) – With major cryptocurrency exchange FTX on the brink of collapse, some investors are beginning to question the viability of a sector already ravaged by the bursting bitcoin bubble and shutdowns of key market players.

Crypto markets have come under intense pressure this year, as rising interest rates prompt investors to ditch risky or speculative assets. The collapse of several crypto lenders, including Celsius and Voyager, major tokens terraUSD and Luna, and the hedge fund Three Arrows Capital, had already rung alarm bells before the failure of FTX, led by Sam Bankman-Fried.

He was racing on Thursday to find funding to shore up his struggling crypto exchange, according to a Slack message to FTX employees seen by Reuters, after rival Binance scrapped a proposed bailout following a review of the company’s structure and books.

FTX did not immediately respond to a request for comment.

Some in the industry say this fundraising challenge may be past him, as concerns over irregular supervision and counterparty risk begin to overwhelm likely returns from the asset class, at least in the near to medium term.

“From an economic point of view, it’s fair to say that confidence is going to be somewhat shaken, because if you can’t trust FTX, what can you trust?” Yat Siu, co-founder of Hong Kong-based investor Animoca Brands, told Reuters on Wednesday.

FTX’s rapid fall from grace followed heavy speculation about its financial health that sparked $6 billion in withdrawals in just 72 hours earlier this week. The company had published a valuation of $32 billion as recently as January.

“What makes this new phase of retrenchment more problematic is that the number of entities with stronger balance sheets capable of rescuing those with low capital and high leverage is shrinking within the crypto ecosystem,” analysts at JP Morgan said in a note to clients.

“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.”

Speaking at the Token2049 crypto conference in London on Wednesday, Andrei Kazantsev, global head of crypto trading at Goldman Sachs, said “counterparty risk is starting to peak” for some clients who were once attracted to crypto trading by its high volatility and returns.

Unlike traditional companies and financial firms, crypto entities operate in a regulatory gray area. For example, deposits with crypto lenders are not insured by the government.

As for FTX, US residents cannot trade on its global platform due to strict US crypto space regulations. FTX has an American partner, FTX.US, but its offerings are more limited than the global platform.

Ken Lo, co-founder of Hong Kong-based crypto exchange and custodian Hong Kong Digital Asset Exchange, said counterparty risk, which comes from a lack of transparency and information disclosure, underscores the need for “clear regulations and vision statement.”

‘POSTER CHILD’ NO MORE

Bankman-Fried, 30, who is from California but lives in the Bahamas where FTX is based, had been seen in recent months as a crypto white knight rescuing beleaguered crypto firms that faltered as prices plummeted.

In an interview with Reuters in July, Bankman-Fried said his company still has “a few billion” on hand to prop up struggling businesses and could further destabilize the digital asset industry.

“The show must go on, the industry must continue to grow, but it’s definitely a step backwards in itself when you see the poster child of the industry being put in this position,” said Jean-Marie Mognetti, CEO of Crypto Assets. manager CoinShares.

“The people who are the best of all of us end up being the ones who let the industry down. But it’s a lesson that seems to repeat itself,” he added, citing certain star traders at various companies who ran into trouble .

While the meltdown would not stop companies from creating new blockchain-based products, Animoca’s Siu said it would “probably create a small chill effect” for institutional investors entering crypto markets.

Market sentiment took a big hit in the hours immediately after the extent of FTX’s problems became clear, as caution spread to other digital currencies.

Bitcoin , the largest cryptocurrency by market capitalization, hit a two-year low of $15,632, down approx. 77% from an all-time high of $69,000 in November 2021. Ether, the second largest, extended losses on Wednesday to its lowest since July.

FTT , the smaller token linked to FTX, plunged. Its market capitalization fell to around $360 million, down from around $3 billion at the start of the week, according to CoinGecko data.

Max Boonen, co-founder of digital asset liquidity provider B2C2, said FTX’s problems have set the crypto space back by six months. Speaking at the Token2049 crypto conference in London, he suggested that investors need to rely more on credit managers doing due diligence on private finances.